As the new managing director of the Federal Housing Finance Board, Rita Fair is overseeing legislative efforts to overhaul the Home Loan Bank System's capital structure and supervision.
The 12 district Home Loan banks, which provide liquidity for banks and thrifts that make housing loans, each recently concluded public forums held to hear industry and community views on the proposed restructuring.
Two more hearings will be held here next week to discuss the results of the 12 prior hearings and other matters concerning the upcoming legislation, which is expected to be completed early next year.
With the bulk of the public forums behind her, Ms. Fair sat down with American Banker's Olaf de Senerpont Domis to discuss the reform proposals she plans to submit to Congress early next year.
Q.: Why does the Federal Home Loan Bank System need to be overhauled?
FAIR: The whole mortgage finance system of the country has changed over the years, and we want to have a system that is positioned to respond to the needs that are out there in terms of mortgage credit.
One of the areas that needs attention is the community development area. We need to look at what the system can do to provide a little bit more support in a prudent and safe and sound way to help in those kinds of developments.
Another reason the system needs to be overhauled is that we need a permanent capital base. With a membership that is moving toward voluntary members who can pull out at any time, you need to create a system that will support what we're doing, even if members come and go.
There are a number of ways to change the capital structure. You can change the ability to get out of the system by taking a longer time to redeem stock. You can translate some of the capital that's in there now into a permanent capital base through some mechanism.
Q.: What information have you gathered from the public forums that will help you update the system?
FAIR: One of the things we'll pull out of the hearings is that the system serves a good purpose in providing mortgage financing for the country. I hope that one of the other things that we'll be able to get out of it is the definition of community development -- it has a lot of different meanings.
I think that what people are talking about in terms of community development is some type of development that stabilizes. a neighborhood -- not a big commercial development or shopping center. It is basically the kinds of things we have been doing, but maybe asking us` to give a little more thought to how we could be more creative in using the community investment program to provide some of this kind of support.
Q.: Was most of the feedback that you received from the hearing positive?
FAIR: It was generally positive. If there was anything negative, it concerned the governance issue. Some of the members of the system were saying that we need to decentralize some of the things that we do in Washington.
We do a lot of administrative oversight on the banks. We approve all their budgets, and we approve, on an annual basis, the reappointment of their presidents and the presidents'salaries.
And there was some conversation about why we need to do all that. Some said, "We are a beard of directors out here, and we can probably do that better than you can,"
We're already working on that here. We have staff here and staff at the banks who are in the midst of a governance process, because we're looking at what tasks we can move out of here even before the we get legislation.
Q.: Is the new Republican majority in both chambers of Congress going to affect the prospects for this legislation next year?
FAIR: It's hard to tell whether the new atmosphere on Capitol Hill is going to affect this, because one of the biggest proponents for an overhaul of the system was Congressman Baker, a Republican from Louisiana, who may wind up in some leadership position.
There's not an overwhelming knowledge of the Federal Home Loan Bank System on the Hill. We have a tremendous educational process, and with this big a turnover, not only in members but in leadership, we'll be pretty busy with our educational effort.
Members of Congress need to understand how our programs benefit the people in their districts. I think they need to see some examples of the partnerships we've had with the neighborhoods and the state and local governments to build housing that probably otherwise wouldn't get built.
If we just get enough consensus on the issues, it would be a lot easier to get something through Congress, which has a lot of other things to focus on that-may he more of a crisis nature than the system legislation is.
Q.: How do banks benefit from being members of the system now, and how will they profit from the legislation?
FAIR: Member banks get a ready source of liquidity, and when you are talking to smaller banks that don't have access to Wall Street, that's pretty important.
If you look at a profile of our membership, most of the banks that are joining the system are very small banks, in the area of $70 million or $100 million [in assets]. There are lots of really small banks.
We provide technical assistance, in terms of low-cost housing. Each district bank has a community investment officer who brings the nonprofits together with the small banks if they are interested in building community, low-cost housing.
The legislation will reaffirm the bank system's mission. It will basically say, 'We need this system because it has done a lot to provide support for mortgage financing, to portfolio lenders and through its contribution to the Affordable Housing Program."
It will be a reaffirmation that this is a system that today, in spite of all the changes in mortgage finance, is still necessary. I think there is no really critical need for the bank system legislation, because it is operating fine.
We just think that it could be operating better.
