When a controversial proposal to dramatically overhaul the capital structure for the Federal Home Loan Bank System was withdrawn last year, the threat of submitting a new proposal was given (MBSL 11/22/99).

Now, almost five months later, the Federal Housing Finance Board has proposed that new rule, aimed at curbing the amount of non-mission-related assets held by the FHLBanks.

A major component of the proposed rule is to end the pilot status of the Mortgage Partnership Finance (MPF) program, which was set up by the FHLBank of Chicago as an alternative to selling mortgage loans to Fannie Mae and Freddie Mac. By making the program permanent, the $9 billion cap will be removed. Seven of the 12 FHLBanks currently participate in the program; the FHLBanks of Topeka, Kan., Indianapolis and San Francisco either submitted applications or are slated to submit them.

The proposal also will authorize the FHLBanks to acquire their members' assets through risk-sharing arrangements - mainly whole mortgage loans originated or held by the member banks.

The proposed rule will also define core mission activities for the FHLBanks. These include advances to members, standby letters of credit, targeted investments that support affordable housing and economic activities and small business investment corporations.

"What we're doing ahead of time is telling them, Look, this is what you should be investing in. These are the types of core mission activities you should be investing in,'" Glavin said.

Absent from the new rule is the clause that would have made the FHLBanks liquidate their mortgage-backed securities holdings. In the proposal made last year, "We said, any money you guys raise on Wall Street has to go into mission-related activities, and MBS isn't one of them," said Bill Glavin, spokesman for the FHFB.

To appease opponents of this clause, the FHFB has put off limiting the amount of MBS the FHLBanks can invest for now. "As far as MBS is concerned, we did say look, We're not limiting MBS investments at this time. We promised we wouldn't do it until after capital standards are in place.' So that's still operative," Glavin said. Any MBS purchased before April 12, 2000 would be able to be held until maturity.

The risk-based capital standards, once they take effect will give the FHLBanks capital to make investments, making them able to take some risks with that capital to back it up. "And they'll be less likely to buy MBS," Glavin said. "They won't have as much incentive to buy MBS."

However, the proposal has already seen opposition. A letter jointly submitted by American Bankers Association, America's Community Bankers, Independent Community Bankers and the Council of Federal Home Loan Banks asked the FHFB to postpone any new rules until the risk-based capital standards are in place, which could be a few years down the road.

The letter said that any "mission achievement analysis" should be done "in conjunction with the development of the new capital structure and with the active participation of the members of the system." It further stated that Congress has already addressed the FHLBank's mission adequately, and suggested forming focus groups of the signing members to discuss such proposals.

"As proposed, this policy could pose problems to the FHLBanks' membership and programs, and their ability to assume the self-governance role that Congress specifically authorized last year," said Diane M. Casey, president of America's Community Bankers in a prepared statement. "ACB believes that the Bank System should have the opportunity to implement the provisions of the new law and assess the results before a regulatory mission achievement policy is considered."

The proposed rule is expected to be placed in the Federal Register next month, after which a 30-day public comment period will ensue.

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