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Legislative Updates

April 19, 2005

GSE reform gathered additional momentum in the past month with the likelihood that legislation will be reported out of key House and Senate committees by the end of May. Recent government-sponsored enterprise (GSE) legislative developments include:

• The House and Senate banking committees held five hearings on GSEs.
• The administration and the Federal Reserve spoke in greater detail about their current respective positions on GSE reform.
• New FHLBank issues arose:
  • the desirability of a statutorily mandated mission
  • the consolidation of FHLBanks (in response to the Seattle situation)
  • the adequacy of information-sharing between FHLBanks
  • the application of affordable housing goals not only to FHLBank mortgage purchase programs but to collateral pledged for advances
  • the ability of CDFIs to borrow from FHLBanks
  • the development of a bank-like receivership scheme for FHLBanks
• House Financial Services Committee Chairman Mike Oxley (R-OH) and Capital Markets Subcommittee Chairman Richard Baker (R-LA) introduced H.R. 1461, the Federal Housing Finance Reform Act of 2005.

Last year's pivotal issue was the application of bank-like receivership provisions to Fannie Mae and Freddie Mac, and it ultimately caused the legislation to stall. Receivership is now accepted as part of any final legislation.

This year's central issue will be how and to what degree this legislation will govern future portfolio growth at these two GSEs. As in the case of receivership, the issue of portfolio growth was raised by the Fed. Unlike the receivership issue, the Fed and the administration have parted company over whether the portfolio limit should be hardwired in the statute (the Fed's position) or left to the discretion of the regulator with congressional advice (the administration's position).

The fact that the administration articulated a more flexible approach on the portfolio question is a very positive development in assessing the legislation's possible passage. This issue will be played out in terms of what instructions Congress will give the regulator:

• Should the portfolio's size be limited only to mortgages in the experimental stage or affordable range
• Should the GSEs be able to increase purchases to serve as a counter-cyclical outlet when other mortgage investors are pushing away from the table
• How liquidity will be integrated into this calculation

While the issue of portfolio growth restrictions could kill the legislation, it appears that all the major players — the administration, Fannie Mae, Freddie Mac and congressional leaders of both parties — are of a mind that legislation is needed. All policy makers continue to agree that FHLBanks do not present the urgency or magnitude of concerns as do Fannie and Freddie, but that FHLBanks should be included in the legislation. In fact, many of the statutory features of the Federal Housing Finance Board's authority are pointed to as the template for the powers of the new regulator.

The chairmen of the House and Senate committees appear to be moving quickly to get legislation out of their committees and onto the floors of their respective bodies. House Financial Services Committee Chairman Oxley said he intends to report out legislation by the end of May, and that House leadership will give the bill floor time this summer. Indications are that the Senate Banking Committee will also report out a bill in May, although the outlook for floor time in the Senate is more problematic for a number of reasons. First, near unanimity is needed for the bill's vote out of committee, since a few senators can impede the Senate's rapid consideration of a bill. Secondly, the prospect of a meltdown in the Senate over the issue of minority filibusters during consideration of judicial nominations could bring the Senate floor to a virtual standstill.

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II. Affordable Housing Groups Start to Lay Out FHLBank Wish List

On April 15, a group of consumer and affordable housing groups sent a letter to congressional leadership laying out their concerns in the emerging GSE legislation. In addition to a number of points concerning Fannie Mae and Freddie Mac, the letter supports a number of FHLBank provisions, including "affordable housing and community economic development goals for the core business activities of the FHLBanks [advances]; disclosure of loan-level public use data base comparable to HMDA (Home Mortgage Disclosure Act) reporting by lenders [on advance collateral]; and the retention of the current standard requiring that 40% of the board of directors' seats for each FHLBank be comprised of public interest directors, including two specifically for community interest directors."

In addition, advocates for Community Development Financial Institutions (CDFIs) are seeking authority for "CDFIs with an affordable housing mission and strong track records to borrow from their respective Federal Home Loan Bank, without the required purchase of FHLBank stock, utilizing each FHLBank's 'community development advance' (or similar) program. Collateral for said loans from the FHLBanks shall be the mortgage loans originated by the CDFIs."

Add these CDFIs to other financial services entities that are not regulated financial institutions seeking FHLBank access. In other legislation supported by House Financial Services Committee Chairman Oxley, privately insured state-chartered credit unions would be granted membership. In addition, the mortgage bankers have sought membership for independent mortgage bankers for many years.

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III. A Statutory Mission for FHLBanks?

During his recent testimony before the House and Senate banking committees, Treasury Sec. John Snow raised — but did not answer — the question of what mission FHLBanks should have in statute. Sec. Snow said, "The administration believes regulation of the Federal Home Loan Banks would be enhanced if Congress were to delineate an explicit mission for them." Sen. Paul Sarbanes (D-MD) asked the Treasury secretary to provide specific language to the committee.

While there is no specific mission section for FHLBanks in statute, mission goals are mentioned throughout the existing law. The Council of Federal Home Loan Banks adopted an FHLBank mission statement at its February meeting. That mission is:

• To provide cost-effective funding to our members for use in housing finance and community development
• To provide liquidity to our community bankers
• To encourage regional affordable housing programs and, thus, create housing opportunities for low- and moderate-income families

It is unclear at this point whether or not a specific mission for FHLBanks will be in any final legislation. Already stakeholder groups are starting to lay out additional provisions. The Independent Community Bankers of America (ICBA) is urging the inclusion of farming and small business loans in any statutory mission.

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IV. Senate FHLBank Oversight Hearing Focuses on Securitization

On April 13, the Senate Banking Committee held a full committee hearing on the FHLBank System. Four current and former FHLBank directors and officers made up a majority of the panel: George Engelke, chairman of the board of the FHLBank of New York; Paul Clabuesch, chairman of the board of the FHLBank of Indianapolis; Ed Norris, former chairman of the board of the FHLBank of Atlanta; and Alex Pollock, AEI fellow and former president of the FHLBank of Chicago. Martin Eakes, president of the Self-Help Credit Union, a member of the FHLBank of Atlanta and the Government Accounting Office, also testified.

The following issues were covered at the hearing:

Securitization: The pro-securitization viewpoint, as expressed by Pollock, Clabuesch and Norris, is that securitization is necessary for the growth of the mortgage programs, will increase competition in the secondary markets and ultimately drive down prices for the consumer, and is a proven tool that will enable the FHLBanks to mitigate the risks of their mortgage purchases.

Engelke opposed the proposal and said that twelve different securitization programs would diminish the value of the System's implied government guarantee and hinder its ability to fulfill its mission. He also said that if securitization authority were to be granted — while emphasizing the New York FHLBank's objection to the proposal — that it should only be allowed on a System-wide basis.

Chairman Richard Shelby (R-AL) indicated he might be willing to consider FHLBank securitization under certain circumstances.

Predatory Lending and Affordable Housing: Eakes recommended that Congress implement affordable housing goals on the System's mortgage purchases and advances, that the Mortgage Partnerhip Finance® (MPF®) predatory lending guidelines, which he stated are "excellent," need to be extended to the advance programs, and that the FHLBanks should be required to provide loan-level data that examines all collateral of the System.

Sen. Sarbanes pointed to the high average FICO scores and loan-to-value ratios of the loans purchased by the System and asked whether or not the FHLBanks should be doing more to help low-income consumers.

Consolidation: Engelke stated that consolidation of the System may be desirable at some point given the joint and several obligations of the System. He said consolidation would provide for centralized management of currently disparate programs.

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V. Baker and Oxley introduce H.R. 1461, Federal Housing Finance Reform Act of 2005

This bill, introduced by Rep. Baker April 5 with Rep. Oxley and several committee members including Rep. Mike Fitzpatrick (R-PA), is modeled on the Senate GSE reform bills (S. 1508, Senate Banking Chairman Shelby's bill in the 108th Congress, and S. 190, Sen. Chuck Hagel's
(R-NE) bill introduced in this Congress), with some differences.

Differences with the Senate bills include:

Receivership Provisions: Unlike the Senate bills, the Baker bill includes the FHLBanks in Section 144 dealing with authority over critically undercapitalized regulated entities.

Annual Housing Report for Regulated Entities: The Baker bill requires an annual housing report that must include an assessment of the extent to which each FHLBank is meeting its AHP contribution requirements, as well as the extent to which the FHLBanks and Fannie/Freddie are achieving their purposes. The report must also examine actions that each FHLBank has taken or could take to promote and expand the community investment and affordable housing programs as well as opportunities for first-time homebuyers.

Mission: The Baker bill, as did the Hagel bill, provides that one of the principal duties of the director is to ensure that each regulated entity carries out its mission only through activities that are consistent with the legislation and the authorizing statutes. The bill does not direct mission changes or restrictions for the FHLBanks.

FHLBank Boards: The Baker bill, as did the Senate bills, does away with the process of appointing directors for Fannie/Freddie and the FHLBanks. The Baker bill did not include the provisions for nonmember directors that were included in the Hagel bill, but does provide for four-year terms for all directors and does remove the statutory caps on director compensation.

Community Financial Institution Members: Unlike the Senate bills, the Baker bill includes language amending the definition of "community financial institution" to include institutions with less than $1 billion in average total assets, instead of $500 million. The section also includes language stating that advances to community financial institutions may also be used for community development activities.