After months of controversy, the signing of the Financial Modernization Act (S. 900) this month finally prompted the Federal Housing Finance Board to vote Nov. 15 to withdraw the controversial proposal that would have drastically overhauled the Federal Home Loan Banks' capital structure.

However, a new proposal is bound to be resubmitted next year, officials say.

Faced with community backlash and a proposed legislative moratorium, Bruce Morrison, chairman of FHFB, told Congress he would withdraw the Federal Management and Mission Achievement (FMMA) proposal due to the pending financial legislation.

The FHLBanks were given seven new regulations upon the passage of the legislation, and Morrison has indicated a similar proposal will surface, taking into account the new regulations.

The seven new regulations are as follows:

* The creation of expanded membership and borrow

ing access for community banks with $500 million or

less of assets;

* The creation of universal voluntary membership;

* Elimination of distinctions between QTL and non-

QTL members;

* Expansion of eligible collateral for all members to

permit acceptance of "community lending" collateral

for advances;

* Statutory delegation of FHLBank governance

responsibilities from the FHFB to the boards of

directors of the FHLBanks;

* Establishment of a percentage of earnings RefCorp

assessment which both protects the FHLBanks

against excessive assessments in the event of

decreased earnings and limits the total responsibility

to the 40-year $400 million per year payment created

in FIRREA; and

* Replacement of the current, inflexible subscription

capital rules with a risk-based capital regime

embodying improved leverage, greater flexibility in

capital structure and elimination of the need to retain

and leverage capital greater than that required for

mission-related activities.

"Additional statutory changes in the capital structure mandated by S. 900 do require us to revisit proposals made prior to the statute's enactment," Morrison said. "The proposed FMMA is no more. However, its various aspects will reappear, likely in modified form, in a new sequence consistent with the requirements of S. 900."

The legislation did not enact any reform related to the inception of the controversial "member mortgage assets," or MMAs, which would have required the FHLBanks to divest their mortgage-backed securities and replace them with MMAs (MBSL 10/4/99, 10/25/99).

The MMA structure had been widely criticized by community groups. "With these MMAs ... you have an added credit risk, a risk exposure you don't have with MBS, so even if gross return was the same for FHLBanks, the net return, adjusted for operational costs and credit risk, would not be the same," said Brian Smith, head of economic research and policy at America's Community Bankers.

However, Morrison hinted that MMA programs will be proposed with his forthcoming revised FMMA. "The withdrawal of the FMMA does not reflect a retreat from my belief that the FHLBanks can and should create new products for their members, such as MMA programs," he said.

Morrison hopes to have in place by March definitions of mission and mission-related assets and authorization of FHLBank investments in member mortgage assets and targeted equities.

And by June, Morrison hopes to amend advances regulations to establish review standards for new collateral and for the removal of the 30% cap on "other real estate-related capital." The FHFB hopes to have its mission achievement standards in place sometime in 2001.

However, ACB believes more time should be taken before any new version of FMMA is put on the table. "The finance board needs to absorb the components of the legislative package and wait to see the responses from the banks before they resuscitate, reconsider or restart the FMMA regulation," Smith said.

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