The Federal Housing Finance Agency’s proposal to clamp down on Federal Home Loan Bank membership eligibility could drain hundreds of billions worth of borrowing capacity from the system, claims the president of the Chicago FHLB.
The FHFA proposal would require many banks, thrifts and credit unions to hold 10% of their assets in the form of mortgages in order to maintain their FHLB membership. Smaller institutions with less than $1 billion of assets would have to maintain at least 1% of their assets in mortgages.
“Our early estimate is that the proposed reg would eliminate between $230 billion and $350 billion of borrowing capacity just from the members that would have failed to qualify over the past five years and, as a result, would have become ineligible for FHLBank membership,” Matt Feldman, president and CEO of the Chicago FHLB, said at a Sept. 15 Bipartisan Policy Center housing summit.
The FHFA’s effort would in effect boot out real estate investment trusts and their captive mortgage insurance operations from the FHLB System, including Two Harbors Investment Corp., whose CEO recently defended its membership in the Des Moines FHLB.
Some have proposed using the FHLB System to jump-start the still-struggling private-label securitization market, particularly in light of the Chicago FHLB’s partnership with Redwood Trust to develop a jumbo mortgage conduit. And many are raising red flags about potential unintended consequences of the proposal.
The Federal Home Loan Banks have emerged from the Great Recession with “strong capital positions,” and demonstrated an ability to support our members, Feldman said at the BPC summit. During that entire period, the FHLBs have “not experienced a single dollar of credit losses from advances to members,” he added.
Separately, the Mortgage Bankers Association called on the FHFA to abandon the proposal, arguing it will “undermine” the FHLB’s mission and reduce the availability of mortgage credit, the trade group wrote in comments on the FHFA’s proposed 2015-2019 strategic plan.
“Many current members in good standing could have their membership involuntarily terminated, severing a critical financing relationship,” the MBA said in the Sept. 15 comment letter. “The end result will be less capital contributed to the FHLBs and fewer advances, significantly impairing the FHLB’s ability to fulfill their statutory mission of providing liquidity to finance home lending.”
The American Bankers Association, Independent Community Bankers of America, National Association of Federal Credit Unions and National Credit Union Administration have also raised objections to the FHFA proposal.