The Federal Home Loan banks and their members are urging the Federal Housing Finance Agency to scrap a proposal that would make it tougher to join — and stay a part of — the cooperative system. The banks and their allies argue the plan is too restrictive and could both harm the economy and jeopardize the future of the Home Loan Bank System.
"To layer new requirements on top of the admittedly undigested changes brought about by the Dodd-Frank legislation is 'piling on' and threatens to bring to a screeching halt what little economic recovery has occurred," wrote William White, chairman and president of the $262.1 million-asset Dearborn Federal Savings Bank in Michigan.
At issue is a proposal released in December that is designed to strengthen qualifications for belonging to a Home Loan Bank. Among other things, the proposal would force members to maintain at least 10% of their assets in mortgages on a permanent basis, create long-term mortgage lending requirements, and mandate adherence to an explicit home financing policy. Failure to adhere to any of these requirements would terminate a bank's membership.
That is a marked shift from the current system, where institutions must meet certain qualifications, including a 10% threshold for mortgage assets, but do not have to maintain that level.
In 135 comment letters to the FHFA, community banks and their representatives said the proposal was a mistake. If institutions know they can be kicked out of the system, they will no longer look to it as a stable source of funding. The Home Loan banks warned it could upset their operations as membership becomes more volatile.
"The ramifications of members failing the test at some point in time but then later satisfying the requirement would disrupt the workings of the FHLBanks because institutions might be required to terminate their memberships and redeem their capital stock only to later requalify and possibly rejoin their FHLBank," the 12 bank presidents wrote.
Though many commenters called the proposed qualifications unnecessary and burdensome, the FHFA signaled last year that it was concerned such requirements were lax.
"The residential mortgage loan requirement is a one-time requirement, and, until FHFA reversed an earlier regulatory interpretation in March [2010], that requirement could have been met through a single repurchase agreement," the agency's acting director, Ed DeMarco, said in a speech last April. "In short, borrowed assets could have been used to meet the requirement to support housing finance."
The agency issued its proposal for two key reasons. For one, there has been a significant increase in the number of FHLB members, namely insurance companies that have joined the system because of the relatively easy standards that were applied to the qualification process.
Secondly, although the system was set up in the 1930s as a way to fund mortgage loans, current rules permit an insured depository institution that does virtually no mortgage lending to be a member.
