Trade orgs say FHLBank targets may increase small member participation

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The changes to the Federal Home Loan Banks' affordable housing goals should encourage smaller financial institutions to use their secondary mortgage market programs more often, a pair of trade groups said.

Many members of the Independent Community Bankers of America use the Mortgage Partnership Finance or the Mortgage Purchase Program that the various Home Loan banks offer.

"They tend to be the folks that don't do the big volumes of mortgage loans," said Ron Haynie, senior vice president of mortgage finance policy at the ICBA. "Those programs are a way for them to sell those loans and manage the interest rate risk. The underwriting and their pricing for some products is not as prescriptive or not as expensive as selling the loans to Fannie and Freddie. And our banks can service them."

For these institutions, the MPF and MPP programs are an alternative to having to sell the loan on a servicing-released basis to an aggregator, typically a larger bank. Being able to retain the servicing rights also means these smaller institutions can retain the relationship with the consumer, he noted.

ICBA members are in small towns and rural communities where there are a high percentage of low- and moderate-income borrowers, so it is a natural fit, Haynie said.

"It might move the needle a little bit" to add volume to the Home Loan banks' secondary market programs, "but I don't think this will cannibalize the share from Fannie or Freddie," Haynie said.

The rule includes a proviso for small member participation of 50% of Acquired Member Asset users (which includes MPF and MPP) as part of the affordable housing goals.

"The Home Loan banks work with small lenders anyway all the time," Haynie said. "This is probably just a little more incentive to help to get some of those smaller banks that maybe have never sold loans in the secondary market to utilize these programs."

Credit unions in general rely heavily on the Home Loan banks as a source of liquidity to provide more loans to their members and to serve their communities, said Ann Kossachev, director of regulatory affairs for the National Association of Federally-Insured Credit Unions. This is especially important now given the difficult economic situation in the U.S.

During the comment period for this rule, NAFCU looked at Home Loan bank data and found about 200 credit unions participated in MPF and MPP during 2017 and 2018, making up roughly 20% of participants, Kossachev said.

But given the number of credit unions nationwide, that amount of participation "may be not as substantial as the FHLBanks were hoping or the FHFA was hoping. So, it does seem like the final rule is to encourage more financial institutions, not just credit unions, to consider working through the AMA program," Kossachev said.

"I think it's a good fit and credit unions hopefully will become more involved in the program with these new goals in the final rule," Kossachev said.

But NAFCU is still suggesting some tweaks. In its comments on the rule, the organization expressed a preference for the targets to be flexible enough for each Home Loan bank to set its own, based on the particular needs in its particular district, rather than the broad national goal that was included in the final rule.

But using a percentage goal rather than the dollar volume as determined by lagging Home Mortgage Disclosure Act data is an improvement, Kossachev said.

"We supported, in the proposal, setting a target that is prospective rather than retrospective, and relying on the HMDA data is taking a backwards approach to evaluating whether the FHLBs are meeting those goals," she said. "A more forward-looking approach will incentivize more affordable [housing] activity and encourage more lenders to participate in this space."

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