WASHINGTON - In an attempt to head off new rules, four trade groups on Monday advised the Federal Housing Finance Board against restricting investments by the Federal Home Loan Bank System.

On Wednesday the agency, which oversees the system, is expected to propose new rules that would define what assets the 12 Home Loan banks can buy.

In a letter to Finance Board Chairman Bruce A. Morrison, three banking trade groups and an association representing most of the Home Loan banks urged the board to delay the investment rules and issue them along with the new capital regulations required by the Gramm-Leach-Bliley Act.

"The direction that the Finance Board provides for the development of FHLBank capital structure plans will greatly affect the actions that FHLBanks take to achieve their mission," according to the letter from the American Bankers Association, America's Community Bankers, the Independent Community Bankers of America, and the Council of Federal Home Loan Banks.

"Conversely, activities that the FHLBanks undertake for mission achievement will affect their ability to generate and hold capital and comply with risk-based capital standards," the letter said.

Those capital rules are expected to be proposed in May or June.

Banks and thrifts can buy stock in a Home Loan bank and gain the right to borrow funds. Depending on their profits, the Home Loan banks pay dividends on that stock and adjust their lending rates. The industry trade groups are concerned that new investment limits would hamstring the Home Loan banks, which in turn could lead to higher borrowing rates or lower dividends.

Advances, the loans Home Loan banks make to member institutions, were up 37.3% to $396 billion in 1999 while the Home Loan Bank System's total assets rose 34.4% to $583.2 billion. Net income was up 19.7% to $2.1 billion while dividends jumped 21% to $1.353 billion.

Mr. Morrison has long advocated investment limits to ensure that the Home Loan banks stick to their mission of expanding affordable housing. Last year, the Finance Board proposed barring the banks from investing in mortgage-backed securities.

But last fall when Congress was debating the Gramm-Leach-Bliley Act of 1999, the agency agreed to back off.

The proposal expected Wednesday will define what assets Home Loan banks may buy, but it will not impose any limit on mortgage-backed securities. "We believe it is important to signal to the banks what we expect," an agency spokeswoman said. "It is very much what we did last year except there is no limitation on MBS.

"You can do it, but it will not count as a core-mission asset," she said.

According to the system's recently released 1999 financial statements, investments increased 25% to $171.4 billion. Mortgage-backed securities increased 29.2% to $73 billion.

The Finance Board says it would prefer the Home Loan banks buy assets directly from member banks and thrifts.

The Federal Home Loan Bank of Des Moines is already on board. It has stopped investing in mortgage-backed securities, bank president Pat Conway said Monday. The bank decided it was more efficient to use its capital to buy mortgages directly from its members than to invest in mortgage-backed securities, he said.

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