Experts say a proposed rule to limit the ability of the 12 Federal Home Loan banks to buy mortgage-backed securities would have minimal impact on the secondary market for mortgages.
The rule, proposed last week by the Federal Housing Finance Board, would bar the banks from using money they raise in the capital markets to invest in mortgage-backed securities. The idea is to keep the banks focused on their mission of promoting home finance by providing liquidity to member institutions, and to prevent them from conducting arbitrage.
Market experts said that the rule would eventually take a big buyer out of the market, but that there is little danger of a fast sell-off that would hurt mortgage security values.
The proposal, which would set 2005 as a deadline for compliance, would make mortgage-backed securities "much less attractive, and we will be less of a player or not a player at all in that market," said Alfred A. DelliBovi, president of the Federal Home Loan Bank of New York. But he predicted "a slowing in purchase as this regulation goes into effect" rather than a disruptive dumping of securities.
One trader noted that most of the Home Loan banks own short-duration securities rather than the usual 30-year pass-through securities. "It's not going to produce any selling pressure, because these things will come due" in under five years, he said.
The $57 billion held by the Federal Home Loan banks makes them significant investors, but the amount represents only about 2.5% of outstanding mortgages, said Inna Koren, senior vice president for fixed- income research at Prudential Securities, in a research note.
Therefore, she said, the rule would have "minimal effect on mortgage spreads, due to the lengthy divesting period and the seasoned nature of the FHLBs' mortgage holdings."
The rule would force the Home Loan banks to balance the value of the financial products and services they offer financial institutions equally against the debt they raise in the capital markets. The banks currently have $100 in debt for every $75 in loans to member institutions, a spokesman said.
Mr. DelliBovi of the New York Home Loan Bank said that though the change would do little to hurt the secondary market for loans, it would change his bank's role. "The rule transforms us from a customer of Fannie Mae and Freddie Mac to a competitor," he said, referring to the government- sponsored enterprises that buy loans and package them into securities.
He said the rule would give the 12 Home Loan banks the opportunity to create alternative ways to serve the member institutions. "The question really is, are we going to be able to create enough of them fast enough to replace these mortgage-backed securities?" Mr. DelliBovi said.
The New York bank has been developing and marketing alternative products whereby the bank and the member institution each hold a portion of a mortgage.
