Under a pilot program approved Thursday, the Federal Home Loan Bank of Chicago will fund and hold mortgages originated by its member institutions.
The pilot program is supposed to make it cheaper for Chicago Home Loan Bank members to move mortgages off their books, by averting the guarantee fees they usually pay in secondary markets. These fees average 22 basis points, according to the Chicago bank.
"This offers Federal Home Loan Bank members a more profitable way of handling mortgages than the secondary market currently does," said Bruce Morrison, chairman of the Federal Housing Finance Board, the agency that oversees the Home Loan Bank System.
Under the Mortgage Finance Partnership Program, member banks and thrifts will originate and service one- to four-family home mortgages and hold reserves against credit losses. The Chicago Home Loan Bank, which has 671 member institutions in Illinois and Wisconsin, will manage the interest rate risk.
"Each participant in the transaction contributes what it does best," Chicago Home Loan Bank President Alex J. Pollock said. "The local financial institution has a natural competitive advantage in doing everything that touches the customer, while a Home Loan bank brings major expertise in national and international funding and hedging markets."
The pilot, initially limited to $750 million of loans, is expected to start by June, Mr. Pollock said.
Reaction was mixed among industry representatives.
"This has real potential to allow us to provide more funding for consumers in the Chicago district," said J. Dennis Montgomery, president of the Illinois League of Financial Institutions. "If it does that, it improves our ability to serve the community, and that's a major reason the Federal Home Loan Bank exists."
Raymond S. Stolarczyk, chairman of Fidelity Federal Savings Bank of Chicago, said, "To make loans in this market, you need to be competitive, and this partnership allows me to do the things I'm good at, and to pass on those kinds of risks that are embedded in mortgage lending to the FHLB." Mr. Stolarczyk is also a director of the Chicago Home Loan Bank.
However, officials at America's Community Bankers panned the plan as a first step toward direct lending by government-sponsored entities.
"The loan is closed in the name of the Federal Home Loan Bank of Chicago," said Brian P. Smith, director of policy development at the thrift group. "It's not even for a fleeting microsecond owned by the member institution."
"This is controversial as hell," said Lou Nevins, president of the Western League of Savings Institutions. "If they can do this, we're not even mortgage bankers - we're mortgage brokers."
Similar pilot programs have been approved for the Atlanta and New York Home Loan banks.
But unlike the Chicago bank plan, which lets the government-sponsored enterprise hold whole loans, the Atlanta and New York Home Loan banks may hold just pieces of community development and affordable multifamily housing loans originated by member institutions.