Since it began buying mortgages from its members in June 2001, the Federal Home Loan Bank of Indianapolis has amassed a $7.3 billion portfolio.
But Martin L. Heger, its president and chief executive officer, says it could do even better if its regulator would amend a rule that prevents it from buying loans from dozens of Michigan banks.
Those banks, more than 50 in all, make mortgages through subsidiaries. They do so for a compelling reason: Michigan taxes mortgage income generated by subsidiaries at a lower rate than mortgage income generated by banks directly.
This presents a significant problem for the Indianapolis Home Loan Bank and its Mortgage Purchase Program. Its regulator, the Federal Housing Finance Board, bars Home Loan banks from purchasing assets from any organization other than its member banks.
The rule effectively blocks the Indianapolis bank, whose territory covers Michigan and Indiana, from buying loans from some of Michigan’s biggest mortgage lenders. Those include the state’s biggest, the $49.7 billion-asset Standard Federal Bank in Troy, which makes mortgages through ABN Amro Mortgage Group, and the $1.4 billion-asset MBT Financial Corp. in Monroe, which lends through its MBT Credit Co. Inc. subsidiary.
“The challenge in Michigan has been with affiliates,” Mr. Heger said. “We don’t have opportunities to buy mortgages from them. … It’s a big issue for us.”
It is also an issue for banks with mortgage subsidiaries, which would like to sell loans to the Indianapolis bank without giving up their tax break.
Those banks are free to sell their mortgages to Fannie Mae, Freddie Mac, or some other secondary-market player. Many would prefer to sell to the Home Loan bank, however, because they are shareholders and receive direct benefits — in the form of quarterly dividends — when its profits increase. Officials at the Indianapolis bank said the Mortgage Purchase Program is one of the biggest drivers of its profits, which totaled a record $43 million in the third quarter.
The Michigan Bankers Association, the Michigan Office of Financial and Insurance Services, Sen. Debbie Stabenow, D-Mich., and a number of banks based in the state have asked the Finance Board to amend the Acquired Member Assets regulation. They have proposed letting the 12 Home Loan banks to buy mortgages from a subsidiary when a bank owns 80% or more of it. Currently a bank must reabsorb the mortgage business to sell the assets to a Home Loan bank.
Critics of the proposal, including two former assistant secretaries of the Treasury, said it would move the Home Loan Bank System too far from its mission of lending to banks.
Sheila Bair, who served as President Bush’s first assistant secretary of the Treasury for financial institutions, said Monday that allowing Home Loan banks to purchase subsidiaries’ assets would “dilute the parameters Congress set for the system” and create safety-and-soundness questions.
Gregory Baer, who held the same position during the Clinton administration, agreed with that assessment. “The statute says the Home Loan banks can only lend to” or buy from members, “and only banks are members,” he said. “Their subsidiaries aren’t members.”
This year Ms. Bair, now a professor of financial regulatory policy at the University of Massachusetts, Amherst’s Eugene M. Isenberg School of Management, published a report critical of such plans. Fannie funded the report, but on Monday a spokeswoman for the government-sponsored enterprise said it has not taken a position on the Indianapolis bank’s proposal.
The Finance Board has been considering changes to the assets regulation for more than five months, but it has shied away from letting the Home Loan banks buy loans made by any subsidiary.
A spokesman for the agency said Monday that it is continuing to study the rule but has set no timetable for proposing amendments. Its deliberations may have gotten more complicated with Standard & Poor’s Corp.’s announcement Monday that it had revised its outlook on three Home Loan banks — including the Indianapolis one — because of concerns about their mortgage-purchasing activities.
It is unclear why Michigan taxes subsidiaries less than banks, and no one interviewed for this story could say precisely how long the law has been in effect. Donald Heikkinen, a senior vice president and a staff counsel at the state trade group, said it has been in place for “at least 25 years.”
Because of the tax consideration, many Michigan banks — and not just big ones — have set up mortgage subsidiaries. The $165 million-asset Northpointe Bank in Grand Rapids has one, as do the $165 million-asset Thumb National Bank in Pigeon and the $45 million-asset University Bank in Ann Arbor.
The Finance Board allows Home Loan banks to accept subsidiaries’ loans as collateral for advances to their owner banks. And Mr. Heger, who began his career in Michigan with the old National Bank of Detroit, said he found that curious. “It seems logical that if we can accept them as collateral, we should be able to purchase them.”
The Indianapolis bank’s purchase program has certainly been affected by the regulation. A spokesman said it buys six Indiana loans for every Michigan loan it buys, even though almost half of its 434 members are Michigan banks.
Mr. Heger and the Indianapolis bank’s supporters say the Michigan-Indiana disparity would quickly disappear if the Acquired Member Assets regulation were changed.
“There is no doubt that more Michigan members would take advantage of the [Mortgage Purchase Program] if the proposed regulation allowed the Federal Home Loan Bank of Indianapolis to purchase mortgages directly from a member’s subsidiary,” Terry G. Greisinger, the Michigan Bankers Association’s vice president of government relations, wrote in an Aug. 13 letter to the Finance Board.
Mr. Heger said that “there’s a nice upside potential” to the program. “We’re hoping something can be done.”
