With the exception of Ginnie Mae mortgage-backed securities, the Federal Housing Finance Board has proposed restricting investments by member banks in mortgage-backed securities. The Federal Home Loan Banks' portfolio of MBS totaled $56 billion at the end of the 1998, a spokesman said.

The proposal to restrict MBS investment surfaced during a discussion at a board meeting this month, and if approved would be implemented sometime over the next five years.

The discussion came during consideration of a thoroughgoing FHFB staff document on financial management and mission.

The document, however, excludes a number of items from its restriction on MBS. It excludes Ginnie Mae MBS, FHA whole loans, mortgages made as part of the Chicago FHLBank's Mortgage Finance Program and mortgages from housing finance agencies.

Senior Treasury Department officials and Chairman Jim Leach, R-Iowa, of the House Banking Committee, have criticized the arbitrage that government-sponsored enterprises, like the FHLBanks, realize on portfolio holdings of MBS, as part of their government-sponsored enterprise status. The critics have said that this arbitrage detracts from the FHLBanks' core housing mission.

The staff document also proposes a risk-based stress test. This proposal is similar to what is presently being developed as a regulatory tool for Fannie Mae and Freddie Mac. The concept could reduce the level of static capital reserves required for the FHLBanks.

The proposal is expected to be developed in greater detail at the July 14 meeting of the FHFB.

- ES

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