WASHINGTON — Though it was once a top priority for the Federal Home Loan banks, the Federal Housing Finance Agency said Thursday that finding a way for the banks to securitize mortgage loans is off the table.
"I do not recommend permitting the FHLBanks to securitize mortgages at this time," agency Director James Lockhart wrote in a report to Congress. "Rather, the FHLBanks may continue to use programs such as MPF Xtra to serve as a conduit for mortgage purchases from their members to a third party that can securitize those mortgages."
Under that program, financial institutions sell their mortgages to a Federal Home Loan Bank, which passes them on to a third-party investor. But doing that makes Home Loan Banks little to no money, and essentially relegates the mortgage purchase programs to a service for members, not a competitor to Fannie Mae and Freddie Mac as once was envisioned.
Home Loan bank representatives said Lockhart's decision would continue to restrain the program.
"Until the banks can get securitization, it will limit what we can do on the mortgage programs," said John von Seggern, the president of the Council of Federal Home Loan Banks. "Right now, it's just the way it is."
Mortgage programs were once seen as key to the future of the FHLB system. The Federal Home Loan Bank of Chicago introduced its Mortgage Partnership Finance Program in 1997 with the hopes that it would compete with Fannie and Freddie. But without the ability to securitize, the Home Loan banks had no choice but to retain souring mortgages on their books, ultimately largely killing the programs. The Chicago Home Loan bank stopped making purchases under its program last year.
Lockhart held out hope that securitization could be reconsidered once the Obama administration decides how to proceed with the government-sponsored enterprises.
"The potential for FHLBank securitization of mortgages should be considered after the Treasury Department and the Department of Housing and Urban Development, working with FHFA, develop recommendations of the future of Fannie Mae, Freddie Mac and the FHLBank system," he wrote.
The White House has said this should be done by February.
The report, which was required by the Housing and Economic Recovery Act, was released as Lockhart noted his agency's first anniversary. But any celebration was marred by the continuing conservatorship of Fannie and Freddie and the likelihood the government will lose money on its investment in the GSEs.
"My view is that some assets … will have to be left behind as they come out of conservatorship," Lockhart said. "That will mean that some of the losses will never be repaid. When you're writing mortgages on over 100-to-1 capital structure, even those relatively small losses and serious delinquencies … just means that their capital is nowhere near adequate."
