FHLBs Score New Plan On Dividend Payouts

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In a rare show of unanimity, the chairmen of all 12 Federal Home Loan Banks called on their regulator last week to withdraw a proposal that would increase retained earnings requirements and limit dividend payouts.

The proposal would have the effect of reducing dividends but would also prohibit the FHLBs from paying dividends in stock, which benefits more than 9,000 FHLB members, including almost 1,000 credit unions. The proposal by the Federal Housing Finance Board would require each FHLB to have at least $50 million in retained earnings, plus an amount equal to 1% of "non-advance assets," such as mortgage and mortgage-backed securities. It would require all but two of the FHLBs to cut back their dividend payments in order to reach the benchmark.

The healthy dividends paid by FHLBs are the main reason credit unions join the system, already having ready access to low-cost capital to fund mortgage lending through the corporates. FHLBs regularly pay dividends of 4% or better, one of the better returns available in the low-rate environment of the past few years.

The issue of regulatory capital has come into play in the last few years as several of the FHLBs have encountered problems with their secondary mortgage market program known as Mortgage Partnership Finance. As many as half of the FHLBs pay quarterly dividends by issuing more stock, enabling them to rationalize existing retained earnings.

The Journal's Ed Roberts can be contacted at eroberts cuournal.com.

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