What major finance groups say about the Federal Home Loan Banks

The role of the Federal Home Loan Banks is clear and defined by Congress, the organization that represents the 11 institutions said in its comment letter to the Federal Housing Finance Agency.

In May, the FHFA put out a request for input in advance of potential rulemaking. One of the aims of it was to clarify the mission of the FHLBanks, in light of the findings in the FHLBank System at 100: Focusing on the Future review. The comment period ended on July 15.

"The Council respectfully suggests that FHFA consider this regulatory review as an opportunity to provide more flexibility that would enable the FHLBanks to continue to meet their mission of supporting housing and the economy by being a reliable source of liquidity to members of all sizes," the letter, signed by Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, said.

The letter also highlighted the recent Supreme Court decision that ended the Chevron deference and stated that any changes to the Banks' role can only be done by Congress.

"The Bank Act's purpose is clear from its operative provisions: Congress intended for the FHLBanks to provide liquidity to their member institutions, backed by collateral that it specified, to enable the FHLBanks to fulfill their housing and community development mission," the letter said. "No further clarification of the Bank Act intents and purposes is required."

Only Congress can create a member incentives program for those with "a strong and demonstrable connection" to the system's mission, the FHLB letter reiterated.

Several other entities took the opportunity to weigh in on the FHFA's questions.

A joint letter from groups representing state depository regulators also called for restraint from the FHFA.

"State regulators urge the FHFA to refrain from: 1) issuing a proposed rule that would significantly revise the FHLBank System's mission or measurement of that mission, and 2) establishing any member incentive program that provides preferential treatment to institutions based on certain activities," the letter from the Conference of State Bank Supervisors and the National Association of State Credit Union Supervisors said.

"These revisions could place non-statutory conditions or limits on FHLBank liquidity to a wide range of member institutions, have adverse impacts on credit availability for consumers and businesses, and undermine the safety and soundness of member institutions."

FHLBank funding increases mortgage originations by $130 billion and lowers mortgage interest payments by $13 billion every year, an accompanying CSBS press release pointed out. It also allows smaller institutions to compete against larger competitors to provide residential finance.

"Liquidity policy changes made without coordination, or with inadequate consideration for the timing of such changes, could undermine financial stability, particularly as financial institutions continue to face a higher rate environment and economic headwinds," Brandon Milhorn, CSBS president and CEO, said in the press release.

The Independent Community Bankers of America also cautioned against any radical changes to the FHLBanks, warning "against creating additional requirements that raise the cost of or restricts FHLB advances to members in good standing and with eligible collateral. This will only reduce the availability of mortgage credit or community development funding in our nation's communities."

The FHLBanks mission is clear, the ICBA letter states, and does not need to be "substantially changed or clarified."

FHFA's potential change to emphasize the affordable housing and community development mission over that of providing liquidity to its members was not the intent of Congress when it created the system in 1932 or in 2008, when it passed the Housing and Economic Recovery Act.

Echoing the Council of FHLBanks, the ICBA said only Congress can make the changes the FHFA is contemplating.

ICBA also came out against member incentives, arguing instead that the Banks should retain their current pricing structure for advances.

The Mortgage Bankers Association took the opportunity to once again make the case for non-depositories, specifically independent mortgage banks and real estate investment trusts, being allowed to become FHLBank members.

"While the RFI does not directly reference FHLB membership, MBA believes this key finding has a direct connection to our longstanding position that FHLB membership should be expanded to mortgage finance companies with a strong and demonstrable connection to the mission of the FHLBank System," the letter signed by Pete Mills, senior vice president, residential policy and strategic industry engagement, said.

"Further, we believe expanding eligible collateral types and then aligning collateral standards across the FHLBs would also allow the FHLBs to better serve their mission," he added.

The FHFA needs to look at harmonizing and expanding eligible collateral requirements, the MBA letter said.

Currently, each individual FHLBank has the ability to set its own collateral valuation procedures.

Some members that provide warehouse lines of credit to IMBs cannot use those as collateral against advances at certain FHLBanks.

"MBA believes harmonizing the acceptance of warehouse lines, which directly support housing finance activities, to all FHLBs, is a clear way to enhance members' alignment with the FHLB mission," the letter said.

The trade group also called on FHFA to allow for mortgage servicing rights and mortgage servicing advances to investors to be used as collateral.

The National Community Reinvestment Coalition is calling on FHFA to sharpen the mission statement to be clear about supporting affordable housing and community development.

"It is not enough for the FHLBanks to support member banks' home lending activities if the loans are not affordable and sustainable, leading to increases in borrower delinquency and defaults," said the letter signed by President and CEO Jesse Van Tol.

"Likewise, the mere provision of home loans would not be sufficient if they are not equitably provided to emphasize increased lending to traditionally underserved populations."

NCRC also supports the incentives program and its letter proposes a way to accomplish this using Community Reinvestment Act exam results.

It asks the current 10% affordable housing funding requirement be increased to 50% of net earnings.

"Not only do FHLBanks have the capacity to significantly increase their annual AHP funding, but they also have an obligation to do so," the NCRC said. "In return for the advantages conferred upon their status as GSEs, they have an obligation to fulfill their mission and support taxpaying citizens and the communities in which they reside."

The National Association of Realtors agreed with the FHFA's premise that the FHLBanks had drifted "further and further from a connection to housing and community development," its comment letter said.

It called for "a formal commitment to housing" for banks joining the system as well as a standard for maintaining membership.

The voluntary commitment by the FHLBanks for 15% of income to go to affordable housing should be raised and formalized at 20%, NAR said.

NAR also called for the funding of special purpose credit programs, especially those that provide down payment and closing cost assistance.

"We believe a dedicated commitment to providing funds for SPCPs would play an important part in righting historical wrongs while also furthering the FHLBanks commitments to affordable housing," said the NAR letter, signed by Kevin Sears, president.

Another FHFA RFI generated from the FHLBank System at 100 report asks about improving processes to apply for Affordable Housing Program funding.

"FHFA's efforts to streamline the AHP application process should improve the FHLBanks' ability to provide much needed funding for addressing the shortage of affordable housing," Director Sandra Thompson said in the June 20 press release. "Today's RFI seeks feedback from the public as FHFA develops proposals to make AHP funding more accessible to nonprofits, community organizations, and tribal entities."

The comment period for this RFI closes Aug. 19.