The Federal Home Loan Bank System could be on the verge of playing a bigger role in the $4 trillion U.S. mortgage finance market.
The system's regulator, the Federal Housing Finance Board, wants Home Loan banks to move beyond advancing money to private mortgage lenders and to create a new form of mortgage financing for banks and thrifts. A controversial proposal calls for the 12 Home Loan banks to pool mortgages and share the credit and interest risks with originators.
The pools would give private-sector lenders a third option to selling mortgages to Fannie Mae or Freddie Mac or keeping them on their books until maturity.
Like Fannie and Freddie, the Home Loan banks sell AAA-rated bonds under the auspice of their government sponsorship. They use those funds to make advances to member banks and thrifts. They also bolster their balance sheets by investing in mortgage-backed securities. This practice is opposed by Finance Board Chairman Bruce A. Morrison, who says the Home Loan banks should limit their investments to new mortgages. The proposal, released in July and open for comment until yearend, would give the Home Loan banks five years to replace the securities with their own mortgage pools.
Mr. Morrison said the goal is to modernize the system, which started in the New Deal era. The proposed regulation, known as Financial Management and Mission Achievement, builds on two alternatives to advances designed by Home Loan banks. The Federal Home Loan Bank of Chicago started a pool three years ago and another was approved for the New York Home Loan Bank last month. The Cincinnati, Indianapolis, and Seattle Home Loan banks applied in July to start a third risk-sharing pool program.
The Chicago program has $1.5 billion in outstanding loans. By contrast, the system has close to $300 billion in advances.
Skeptics are concerned that the forced expansion will not be profitable, which could cause advance rates to go up and dividends to go down. Mr. Morrison said that if enough private lenders participate, the pools would be such a force in the marketplace that they could lower the cost of mortgages.
"By doing that, we think we are injecting significantly more competition into the mortgage finance business," Mr. Morrison said.
"If the price can't go down any more, that's great -- we've already reached the promised land," he added. "If the pricing can go down a little further and if the distribution system for the government supported funds can be broadened, then the consumer wins."
There is concern that the Home Loan banks will need more than five years to make the transition. The $60 billion held by the banks in mortgage-backed securities, which account for close to 15% of the Home Loan banks' assets, provide liquidity and diversity. Whether the alternative investments can offer comparable benefits is unknown, said John L. von Seggern, executive vice president of the Council of Federal Home Loan Banks, a trade group that represents 10 of the 12 banks.
"It's clearly a sea change in a system where things are working very well right now," said Mr. von Seggern. "I don't see a reason to rush into this."
To back up the new assets, the Finance Board also wants to impose risk-based capital requirements on home loan banks. The current capital requirements are calculated simply as a percentage of advance borrowers' assets. The financial reform bill pending in Congress would also change Home Loan bank capital rules, and critics say the Finance Board should wait to see if a new law is enacted.
"There are things that we think ought to be fixed legislatively. It would be good if they were, but you can't count on Congress ever passing one of these things," Mr. Morrison said. "We can't sit here."
