June 2012 - In February 2011, the Administration released a Report to Congress titled: Reforming America’s Housing and Finance Market. The report included, among other things, several recommended reforms that could impede the FHLBanks’ ability to fulfill their mission. The reforms include: 1) limiting the level of advances for large FHLBank members; 2) limiting FHLBank membership to a single FHLBank; and 3) reducing and/or altering the composition of FHLBank investments. Although further legislative recommendations from the Administration have been expected, in a recent Senate Banking Committee hearing, the Housing and Urban Development (HUD) Secretary, Shaun Donovan, told Senators that the Administration is not likely to release any legislative proposals for mortgage finance “any time soon.” In fact, with the 2012 elections close at hand, major policy actions on housing finance reform and myriad other important issues are not likely until next year.
While Congress will likely consider the recommendations for the FHLBank System made in the Administration’s report, it is possible they may choose to leave the FHLBanks unchanged. During the May 2012 FHLBanks Directors’ Conference in Washington, D.C., Acting Director of the Federal Housing Finance Agency (FHFA), Edward DeMarco, said, “…the FHLBanks can and should be part of the larger discussion of the future of the country’s housing finance system. The FHLBanks have long been a conduit to the global capital markets. As such, they have enhanced the liquidity and funding of mortgages for decades. Expanding, maintaining, or refining that role will be the focus of the conversation as it pertains to the FHLBanks.”
During the 112th Congress, key lawmakers introduced more than 15 housing finance reform bills, including more than a dozen proposals that would dismantle Fannie Mae and Freddie Mac. To date, these proposals have not focused on the FHLBanks. It is likely that several components from these proposals will be included in the housing finance reform legislation that is ultimately signed into law.
Qualified Residential Mortgage Rule
Regulatory rules being promulgated in accordance with the Dodd-Frank Act are further shaping the future mortgage finance system. Risk retention and more specifically, finalizing the Qualified Residential Mortgage (QRM) rule, is an example of an important regulatory development that will shape the landscape for how housing finance is conducted in the future. A key component to this rulemaking is what the Consumer Financial Protection Bureau (CFPB) will determine are the criteria and characteristics for a “qualified mortgage” (QM)—which will essentially define which mortgages do not have to meet the proposed risk retention requirements. Another important consideration is whether the previously proposed 20 percent down payment requirement will be lowered for mortgages deemed to be QMs.
Regarding potential risks that the QRM poses, the primary concerns include the possibility of longer foreclosure processes and legal suits filed against lenders by borrowers claiming the lender made a loan the borrower could not afford. Should the borrower win the suit, the lender could be forced to pay off all of the interest and principal of the mortgage. It has been widely rumored that the CFPB may extend the deadline for publishing the rule until after the 2012 elections.
In late May, the CFPB re-opened the comment period for the QM rule, asking specifically for comments on the “ability-to-repay” provision, extending the deadline for comments to July 9, 2012.
Additional risks stem from the international rules being written by the Basel III Committee.
The risks include the Basel III proposed rule on liquidity standards, specifically the Liquidity Coverage Ratio (LCR) rule. The LCR relates to the amount of high-quality, unencumbered liquid assets a banking organization must have on hand in the event of a liquidity crisis that lasts for 30 days. As currently drafted, the LCR is significantly biased, and only gives full-recognition to on-balance sheet liquidity (Treasury securities and cash), and only partial and limited recognition of FHLBank obligations. The proposal does not recognize available borrowing lines such as FHLBank advances.
If FHLBank obligations, advances, and other forms of reliable liquidity unique to the financial system in the United States are left out when Basel III is implemented, it has been reported that U.S. financial institutions would be approximately $1.4 trillion short of meeting the LCR requirement.
There is still opportunity for the regulators implementing the accords in the United States to remedy these issues in the LCR. Basel III anticipates that national differences will need to be considered, and the standards adjusted, as they are implemented globally. The FHLBank System, which is unique to the United States, is an example of one of these national differences that will require adjustment to protect the safety and soundness of the U.S. banking system.
FHLBank Letter of Credit Authority
The Housing and Economic Recovery Act of 2008 (HERA) amended Section 149(b) of the 1986 Internal Revenue Code to add the FHLBanks to a list of other entities that are able to issue Letters of Credit (LOCs) to enhance credit for non-housing tax-exempt bonds.
This authority enabled the FHLBanks to provide credit enhancements, through FHLBank shareholders (including community banks, credit unions, and other financial institutions), to issuers of tax-exempt bonds, and in many cases, to issuers historically underserved by the larger bond insurers. These FHLBank LOCs provide shareholders with an oppportunity to participate in and help local governments invest directly in community-based projects. LOCs are offered at attractive rates to FHLBank Atlanta shareholders and enables them to offer their customers access to AAA/AA+ financing, lowering the financing cost to the community-based issuer. The FHLBanks have been working to restore the LOC authority since it expired December 31, 2010.
During the two-year period that the FHLBanks had this authority, FHLBank LOCs credit enhanced more than 185 bond transactions, financing more than $4.6 billion in projects and helping communities stabilize and meet their economic needs. Of the total $4.6 billion in projects financed under this authority, more than $2.6 billion were financed through FHLBank Atlanta and its shareholders.
Communicating Our Public Policy Priorities
When Congress ultimately proposes a complete solution for housing finance reform, it may be a hybrid of the various proposals that have been offered. Nevertheless, given the still-fragile state of the housing market, it is unlikely that any housing reform legislation will be signed into law during the remainder of 2012.
Whatever the future brings, FHLBank Atlanta will continue to ensure policymakers are aware of how various legislative and regulatory proposals may impact the FHLBanks; you, our shareholders; and the communities you serve. In our ongoing outreach to policymakers, we will continue to stress the following key public policy priorities of the 12 FHLBanks.
- Preserve historical statutory treatment and structure of the FHLBank system.
- Ensure equal access to advances by all creditworthy FHLBank members.
- Preserve FHLBank investment authority.
- Preserve Affordable Housing Program.
- Preserve current form of FHLBank district membership.
- Oppose any regulatory or legislative initiative that would weaken or reduce the FHLBanks' ability to perform their mission prior to broader housing finance reform.
The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial and accounting advisors before entering into any transaction.