The 12 Federal Home Loan banks, founded to advance cheap money to thrifts for home loans, are casting about for a new role as thrifts become smaller mortgage players.
Judging by two new pilot projects, the banks have set their sights on buying and holding multifamily housing loans - a notoriously tricky business that has some experts and some member institutions worried.
The pilots are small so far - involving $300 million over several years in contrast to the $145 billion of total advances the banks made through June 30 this year. But Bruce A. Morrison, chairman of the banks' regulator, the Federal Housing Finance Board, acknowledges that such loans are the wave of the future.
In an interview, Mr. Morrison said he wants the banks to become a powerful tool for community development, financing not just housing but mixed-use developments, hospitals, and other projects that bring jobs to inner city neighborhoods and strengthen the housing market.
"For more than a year, we've encouraged the banks and their members to articulate the ways in which their ability to provide credit for housing and community development could be strengthened if the Federal Home Loan banks did things they have not done in the past," he said.
In North Carolina last week, Mr. Morrison announced that the Atlanta Federal Home Loan Bank would invest $50 million in multifamily loans made by a consortium of North Carolina community banks. The purchases will free up the consortium to make more loans.
In July, the finance board approved a similar plan by the New York Federal Home Loan Bank. The New York bank will invest $250 million in multifamily and mixed-use residential loans in low- and moderate-income neighborhoods, offering participations to its members.
Both pilots came in response to what lenders needed in those areas, he said. Many more are in the works, he added.
A former Democratic Congressman from Connecticut, Mr. Morrison is well schooled in the ways of Washington and appears to have crafted a strategy of expanding the Home Loan banks step by painstaking step, all the time arguing that the new projects are only refinements of the banks' existing mission.
Some here compare him to another Clinton appointee, Comptroller of the Currency Eugene Ludwig, who is bypassing congressional gridlock over whether commercial banks should be able to sell insurance by giving them the power to do so through regulation.
Mr. Morrison, who attended Yale Law school with Mr. Ludwig and President Clinton, said he was flattered to be compared to the comptroller. "But, from where I sit, this is not competition with Congress. These are existing authorities, but we are certainly taking the view that the world we're dealing with has changed a lot since 1932, and some things need to be done in a way they might not have been done historically," he said.
Still, experts worry that the banks will lose money in the multifamily business, reversing a spotless record that dates to their founding in the 1930s.
"The critical question is whether the Home Loan b0anks have the capacity to do the job without taking on excessive risk," said Thomas H. Stanton, a Washington lawyer and an expert on government-sponsored enterprises.
To make good apartment loans, lenders must be able to predict whether the building will bring in a steady stream of income for 20 or even 40 years. If the neighborhood goes bad or the nearby steel mill closes, such loans can be very vulnerable, he said.
Lou Nevins, president of the Western League of Savings Institutions, which represents the big California thrifts, said he believes the Federal Home Loan banks' new direction should be vigorously debated in Congress and in the bank system.
Mr. Morrison said the board was taking several precautions. The projects are small, the lenders retain a stake in them, and the banks will be examined for their underwriting expertise.