In recent months I have worked closely with Bruce Morrison, chairman of the Federal Housing Finance Board, to develop vehicles that will bring new investments to underserved communities. I applaud his leadership in this area. And I applaud his leadership in another area: his efforts to refocus the Federal Home Loan Banks on their essential mission of housing finance by weaning them from their reliance on arbitrage profits generated by non-mission-related investments.
This is important work. It takes place far from the public spotlight and attracts enemies -- people and institutions that see any challenge to the status quo as inimical to their own narrow interests. In their defense of the status quo they will come up with any possible argument, no matter how tenuous, in an attempt to obfuscate the central issues.
A prime example of this is the commentary in the Sept. 17 American Banker by Lawrence Costiglio, a former member of the Federal Housing Finance Board who was removed from that position by President Clinton in 1998. He said that moves such as Chairman Morrison has made to require the Home Loan Banks to do mission-related work actually undercut the Affordable Housing Program, AHP. His logic is that arbitrage is more profitable than housing finance, therefore generating a larger AHP pie at the end of the day.
I know a Trojan Horse when I see one. I can smell trickle-down economics a thousand miles away. This is a transparent effort to disguise a push to increase bankers' profits as a way to promote affordable housing.
The basic premise of the argument is flawed. Why assume that housing finance is a bad business? Reasonable projections indicate that life under the new rules would not be so bad -- that comparable or better returns by the end of the transition period are likely, preserving or increasing current AHP funding.
But let's assume for a moment that if the Home Loan Banks actually do what they are supposed to do, then profitability declines. Out of every dollar generated by arbitrage profits, 10 cents would go to AHP. The rest would be paid out in dividends to the banks that hold the stock of the Home Loan Banks.
What Mr. Costiglio is really saying is: "Let the (Home Loan) banks continue to be less focused on their mission so that the private shareholders can increase their dividends." This hardly represents, in his words, "a restructuring being done on the backs of those who can least afford it."
If the affordable housing community is truly concerned about the loss of the AHP subsidy, they should ask Chairman Morrison to increase the current statutory level of required contributions to make up for the shortfall. That sounds a lot better to me, given its very small impact on bankers' dividends, than having those advocates ask the Finance Board to authorize an extra $10 in non-mission-related arbitrage profits to obtain $1 for affordable housing.
True friends of affordable housing -- and of a Federal Home Loan Bank System true to its purpose -- are on Chairman Morrison's side in this debate.
Rev. Jesse Jackson