Congress should require the Federal Home Loan Banks to pay for an explicit government guarantee on their debt, according to a former GSE regulator and congressman.

Testifying before a House subcommittee, Bruce Morrison said the 12 FHLBs currently operate with an implicit guarantee, which got their fellow GSEs — Fannie Mae and Freddie — into trouble and operating under conservatorships.

"I don't think we should have, as a country, pledges on behalf of taxpayers that are not funded upfront," Morrison told a House oversight panel Wednesday afternoon. The FHLB's explicit guarantee "should be paid for like FDIC," he added.

The former Democratic congressman from Connecticut served as the chief federal regulator of the FHLB System (1995-2000) during the Clinton Administration.

Rep.  Scott Garrett, R- N.J., said the FHLBs performed well during the financial crisis, providing advances and liquidity to their member institutions. However, the chairman of the House GSE subcommittee agreed with Morrison that a government guarantee should be paid for upfront.

"We have to look at this," Rep. Garrett said. "There is not going to be an easy answer to this, but it is essential that we have that discussion."

FHLB supporters claim the district banks pose very little risk to taxpayers and are wary of any changes to the system.

Testifying on behalf of the American Bankers Association, Empire State Bank chairman Anthony Costa urged lawmakers not to make modifications to the system. He stressed that the traditional business of the system needs to be protected as Congress considers GSE reform.

"Failure to do so will have a detrimental effect on mortgage funding and homeownership for many years to come," Costa said at Wednesday's hearing.

Standard Bank president and chief executive Timothy Zimmerman said the FHLBs offer a range of services to community banks and the Mortgage Partnership Finance is especially important to his Monroeville, Pa., depository.  "We sell all of our fixed-rate loans with a term of more than 15 years to the FHLB of Pittsburgh to avoid interest rate risk exposure," he testified on behalf of the Independent Community Bankers of America.

Standard Bank used to sell all those mortgages exclusively to Freddie Mac until recently. Without the MPF option, "we would not be able to make the long term fixed-rate loans our customers expect and not be able to compete with large banks," Zimmerman said.

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