The Federal Housing Finance Agency extended the public comment period on its far-reaching proposal to tighten the Federal Home Loan Bank membership rules. The comment period will now end on Jan. 12.

The FHLB regulator issued the membership proposal in early September for a 60-day comment period. Since then, more than 50 interested parties have urged FHFA Director Mel Watt to extend the comment period for an additional 60 days.

"We greatly appreciate the extension to a full 120 days and we're grateful to Director Watt for leading a genuinely open dialogue on a very big issue affecting the FHLBanks, their members and the communities they serve," said David Jeffers, executive vice president at the Council of Federal Home Loan Banks.

The FHFA proposal would require many banks, thrifts and credit unions to hold 10% of their assets in the form of mortgages in order to maintain their FHLB membership. Smaller institutions with less than $1 billion of assets would have to maintain at least 1% of their assets in mortgages.

Currently, applicants have to meet these asset requirements to become a FHLB member. But there has been no on-going requirement to retain a certain percentage of mortgage assets in portfolio.

The FHFA proposal is intended largely to curtail the growing trend of real estate investment trusts becoming FHLB members through captive mortgage insurance operations. The REIT industry's participation in the FHLB system has been criticized as too risky, a claim rejected by REIT executives.

While the FHLBanks and their members are calling for a longer comment period, they also received support from the Mortgage Bankers Association, National Association of Home Builders and others groups.

"NAHB is concerned the proposed changes to the membership requirements for community banks and others in the Federal Home Loan Banks system would have a negative effect on credit availability and affordability for homebuilders and consumers," NAHB senior vice president David Ledford says in a letter to FHFA.

The MBA noted the on-going asset test requirement will "likely harm community banks and credit unions." MBA president and chief executive David Stevens also objected to a provision would phase-out FHLB membership for captive insurance companies over a five-year period. Several of these captives are real estate investment trusts that are issuing private-label mortgage-backed securities.

"The System plays a critical role in the providing liquidity to the housing finance system, and the proposal raises significant business, legal and policy issues that must be reviewed carefully," MBA says in its letter to FHLB regulator.

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