With discussions up in Congress for a combined new regulator for the Federal Home Loan Banks as well as Fannie Mae and Freddie Mac, one issue that has also been deliberated is the possibility of FHLBanks using securitization for risk mitigation. Although some have warmed to the idea, many public officials and trade groups are concerned about the lack of securitization know how and the danger that this would divert away from the real goal of the FHLBanks, which is to be a liquidity source for its members.
Sources said that even if the 12 FHLBanks are not particularly opposed to securitization - as evidenced by the Counsel of Federal Home Loan Banks vote agreeing that regulator Federal Housing Finance Board has the authority to allow the FHLBanks to securitize - members do not want the issue brought up before Congress, as they fear this would hinder the passage of the much-anticipated GSE Regulation bill.
The Federal Home Loan Bank of New York in March adopted a board resolution expressing concern that adding securitization to the list of issues up for consideration in GSE legislation - considering its controversial nature - could possibly "cause harm to, and possibly derail, the chances for positive statutory reform for the Federal Home Loan Bank System." The Board also stated that securitization is "an extremely risky line of business and, because of the potential for risk, it would require management by a central organization and not by individual banks," adding that centralized management as opposed to individual FHLBank management, have proven to be a "stumbling block" when it comes to various Federal Home Loan Bank systemic matters.
And to complicate matters, there are varying views as to whether the FHLBanks do have the authority to securitize. Recently, Federal Housing Finance Board Chairman Ronald Rosenfeld, as part of his April 21 testimony to the Senate Banking Committee, requested clearer guidance from Congress as to whether the FHLBanks should securitize or not. Rosenfeld said that securitization is such a departure from the FHLBanks' core mission that he prefers Congress to weigh in and clearly delineate the FHLBs' role, and whether this role includes securitization. Meanwhile, John Von Seggern, president at the Counsel of Federal Home Loan Banks, said that they believe the Federal Housing Finance Board currently has the authority to allow FHLBanks to securitize, adding that that the FHLB system has run a very successful mortgage program, which is reaching capacity. Over time, the FHLB is looking at various ways to mitigate risk, with options including securitization.
Ann Grochala, director of lending and accounting policy at the Independent Community Bankers of America (ICBA), said that, "The question that has to be decided is what the FHLBanks' function is - whether it is to provide liquidity or secondary market activity."
In ICBA's Chairman David Hayes April 19 testimony to the Senate Banking Committee, he acknowledged that FHLB securitization could increase competition with Fannie and Freddie, which could result in lower guaranty fees and borrower costs as well as increase profits and member dividends. "But we also recognize that with increased profits can come increased risk to the FHLBanks and the system," Hayes said. He stated that ICBA does not currently have a view on whether these banks could securitize mortgages or other types of assets. However, they oppose Congress merely clarifying that the Federal Housing Finance Board has the authority to determine whether the FHLBanks can or should securitize member assets as the ICBA believes the Congress should determine an issue of this magnitude.
Meanwhile, Brian Harris, senior analyst in the Moody's Investors Service real estate finance group, said that securitization for the FHLB could mean two things. One is merely selling securitized loans to the marketplace while the other would involve a guaranty business similar to Fannie Mae and Freddie Mac. He said that for the FHLBanks to have this type of guaranty business, it would take a system-wide effort to generate expertise and infrastructure, which the FHLBanks do not currently have. "The question is what is the time frame?' because even if you gave FHLBs the right to guaranty loans, it's going to take time to develop the infrastructure," Harris said. He added that if securitization merely involves selling bonds into the market place, this could be done on an individual bank basis, noting that the Federal Home Loan Bank of Chicago has done two transactions in the past.
Harris is referring to two MPF Shared Funding transactions. The first one was backed by roughly $475 million of single-family mortgages - provided by affiliates of National City Mortgage and Wells Fargo Home Mortgage who are FHLB members - and involved privately placed certificates by Chicago FHLB member One Mortgage Partners Corp. The Chicago, Des Moines and Pittsburgh FHLBanks bought the senior portions of the deal. David Feldhaus, spokesperson for FHLB Chicago, said that this transaction represents an innovative technique that the FHLB could use to manage interest rate risk and create additional liquidity.
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