Home Loan Bank Tactic To Avoid Payments on Bailout Bonds Is Banned

WASHINGTON - The Federal Housing Finance Board has banned the 12 Federal Home Loan banks from using resale agreements to extend credit to their members.

In late 1993, the Home Loan Bank of San Francisco began pushing the resales - which entail selling securities to a member bank or thrifts that agree to buy them back later at a higher price - alongside its traditional advances.

By using resales, also known as reverse repos, the San Francisco bank cut its share of interest payments due on Resolution Funding Corp. bonds, which were sold to finance the work of the Resolution Trust Corp.

How much a Home Loan bank owes is calculated partly on the amount of advances it makes to Savings Association Insurance Fund-insured members.

The San Francisco bank's practice raised the ire of other Home Loan banks, and on Wednesday the Housing Finance Board heeded their protests and voted unanimously to ban all the banks from entering into resale agreements with members.

"I applaud the finance board for taking action to once again level the playing field," said Alfred DelliBovi, president of the Federal Home Loan Bank of New York. "We think the 'bootleg advances' were unconscionable, because they constituted under-the-table advances that avoided Refcorp taxation."

Gary Curley, senior vice president for banking and community investment services at the San Francisco bank, acknowledged that avoiding Refcorp payments was crucial to the making the resale agreements both low priced and profitable.

But even with the growth in resales - from $2.5 billion at the end of 1993 to $10.7 billion at the end of 1994 - the San Francisco bank's advances increased as well, from $23.8 billion to $25.3 billion.

"This was largely new business we were able to obtain by being responsive to the marketplace," Mr. Curley said.

With the bank's resale business cut off, Mr. Curley added, some big California thrifts may choose to drop their membership, thereby cutting into the income of the San Francisco bank, the system's largest but least profitable, as well as that of the entire Federal Home Loan Bank System.

This is not the first battle of the Home Loan banks over interest payments on the Resolution Funding Corp. bonds.

Each of the 12 banks has to send 20% of its net income each year to pay Refcorp interest. If that doesn't add up to $300 million - and it never has - the banks have to kick in the rest according to a formula based on their advances to members insured by the thrift fund.

That means the San Francisco bank, with California's giant S&Ls among its members, has to pay relatively much more than, for example, the Boston and Pittsburgh banks.

The San Francisco bank's total Refcorp bill in 1994 was $70 million, down from $75 million the year before. The Boston bank paid $15 million in 1994, up from $13 million in 1993.

Attempts by the Clinton administration and Rep. Richard Baker, R-La., to rejigger the formula as part of broader Home Loan Bank System reform legislation have stalled in the face of fierce opposition from the Boston, Pittsburgh, and New York Home Loan banks.

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