A recent proposal from the Federal Housing Finance Agency (FHFA) that would limit membership in the federal home loan banking system has bankers worried that it could squeeze liquidity out of the mortgage market at a time when the market has been sluggish to rebound.
After pushback from the Federal Home Loan Banks, the FHFA recently extended the comment period on the notice of proposed rulemaking. Until now, the FHFA has generally narrowed the scope of its focus on government-sponsored entities to Fannie Mae and Freddie Mac. Now it’s taking a closer look at the federal home loan bank system.
In effect, the proposed rule would subject all members of the federal home loan bank system to an ongoing requirement that member institutions hold at least 1 percent of their total assets in residential mortgage loans, and that some larger institutions hold at least 10 percent of their total assets in residential mortgage loans. Currently, banks and other financial institutions are held to those rules only at the time they apply for membership.
According to the FHFA’s proposal, “The absence of an ongoing requirement means that a member may reduce, or even eliminate, its residential mortgage loan holdings without affecting its eligibility to continue as a bank member.”
This doesn’t sit well with some community bankers, nor with the federal home loan banks themselves, who worry that an ongoing requirement could, over time, disqualify many smaller financial institutions from membership, as they sell off low-interest rate mortgage loans over a cycle of normal ups and downs in the marketplace.
But the FHFA counters that the ongoing “10 percent” test would not apply to any federally-insured community financial institution with assets less than $1.1 billion – a line that may sound awfully familiar to many community bankers.
“If you’re below that [$1.1 billion mark] you don’t have to worry about this test, but in Connecticut we have many banks over $1 billion that are active participants in the Federal Home Loan Bank of Boston, so there could be an impact on them,” said Lindsey Pinkham, president of the Connecticut Bankers Association. “No question, banks buy and sell assets all the time and in an effort to do asset liability management. There could be swings in portfolios that could negatively impact it if there’s a bright line test at a certain date.”
The proposal would also exclude captive insurance companies – including those used by mortgage REITs to gain access to FHLB advances – from membership, but would allow current members to remain so for five years with some restrictions on the ability to obtain advances.
‘A Solution In Search Of A Problem’
The proposal has some scratching their heads as to exactly what problem or issue the FHFA is attempting to prevent or mitigate.
“That is probably one of our single biggest problems with the proposal. It appears to be a solution in search of a problem,” said David Jeffers, executive vice president of the Council of Federal Home Loan Banks.
A detailed proposal from the FHFA sheds little light on that question, other than to suggest that the agency may be concerned that present regulations aren’t clear enough about what, exactly, constitutes a demonstrated support of residential mortgage lending, and cites the agency’s authority under the Bank Act to tweak those membership requirements as needed.
The potential ramifications of the proposed rule are myriad, and it seems to depend a little bit on who you ask.
“The core value of their membership is not only that liquidity, but the reliability of the availability of that liquidity,” Jeffers said. “Many members only use that access from time to time, but the reliability is important to them. The primary harm this does is threaten that access to credit for the members of the home loan banks and, of course, their customers, the communities they serve.”
While Jeffers estimated that nationwide, more than 100 community financial institutions could be disqualified from membership in the federal home loan banks, the FHFA estimates that only 47 banks or thrifts would be affected by the proposed ongoing test. Neither the FHFA nor the Council of Federal Home Loan Banks could say specifically whether any of those potentially affected institutions would be in Connecticut, however.
Still, others have suggested the new rules might be little more than an administrative pain, on the part of both the federal home loan banks and the banking institutions they would now be required to monitor.
The proposed rule may ultimately be more meaningful to captive insurers that would now be denied membership wholesale, but more broadly, some see this as an overreach on the part of regulators. Their job is to enforce the rules, not make them.
“This should be something that’s coming from Congress and not the regulatory agency,” Pinkham said. “Congress has actually expanded it several times to include insurance companies, to include credit unions. They haven’t contracted it; they’ve expanded the field of membership.”
Pinkham encouraged bankers to file comment letters in response to the proposal. The comment period will close on Jan. 12 of next year.
Email: lalix@thewarrengroup.com
