FHLBs Score New Plan On DividendPayouts

WASHINGTON - (05/08/06) – In a rare show of unanimity thechairmen of all 12 Federal Home Loan Banks called on theirregulator last week to withdraw a proposal that would increaseretained earnings requirements and limit dividend payouts. Theproposal would have the effect of reducing dividends, but wouldalso prohibit the FHLBs from paying dividends in stock, whichbenefits more than 8,000 FHLB members, including almost 1,000credit unions. The proposal by the Federal Housing Finance Boardwould require each FHLB to have at least $50 million in retainedearnings, plus an amount equal to 1% of ‘non-advanceassets,’ such as mortgage and mortgage-backed securities. Itwould require all but two of the FHLBs to cut back their dividendpayments in order to reach the benchmark. The healthy dividendspaid by FHLBs are the main reason credit unions join the system,already having ready access to low-cost capital to fund mortgagelending through the corporates. The issue of regulatory capital hascome into play in the last few years as several of the FHLBs haveencountered problems with their secondary mortgage market programknown as Mortgage Partnership Finance. As many as half of the FHLBspay quarterly dividends by issuing more stock, enabling them torationalize existing retained earnings.