Lining Up at Home Loan System

SAN FRANCISCO - The Federal Home Loan Bank of San Francisco, the largest of Home Loan System's 12 banks, says that an unprecedented number of commercial banks are considering joining the institution.

As of mid-June, the bank was processing 13 applications and had answered 80 requests for applications packages from commercial banks in California, Arizona and Nevada, said senior vice president Gary L. Curley.

Currently, San Francisco Home Loan Bank has 10 commercial bank members, up from three in February.

Applications Snowballing

"We are really beginning to sense a snowball effect," Mr. Curley said. Applicants are mainly community banks looking for a cheap source of funds to finance mortgages and other home loans, he noted.

The San Francisco bank has $42 billion in assets, a little more than a quarter of the Home Loan System's total assets. Its experience mirrors a national trend of heightened commercial bank interest in joining the Home Loan Bank System, which was originally created to fund mortgage lending by thrifts.

As part of the 1989 thrift bailout law, Congress opened membership to banks that have at least 10% of assets in residential loans.

Numbers Large Nationwide

Nationwide, more than 165 commercial banks have joined the Home Loan System and bank membership could reach 350 by the end of the year, system officials say. Given the dwindling number of thrifts, commercial bank membership is the key to the long-term viability of the system.

Growing interest in the San Francisco Home Loan Bank reflects and greater awareness that the bank is "a low-cost provider of funds for residential real estate," Mr. Curley said.

The bank employs six calling officers, who late last year began a concerted drive to recruit commercial bank members.

Unlike the Federal Reserve banks, which are lenders of last resort, the federal Home Loan banks are eager to lend money to members. "We want to be the lender of first resort," Mr. Curley said. The San Francisco FHLB charges interest about 70 to 80 basis points above the Treasury bill rate, he estimated.

Los Angeles-based Western Bank, with four branches and $260 million in assets, joined the bank last December. Western needed a source of funding for mortgages temporarily kept in portfolio until packaged and sold on the secondary market. The Home Loan bank gave it a $54 million "warehouse" line of credit.

"It was a little cheaper than we could have gotten someplace else and they did it in a streamlined way," said Hugh S. Smith Jr., Western's chairman and chief executive.

The main obstacle to commercial bank membership is the high initial investment required. When they join, banks must buy Home Loan bank stock equal to 1% of their residential mortgage portfolios or 0.3% of total assets.

Dividends Have Declined

That stock has paid reduced dividends since 1989 because of Congressionally mandated assessments for affordable housing and resolution of failed thrifts. Dividends currently are only slightly above Treasury bill rates.

Banks with large asset bases are especially wary about joining because of the large outlay required.

"We are virtually certain we're not interested in becoming members" because of the large investment, said Rodney L. Jacobs, chief financial officer of $53 million-asset Wells Fargo Bank. "If it were a freebie, it might be a different story."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.