WASHINGTON - Senate Banking Committee Chairman Phil Gramm has accused Federal Housing Finance Board Chairman Bruce A. Morrison of going back on a 1999 agreement with Congress by proposing to restrict investments by Federal Home Loan banks in mortgage-backed securities.
According to the Sen. Gramm, the rule establishing "core mission" activities for the Federal Home Loan banks, which the Finance Board is expected to adopt Thursday, violates a deal Mr. Morrison made when the Gramm-Leach-Bliley Act of 1999 was being written.
Sen. Gramm cited a letter Mr. Morrison sent lawmakers last October that pledged his agency would not limit Home Loan bank investments until new capital standards were established. "Recent proposals by the board violate the spirit of the commitments embodied in your letter," Sen. Gramm wrote in a letter Friday. "Rather than proceeding once again down this troubled road, the Board should follow the priorities set for it by Congress."
Mr. Morrison, who has announced plans to leave the agency next month, refused to comment on Sen. Gramm's letter.
The Finance Board has proposed new capital standards, but they are not expected to be finalized until November.
The "core mission" rule, proposed in April, attempts to define acceptable Home Loan bank activities. Unlike an earlier incarnation, the rule is not expected to limit mortgage-backed securities specifically, but these investments would be defined as outside the core mission of a Home Loan bank. And the rule would grandfather current securities. Industry sources took that as a definite sign of the agency's intent to limit them.
"If you grandfather something, you are telling people that somehow, someway, you are going to limit it," said Eric Mondres, senior government relations counsel for America's Community Bankers.
The agency is overstepping its authority as a safety and soundness regulator, because mortgage-backed securities are generally considered safe and profitable, Mr. Mondres said. "These securities produce a reasonable return and have an outstanding track record," he said. "It is a useful tool, and we don't think the director has the right to take any tool away if it isn't a safety and soundness issue."
The Finance Board is scheduled to vote Thursday on a less controversial rule, granting member institutions the right to pledge expanded collateral, including farm and small business loans, for Home Loan bank advances.
Last week the agency adopted a rule that exempts banks and thrifts with less than $500 million of assets from a requirement that Home Loan bank members have at least 10% of assets in residential mortgage loans. Membership also was made voluntary, and the process for electing Home Loan bank directors was clarified.