WASHINGTON — Federal Housing Finance Board Chairman Ronald Rosenfeld spent much of last year under siege.
Dominating the board's agenda were disagreements with member banks over a proposal to boost Home Loan banks' retained earnings, disputes with the White House over nominations to fill vacant public-interest-director seats, and an ongoing debate about the role of mortgage holdings in the system.
When the agency's board met Dec. 22 to table its retained earnings proposal, Mr. Rosenfeld barely spoke, rumors swirled that he was planning to leave, and his relationship with the industry and the Federal Home Loan banks he supervises was shaky at best.
But by the time the board met again, on Jan. 18, he appeared to be a different person, chatting amiably with colleagues, acknowledging past faults, and genuinely seeming to enjoy his job.
"This is really getting to be quite a place," he told board colleagues. "I'm glad to be with you. It's a real privilege."
In an interview afterward, Mr. Rosenfeld, 67, sounded upbeat about the future. He also discussed his change of heart on the appointment of public-interest directors, his thoughts on the banks' mortgage programs, and his relationship with the White House. Though all those issues still loom, he attributed his change in tone and attitude to incremental progress made on each.
"Quite frankly, things are more enjoyable and more positive when they're getting better," he said. "This is getting better. I think some of the issues that were of grave concern a few years ago have been mitigated."
If stress levels are lower, the primary reason may have been Mr. Rosenfeld's decision to change tack on the retained earnings proposal, which he found himself defending all year. The initial plan would have forced the Home Loan banks to cut dividend payments to members until retained earnings reached $50 million plus 1% of nonadvance assets. It led to a rare alliance of opposition across the 12 Home Loan banks, raised eyebrows in Congress, and angered small banks.
In his September testimony before a House Financial Services subcommittee, Mr. Rosenfeld dismissed criticism that the plan was too severe, telling lawmakers that "the notion of how draconian it is — is simply nonsense."
He now says those statements were meant to support higher retained earnings — not the specific plan itself.
"I mounted a very strong defense of the notion that retained earnings are very important," he said. "If you look at what ultimately happened, every single commitment I made in my statement in terms of what we would look at and how we would act, we delivered on."
Despite the massive opposition to the plan, the Finance Board was widely expected to finalize it without many changes. But Mr. Rosenfeld said he took a hard look at the more than 1,000 comment letters received on the plan — almost all of them opposed — and decided the retained earnings proposal was flawed.
"The comments were very important," he said. "I applaud the banking groups and the commentators because they were very helpful to the process."
He said he harbors no resentment toward the industry.
"It worked out in a manner that the vast majority of people will say, 'That is a very reasonable, thoughtful conclusion,' " he said.
Mr. Rosenfeld's decision to pull back on the retained earnings plan has helped win him some admirers in the industry. Diane Casey-Landry, the president of America's Community Bankers, which vigorously opposed the retained earnings plan, praised the outcome.
"There are a whole lot of people in Washington who could take a lesson from what he just did," she said.
Mr. Rosenfeld also changed his mind on another controversial topic — public-interest directors. For two years he has declined to have the agency make the statutorily required appointments — about 82 of the 200 board director seats at the 12 banks — while Congress debates overhauling regulation of the government-sponsored enterprises.
But after lawmakers adjourned last year without a bill, the Finance Board on Dec. 22 reappointed the remaining 25 directors for one year. Two weeks ago the agency authorized procedures that call on the individual Home Loan banks to nominate candidates for the positions that were already empty.
Though Mr. Rosenfeld's decision was prompted by political circumstances, he maintains the directors play an important role in the Home Loan Bank System.
"Had we not acted, there would have been no public-interest directors, who are and should be an important part of the governance of the banks. So that's why we acted when we acted," he said.
To critics, Mr. Rosenfeld's decision was another example of uneven leadership.
"The Finance Board has had to reverse itself on some positions. It has not been a smooth reign," said Bert Ely, an independent consultant in Alexandria, Va., and a frequent GSE critic. "It just seems like there have been a lot more problems — unnecessary problems — and controversy than one would expect."
The controversy surrounding the appointments is nothing new for Mr. Rosenfeld. Weeks after he joined the Finance Board in late 2004, the White House's office of counsel rebuked him for reappointing several directors. He was later forced to withdraw the appointments.
Contrary to widespread belief in the industry, Mr. Rosenfeld insists the White House played no role in persuading him to hold off on making the appointments last year.
"We are an independent agency, and the word 'permission' is not in our vocabulary," he said. "However, we try very hard to keep relevant parties informed of what we're doing. And by relevant parties, I mean the Congress, the White House and, where appropriate, the public."
Still, Geoff Bacino, a director at the Finance Board, hailed Mr. Rosenfeld's decision to approve procedures for the appointments.
"Political courage in this town is in pretty short supply, and he did that in December. I don't think it's any secret that he tried to do it before and the White House said no," Mr. Bacino said.
Another source of contention within the Federal Home Loan banks continues to be the role mortgage programs should play in their business. Before he retired last month, Martin Heger, the president of the Federal Home Loan Bank of Indianapolis, argued that the banks could not survive solely on advances and should expand their mortgage purchase programs.
But the Finance Board has appeared skeptical of the programs and has issued two written agreements for the Chicago and Seattle Home Loan banks, partly as a result of their handling of the mortgage programs. The Seattle bank has abandoned the program, and its written agreement was terminated this month.
Mr. Rosenfeld said mortgages can play a positive role at the Home Loan banks but should be treated with caution.
"The mortgage business is a perfectly appropriate, legitimate business — providing you know what you're doing. And the providing you know what you're doing is the critical amplifier of the statement," he said.
He warned that Home Loan banks should be leery of relying too heavily on large banks for the program, because larger institutions can seek out alternative funding.
"I think the Home Loan banks, when they buy mortgages from smaller members, are performing a very valuable service and one that should be encouraged," he said. "There's nothing wrong with dealing with the larger banks either, but you've got to deal with them on an intelligent basis."
The multiple sources of funding available to large banks are one of the biggest threats to the Home Loan Bank System, Mr. Rosenfeld said.
"By and large, the system has nowhere to grow," he said. "Most of the small banks that want to be a member are a member. As you pursue bigger banks, the customer loyalty is more tenuous. They have so many more alternatives to go to, so their business is probably less stable."
But Mr. Rosenfeld said he does not believe Home Loan bank consolidation is imminent. Instead he says the banks might work to reduce inefficiencies in their operations.
"You may well see, in the near future, centers of excellence evolving where a bank that does something really good — whether it's managing mortgages or technology — will perform that service for other banks," he said. "You have 12 banks. You don't need to do every function 12 times."
The Finance Board is starting to discuss revisions to the risk-based-capital rule to require banks to hold more retained earnings against holdings of mortgages and mortgage-backed securities. Beyond that task, Mr. Rosenfeld said, the agency has no policy agenda for this year.
"As a regulator, we're primarily driven by a simple thought, and that's preserving the safety and soundness and mission of the Home Loan banks," he said. "And that's about as good as it can get."
