WASHINGTON — As policymakers inch slowly toward reforming the housing finance system, the Federal Home Loan Banks and their allies have a simple message to Congress: leave the system alone.
Home Loan Bank representatives and community bankers urged lawmakers Wednesday to leave the Home Loan Banks out of any overhaul, arguing they have weathered the financial crisis well and are a key source of liquidity for financial institutions.
"In a time when so many of our institutions are in need of repair, we have a system that works," said Lee Gibson, chairman of the Federal Home Loan Bank of Dallas. "It's a structure that must not be changed."
Timothy Zimmerman, president of Standard Bank in Monroeville, Penn., said that as much as 50% of short term agricultural production loans are funded using advances from the Federal Home Loan Banks.
"Their loss, or any changes that would impair their ability to offer low-cost funding, would present a very significant challenge to community banks serving a variety of markets from coast to coast," Zimmerman, who was testifying on behalf of the Independent Community Bankers of America, said in written testimony.
So far the administration has declined to offer a concrete proposal for the future of the housing government-sponsored enterprises, but it has suggested the Home Loan Banks should at least be addressed as part of an revamp. Options range from placing restrictions on the types of lending that Home Loan Banks may support to forcing a consolidation of the 12 regional banks. Some have also called to restrict membership to small institutions and restricting investments in risky assets.
During the hearing, some lawmakers suggested changes were necessary.
"Do we need 12 Federal Home Loan Banks?" asked Rep. Randy Neugebauer, R-Texas, who chairs the House Financial Services oversight subcommittee.
Zimmerman acknowledged that consolidation within the system would save money, but he said there are benefits to having regional banks.
"The Federal Home Loan Bank of Des Moines has a different customer base, and they have different needs, than the Federal Home Loan Bank of Atlanta," he said.
Rep. Michael Fitzpatrick, R-Penn., noted that the other regional banks would be jointly liable in the event that one of the 12 becomes insolvent. He asked the bankers who testified whether they are concerned that some of the regional banks might take imprudent risks, imperiling their more conservative peers.
But Anthony Costa, chairman of Empire State Bank in New York, who was testifying on behalf of the American Bankers Association, said that the financial crisis of 2008 has made members more cognizant of the risk within the system.
"There is a heightened awareness across the board," he said.
In addition to the three bankers, also testifying at Wednesday's hearing was Bruce Morrison, a former chairman of the Federal Housing Finance Board, which previously regulated the Federal Home Loan Banks. (That job has now passed to the Federal Housing Finance Agency, which was created in 2008.)
Morrison noted that despite the widespread focus on the role that the Federal Home Loan Banks play in providing funding to community banks, many of which otherwise lack access to global financial markets, most of the Home Loan Bank advances actually go to large institutions.
Morrison argued that community banks should be able to decide whether membership in the Home Loan Bank system should be restricted to smaller institutions. He also argued that it should be up to the member banks to decide whether to consolidate the 12 regional banks.
Morrison agreed with the bankers who testified that the Federal Home Loan Banks performed well during the financial crisis.
"It certainly was tested on that score during the recent financial crisis, and it scored admirably," he said.
But he said it is important to be vigilant about the temptation by Home Loan Banks to bulk up through purchases of questionable assets, which could backfire in the long run.
Morrison also endorsed the idea that the Federal Home Loan Banks should be restricted to providing funding for specific kinds of lending, such as residential mortgages, rather than serving as a general source of liquidity to banks.
"The current structure comes close to providing general liquidity lending to most institutions," Morrison said.
