WASHINGTON - The shareholders of the Federal Home Loan Bank System told Congress on Wednesday that the system should reduce its capital, transfer more control out of Washington to district offices, and allow members to join or quit more freely.

The conclusions resulted from a study that Congress mandated in the Housing and Community Development Act of 1992. Some 24 thrift executives from around the country participated.

The law also required studies on the future of the system by the Federal Housing Finance Board, which oversees the system; Congressional Budget Office; General Accounting Office; and Department of Housing and Urban Development.

Funds for Home Loans

Congress created the Home Loan Bank System in 1932 to encourage home ownership. The system consists of 12 district banks, which lend money to their 3,905 bank and thrift members at below-market rates. Members then use the money in part to make home loans, and they must buy stock in the system to borrow from it.

Thrifts whose deposits are not insured by the Federal Deposit Insurance Corp. have always been required to belong to the system. Since 1989, when commercial banks were allowed to join, 1,609 have signed up. The stockholder study favors voluntary membership.

Michael T. Crowley Jr., chairman of the stockholder committee and president and chief executive of the Mutual Savings Bank in Milwaukee, said the stockholders' group also discussed reducing the system's risk-based capital - now at 29.7% - to 12%, and dropping its core capital level from 6.8% to 4% or 5%.

Michael L. Wilson, policy and research director at the Federal Housing Finance Board, said, "The system could operate with less capital than it has today, given its current risk profile."

Local Control Sought

Throughout their study, stockholders pressed for more control over business functions at the district level. Responsibility for the appointment of district bank presidents, as well as approval of individual affordable housing projects, should be transferred to the district banks, according to the study.

The stockholder study also pointed to the bank system's support of community development projects as a key justification for its existence.

In fact, release of the study was delayed so members could add pages that better illustrated members' commitment to affordable housing initiatives. The first 21 pages of the final report deal with President Clinton's catch phrase, community development.

But a Congressional Budget Office report shows that in 1991, the portfolio lenders the system supports made $3 in loans to higher-income borrowers for every $1 that went to lower-income borrowers.

"The question for Home Loan bank reform is: Is the system meeting an identifiable public purpose any more?" said Deepak Bhargava, legislative director for the Association of Community Organizations for Reform Now.

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