giving the 12 Home Loan banks more leeway in forming partnerships with financial institutions to originate and securitize mortgages.
In a trend that began in late 1996, the Home Loan banks began buying mortgages from member banks and thrifts, and then securitizing the loans. The Home Loan banks share the credit and interest rate risk with the mortgage originator. On Monday the finance board gave them more options to customize these risk-sharing agreements.
Applying the new rule for the first time, the government-sponsored enterprise told the Federal Home Loan banks of Cincinnati, Indianapolis, and Seattle that credit risk may be covered partially by insurance paid for by member banks and thrifts.
The finance board said Home Loan Banks could also share credit risk by lowering fees paid to member banks and thrifts if repayments are lower than expected.
The Federal Home Loan Bank of Chicago was the first to pool member bank and thrift mortgages. Through this program, called Mortgage Partnership Finance, the Chicago Home Loan bank has securitized $1.3 billion of loans. The finance board on Aug. 19 approved another pooling program at the Federal Home Loan Bank of New York, which has not started.
The pools are designed to replace the Home Loan banks' investments in mortgage-backed securities, which the finance board wants to end within five years. Home Loan banks hold about $60 billion in mortgage-backed securities.
Separately, the finance board adopted a rule requiring the 12 Home Loan banks to certify each quarter that they are able to pay their share of the principal and interest on the system's outstanding bonds.
Though there has never been a default since the system's establishment in 1932, the agency said procedures needed to established in case one of the banks got into trouble. Under the new rule, the finance board could call on other Home Loan banks to cover the payments. A bank that was unable to meet its obligations would have to reimburse the other banks.