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Legislative Updates

August 17, 2007

This covers developments since the last update (6/26/07).

I. GSE Regulatory Reform/Washington Outlook

The most significant active legislation impacting the FHLBank System has been widely viewed as dead in the Senate for a variety of reasons. In spite of strong May passage in the House of Representatives, disagreements over what power to give the regulator to control Fannie’s and Freddie’s portfolio growth and Republican opposition to a new affordable housing fund are the main reasons for this dim outlook for passage.

The recent turmoil in the mortgage markets, a serious liquidity crunch, and the resulting ripple effects in stock markets and capital markets across the globe may put the legislation back in play. When the congress does return in September, it will be confronted with a number of mortgage market-related issues that have a potential negative impact on the wealthiest, most sophisticated capital market players and the least sophisticated and economically vulnerable mortgage borrowers. Caught in this vortex are banks, mortgage lenders, realtors and homebuilders.

In short, September will bring a witches’ brew of policy churning as some in Congress advocate legislative action. The debate could go in any number of directions.

II. Update on Legislation to Allow FHLBank Standby Letters of Credit (SLOCs) on Certain Tax-exempt Bonds

On August 2, Senator Jay Rockefeller (D-WV) introduced legislation to allow FHLBanks to support member bank letters of credit on tax-exempt bonds. The Senate bill is S. 1963 and is identical to legislation, H.R. 2091, introduced earlier this year in the House. Five senators are cosponsors of the Rockefeller bill including Senators Bob Casey (D-PA) and Tom Carper (D-DE). A current fact sheet on the legislation can be found at Attachment 1.

III. Economic Development Forum in Scranton

On August 7, FHLBank Pittsburgh hosted an Economic Development Forum in Scranton, Pa., featuring Congressman Paul Kanjorski (D-PA) and Federal Housing Finance Board Director Geoffrey Bacino. Eighty community leaders from Northeastern Pennsylvania attended the half-day event that featured comments from Kanjorski, Bacino, John Price, Director Brian Hudson, a senior FDIC economist and local economic development experts. Director Paul Reichert also attended the event.

During his remarks, Director Bacino quoted a 2002 statement by Congressman Kanjorski: “The Federal Home Loan Bank System is a jewel waiting to be polished. The System has grown significantly since its creation and today focuses not only on promoting homeownership but also expanding economic development. This latter mission has the potential to become the System’s most important undertaking.”

Bacino went on to say, “I share his views and hopes about the potential benefits that these Banks can provide to help generate local economic growth and job creation. Fulfilling that commitment to broader community and economic development action by the Bank System and its members is one of my personal goals as an overseer of the Federal Home Loan Bank System. With your local involvement and leadership, the Federal Home Loan Bank System can become the “crown jewel” in generating economic development and job growth, as well as carrying out its housing support mission.”

IV. The Farm Credit Horizons Project:

The Farm Credit System (FCS) is a GSE chartered by Congress to provide credit to farmers, ranchers, farmer-owned businesses and rural home owners. Unlike FHLBanks, the FCS has the authority to engage in direct lending. The FCS is seeking a rewrite of the Farm Credit Act which has become known as the “Horizons Project.” Horizons would allow the FCS to make mortgage loans in communities up to 50,000 (up from the current 2,500) and allow a broad expansion of direct commercial lending to anyone who supports farmers or ranchers. This language would allow almost unfettered commercial lending in rural communities.

A modified Horizons Project was considered as part of this year’s Omnibus Farm Bill when it went to the House floor in July. An amendment offered by House Financial Services Committee Chairman Barney Frank (D-MA) and Ranking Member Spencer Bachus (R-AL) to remove the Horizons language from the bill was adopted by a voice vote on the House floor. Had it gone to a vote, it would have passed by a very significant margin.

The Senate will begin formal consideration of the Omnibus Farm Bill at the committee level in the second or third week of September. At this writing, Chairman Harkin’s (D-IA) mark will not include the Horizons Project language, but it is expected that Senator Leahy (D-VT) will offer some form of it as an amendment.

Attachment 1

Federal Home Loan Bank Letters of Credit (LOC) for Tax-exempt Bonds

Bi-partisan legislation has been introduced in the House by Ways and Means Committee members Levin (D-MI) and English (R-PA), H.R. 2091, and in the Senate by Finance Committee members Rockefeller (D-WV) and Crapo (R-ID), S. 1963. The legislation allows FHLBanks to support member banks’ letters of credit for tax-exempt bonds. This bill will:

1. Help local communities raise funds for water treatment facilities, infrastructure improvements, industrial development, healthcare facilities, fire stations, parking facilities, long-term care for the elderly, schools and other important activities.
2. Allow FHLBank member banks to assist these issuers by offering FHLBank LOCs without triggering the loss of the bonds’ tax-exempt status. Obtaining a performance guarantee from a Triple-A rated entity, such as the FHLBanks, further lowers costs for communities.
3. Not transfer risk to the federal government nor provides a double subsidy of tax-exempt bonds. FHLBanks are privately owned financial institutions whose obligations are explicitly not guaranteed by the United States. The credit markets independently rate the obligations of the FHLBank LOCs on objective criteria assessing the financial strength of each FHLBank.
4. Amend Section 149 of the Internal Revenue Code (IRC) to add FHLBanks to the list of GSEs that can credit enhance tax-exempt municipal, industrial development and other private activity bonds. Fannie Mae, Freddie Mac, Ginnie Mae, FHA, and VA have been permitted since 1984 under the IRC to provide credit support. At that time, FHLBanks did not offer LOCs for tax-exempt bonds. Now they do - for tax-exempt housing bonds (in addition to taxable bonds).

This legislation change should not significantly reduce Federal budget receipts. It was scored by staff of the Joint Committee on Taxation in 1997 at $6 million over 5 years and $20 million over 10 years. The provision was in the Senate-passed version of H.R. 2014, the Revenue Reconciliation Act of 1997 and dropped in conference.

1. FHLBank LOCs give local banks the opportunity to compete for this business and serve their communities. FHLBank LOCs will increase competition, helping to ensure the best cost for municipal governments and their taxpayers. Community banks within the FHLBank System are well suited to underwrite the credit for such projects since this is an essential aspect of the business of community banking.
2. The legislation is needed to support communities and small issuers that are currently underserved by bond insurers who are generally more hesitant to seek to do business with these entities because doing so may not be cost-effective and does not fit their business model.
3. If this legislation passes, the standby letters of credit issued by community banks and supported by FHLBanks would go primarily towards modest projects such as small local colleges, health care facilities, small manufacturers and other private activity bonds issued by small local governments.

Supporters of H.R. 2091 and S. 1963

National

America’s Community Bankers
The American Bankers Association
Council of Federal Home Loan Banks
The Independent Community Bankers of America
Mortgage Bankers Association
National Association of Homebuilders
National League of Cities
US Conference of Mayors
National Council of Health Facilities Finance Authorities (NCHFFA)
National Association of Higher Educational Facilities Authorities (NAHEFA)
National Association of Towns and Townships
Council of Development Finance Agencies

State & Local

Builders Association of Metropolitan Pittsburgh (BAMP)
Charleston Association of Home Builders (WV)
Delaware Bankers Association
Eastern Panhandle Home Builders Association (WV)
Greater Pittsburgh Chamber of Commerce
Home Builders Association of Delaware
Home Builders Association of North Central West Virginia
Minnesota Bankers Association
Pennsylvania Association of Community Bankers (PACB)
Pennsylvania Bankers Association
Pennsylvania Builders Association
Tri-State Home Builders Association (WV)
West Virginia Association of Community Bankers
West Virginia Bankers Association
Allegheny League of Municipalities (PA)
County Commissioners Association of Pennsylvania
Delaware League of Local Governments
Pennsylvania Higher Education Facilities Authority
Pennsylvania Housing Finance Agency
Pennsylvania League of Municipalities
Pennsylvania School Boards Association
Pennsylvania State Association of Boroughs
Philadelphia Hospitals and Higher Education Facilities Authority
West Virginia Association of Counties
West Virginia Department of Commerce
West Virginia Economic Development Authority
West Virginia Hospital Finance Authority
West Virginia Municipal League