Treasury: FHLBank Governance Needs Reform Too

The Bush administration still believes the Federal Home Loan Banks should be included in GSE reform legislation next year that would create a "world class" regulator for Fannie Mae and Freddie Mac.

The mortgage activities of FHLBanks have "converged" with the other two housing government-sponsored enterprises, Treasury undersecretary Brian Roseboro told a FHLBank forum in Washington last month.

"The Federal Home Loan Banks are no longer simply a wholesale financing outlet for their members, but have moved directly into the mortgage investment business, which encompasses the same type of risks as Fannie Mae and Freddie Mac face," he said.

The Treasury official declined to comment on an application by the Seattle FHLBank that would move that convergent one step further.

The Seattle bank is seeking regulatory approval to purchase highly rated mortgage-backed securities from member banks and thrifts with the option of selling the MBS to the capital markets. The application is pending before the Federal Housing Finance Board.

However, Mr. Roseboro indicated that Treasury looks favorably on institutions that want to increase competition in the secondary market and increase the breadth and depth of the market. "So as a general principle, these activities we think that increase competition are good," he told reporters.

Finance Board chairman Alicia Castaneda declined to make any comment about the Seattle MBS application, which has been pending before her agency since July 20.

Rep. Barney Frank, D-Mass., told the forum that the FHLBanks are being included in the GSE reform bill because of the possible "negative consequences" of not being regulated like Fannie and Freddie. "It is not driven by any great policy needs," he said.

The second ranking Democrat on the House Financial Services Committee agreed with the Treasury official, however, that the new GSE regulator should have two divisions - one division to supervise the 12 FHLBanks and a second division to supervise Fannie and Freddie.

If there is a GSE bill next year, Rep. Frank wants to update the FHLBank affordable housing program to deal with cross-district mergers.

The Massachusetts congressman said he is working on a legislative proposal to make sure AH funds are going back into local communities and not diverted to other FHLBank districts. Due to bank mergers, many Massachusetts banks are owned by banking companies headquartered outside of the Boston FHLBank district. Earnings from a New Bedford, Mass., bank should not be going to pay for affordable housing programs in the Pittsburgh FHLBank district, the congressman said.

Finance Board chairman Castaneda said she is taking a "neutral" position on the need for a new GSE regulator. However, she is working to make sure the Finance Board is an effective regulator if it is merged into the new GSE regulator.

"Even if a new regulator is created in the future, that regulator will acquire a talented, dedicated and skilled staff, one fully capable of continuing the rigorous oversight we have put in place for the Federal Home Loan Banks," she said at the FHLBank forum.

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