Federal Home Loan Bank System (FHLBs) are seeking an exemption from pending risk retention rules so they can continue to provide risk-sharing mortgage programs that they claim have exhibited "superior credit performance" for more than a decade.
About eight of the 12 FHLBs purchase conventional mortgages from their member banks, thrifts and credit unions, requiring credit enhancements that are reflected in the purchase price.
On average, the credit enhancement is similar to a 2% to 3% risk retention requirement, the GSEs say.
Federal regulators are close to finalizing a rule that might impose a 5% risk retention requirement on such loans (which the FHLBs hold in portfolio) along with other underwriting restrictions on downpayments and debt-to-income ratios.
The FHLBs are concerned the high retention requirement would make their loans too expensive and the underwriting requirements will reduce consumer demand.
The new rules also would prevent the FHLBs from rewarding lender members based on loan performance. They currently pay back a portion of the credit enhancement fees over time.
Since 1997, the FHLBs have acquired $146 billion of conventional loans. Losses – net of gains – are only $53.6 million, according to a comment letter signed by 10 FHLB presidents. "About half these losses, $27.8 million, were recaptured simply by reducing the amount of monthly fees paid to members," the joint letter said.