The Federal Home Loan Bank System can't sit waiting on the sidelines until Congress acts to modernize the institution. It has to evolve to meet the changing needs of its members in an industry in flux.

Therefore, some reflection on what the Federal Housing Finance Board has accomplished and can undertake within the current legislative boundaries seems in order.

Recently American Banker, reporting on two new pilot projects approved by the board, suggested we are "casting about for a new role."

Viable institutions, I would argue, are always pushing their potential, but casting about we are not.

In any event, a bit of historical perspective is instructive.

The Federal Home Loan Bank System was created in 1932 to provide a stable and affordable source of liquidity for home mortgage financing. At that time, it helped create the 30-year mortgage - the most revolutionary product then and probably ever in enabling Americans to afford to finance homeownership.

The link at that time was direct: from Federal Home Loan banks to member thrifts - which were then highly specialized residential lending institutions - to homebuyer/borrowers.

Since that time, however, two major changes have caused something of a disconnect.

*First traditional thrift institutions have increasingly broadened their activities - and membership in the system has also expanded beyond thrifts to commercial banks and other lenders. Thus, few member financial institutions have a single-minded housing orientation.

*Second, the growth of the secondary markets in housing finance has produced effective, competing sources of liquidity, particularly for standardized single-family mortgage loans.

At the same time, the need for affordable housing and community revitalization has never been more acute, nor the resources scarcer. And the Federal Home Loan banks, implementing the affordable housing and community investment programs mandated by Congress in 1989, have gained unprecedented experience in how to make local partnerships work to meet unmet community credit needs.

The cooperative structure of the system, the closeness to the community, the decentralized delivery system - combined with flexibility and the ability to customize programs - have made our affordable housing and community investment programs models in public-private partnering.

The question today is how to maximize this capacity, building on the lessons learned from our programs in these areas, to preserve what are clearly system strengths. There are those who argue that, with traditional thrifts dying out, the system is a dinosaur; alternatively, there are those who argue that no change is needed. We see a third possibility: in a changed financial marketplace, building on what has worked, to focus the Federal Home Loan banks' support of member institutions more squarely on the public policy mission of meeting unmet community credit needs.

Since becoming chairman, I have been encouraging member banks to ask their borrowers about their unmet credit needs and to knock on Federal Home Loan Bank doors with innovative solutions. The board also created a set of rules under which it would consider pilot programs on the investment side of Bank balance sheets to support housing and community development.

The pilots we recently approved for the Federal Home Loan banks of New York and Atlanta are outgrowths of this process.

The pilot in New York gives permission for the New York bank to develop a program to purchase participation interests from members and eligible nonmember mortgagees in mortgage assets to meet financing needs of underserved communities.

By committing to participation interests in such loans originated by the member, the bank reduces the member's loans-to-one-borrower level by the amount of its participation, thereby permitting the member to bid on affordable housing and community and economic development projects that otherwise might be impossible for it to fund.

The New York bank will also offer shares of its participation interests in such loans to other members who would not otherwise be able, due to their size or the size of the project, to engage in such lending.

The controversy and criticism the New York pilot generated in some quarters was, to us at the Finance Board, disheartening and for the most part I think based on misunderstanding. It has, at its very core, the promotion of the cooperative nature of the Federal Home Loan Bank System - members acting with other members to accomplish together what could not be accomplished individually and to enhance, together, their ability to compete with larger players.

It meets the three standards I have repeatedly emphasized for new product development: addressing unmet credit needs, maintaining safety and soundness, and preserving the cooperative nature of the system by avoiding unfair competition.

More importantly, innovation does not happen without experimentation - and this is certainly an experiment on a small scale of $250 million.

Most recently, the Finance Board approved a proposal from the Federal Home Loan Bank of Atlanta to develop an Affordable Multifamily Participation Program. Under the proposal, the bank will purchase participation interests in affordable multifamily housing loans originated by the Community Investment Corporation of North Carolina,an affordable housing consortium whose sole purpose is facilitating permanent financing for new low- and moderate-income housing.

Members of the North Carolina group recognized that the need for affordable multifamily housing has outpaced their ability to fund all of the projects presented to them. They brought the multifamily program to the Federal Home Loan Bank of Atlanta as a solution; by selling participation interests in existing projects to the Atlanta Bank, they will be able to "recycle" funds from existing projects to new projects.

This pilot - freeing up funds for "loaned up" consortium members to expand their capacity for new lending - has enormous nationwide potential, in an arena where the secondary market is underdeveloped. Again, it's small - $50 million - with policies, procedures and controls appropriately monitored by the Finance Board.

Members of the North Carolina congressional delegation have called this program "an important step in expanding support for affordable housing without jeopardizing the high credit ratings or the safe and sound operation of the Federal Home Loan Bank of Atlanta."

To go forward, the Federal Home Loan Bank System needs to continue to answer a central policy question, even in the absence of legislation. As a provider of liquidity for members, the question is: Liquidity for what? How does the community actually benefit from the credit support the Federal Home Loan banks supply to financial institutions?

The answer does not require legislation. Rather, the Finance Board will continue to work within the confines of current law to encourage the offering of new, profitable, mission-related products and new approaches that meet otherwise unmet credit needs. We will strengthen our focus on supporting community institutions that in turn support community revitalization. Indeed, I am pleased with the progress we are making toward that goal.

Mr. Morrison is chairman of the Federal Housing Finance Board, which oversees the Federal Home Loan banks.

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