WASHINGTON - For the second time in six months, the Federal Housing Finance Board has signed off on a rule change to help a struggling home loan bank.
The agency approved a rule on Oct. 11 to relieve members of the Federal Home Loan Bank of Seattle from excess-stock rules that would otherwise bar them from borrowing more advances.
In April the Finance Board had ruled that the Chicago Home Loan bank could use $1 billion of its own debt to buy back some excess stock. It said the decision was a one-time deal and said the same of the waiver for the Seattle bank.
"These are all situations that are specific," Michael Powers, the Finance Board's portfolio manager, said in an interview.
The approval was seen by some as a sign of new flexibility at the Finance Board on the issue of excess stock, which it proposed earlier this year to restrict. But others within the board said it did not signal a policy shift and some among that group wondered if the Seattle decision was too tentative.
The Finance Board and the Seattle bank, meanwhile, disagree on exactly what problem the new plan is intended to fix.
The Finance Board said it has doubts about the Seattle bank's ability to attract new members. The bank has not paid a dividend since May 2005, and Washington Mutual Inc., a top customer, said in late August that it planned to walk away from the Home Loan Bank System, because a proposal to raise retained earnings would make business too expensive.
Membership "is a concern with the Seattle bank," Mr. Powers said. "They are not repurchasing stock or paying dividends, so they are having challenges."
Mark Szczepaniak, the Seattle bank's chief financial officer, said the Finance Board has not discussed its concerns with his bank. But he rejected Mr. Powers' concerns, calling the bank's membership base "very strong."
He said he hopes the new rules will make that base even stronger. The amendments, which the Finance Board approved unanimously, open up an excess-stock pool that was worth $747 million on June 30, to support member borrowings. The rules stipulate that only half of the pool can be tapped to fund advances and that no more than 25% can go to a single member.
The pool is said to be necessary because under current rules the bank is prohibited from giving advances to members whose stock holdings are already above and beyond what is required for membership. To join the Seattle bank, a member must buy either $500 of stock that is redeemable after five years or an amount of stock worth 0.5% of their home mortgage loan portfolio, whichever is greater.
Mr. Szczepaniak would not say how many members have hit the excess-stock ceiling, but those institutions are the ones that stand to gain from the excess-stock pool. Less-active stockholders have little incentive to increase their borrowings under the plan.
Though some observers may believe it benefits primarily the bank's largest customers, such as Wamu and Bank of America Corp.'s Oregon unit, Mr. Szczepaniak said it does not give them a leg up over smaller members.
"I don't think the capital-plan amendments were designed for the largest members," he said. "We have smaller members with needs, and their needs for wholesale funding" have increased, "so the amendments support them."
Vincent Beatty, the Seattle bank's treasurer, said executives "don't believe these amendments transfer value from one class to another."
Still, some industry observers view the changes dubiously.
"It sounds like they've taken something simple and made it excessively complex," said Bert Ely, a consultant in Alexandria, Va., and longtime critic of government-sponsored enterprises.
Mr. Szczepaniak said that is not what the Seattle bank had intended. Besides the new excess-stock pool, the amendments create class A stock that can be redeemed after six months. They also merge two subclasses of existing class B stock that are redeemable after five years.
The goal, Mr. Szczepaniak says, is to make membership in the Seattle bank more flexible. If a potential member is seeking a short-term investment, it can buy class A stock and redeem it after six months instead of waiting five years. And if a member is hitting the ceiling and does not want to invest further capital, it can simply borrow advances by drawing from the excess-stock pool.
Mr. Szczepaniak said that given the option of borrowing for free from the excess-stock pool or paying for new stock, he knows most members will opt for the pool. But he said the class A stock will become particularly valuable after the pool is drained.
"As borrowings increase, and the excess-stock pool goes away, class A is there," he said.
The Seattle bank is not the only Home Loan bank with an excess-stock pool, but it is the only bank that has won specific approval of the concept from the Finance Board.
In 2002 the agency approved a capital plan for the Cincinnati Home Loan bank that allowed for a permanent pool similar to Seattle's that was valued at $622 million on June 30.
But the Seattle bank's excess-stock pool is scheduled to expire Oct. 1, 2008, and though the Finance Board can renew it, Mr. Szczepaniak said he did not think that would be necessary.
That contention frustrates Finance Board member Allan Mendelowitz.
"Given that the Finance Board has already gone on the record approving shared capital to support advances, and given that the Finance Board obviously doesn't see this as a safety and soundness concern, I'm somewhat mystified by why the Seattle plan is so tentative with respect to the shared capital," he said during the Oct. 11 meeting that approved the plan.
Other Home Loan bank insiders are viewing the Finance Board's approval of the amendments with great interest. The Finance Board has recently taken a dim view of excess stock at the banks. Its March proposal to raise their retained earnings included a provision that would limit excess stock to 1% of a bank's assets.
Some wonder if the approval signals a change of heart with regard to excess stock.
"We saw [the approval] as en-couraging," said John Byczkowski, a spokesman for the Cincinnati bank.
That bank has been one of the most vocal critics of the Finance Board's retained-earnings plan. If the agency finalizes the proposal, the Cincinnati bank would have to cut its excess stock by $250 million.
But Finance Board officials cautioned not to overread the approval. "This is not a departure," Mr. Powers said.
Other Home Loan banks could follow Seattle's lead, observers said. Since the Finance Board has already approved the plan for a troubled Home Loan bank, some think the agency will have to approve any requests it gets from healthier ones.
In any case, John von Seggern, the president of the Council of Federal Home Loan Banks, said the Finance Board's approval marks the beginning of a different, more cooperative relationship between the banks and their regulator.
"The issue is to allow each bank to make the case that what they're doing is mission-consistent and safe and sound, instead of a blanket rule that doesn't work," he said.
