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Legislative Updates

March 17, 2005

I. GSE Reform Developments

The general momentum for government-sponsored-enterprise (GSE) reform continues to build. Congress leaves next Monday for its Easter recess. Upon its return in early April, the administration and the Federal Reserve will lay out their positions on GSE reform. Also next month, House Capital Markets Subcommittee Chairman Richard Baker (R-LA) is expected to introduce his GSE bill. In addition, House Financial Services Committee Chairman Mike Oxley (R-OH) said yesterday he expects a bill to be reported out of his committee by late spring.

These issues were raised for the first time or have developed further since the last Legislative Update:

• The imposition of growth limits on GSE portfolios (primarily focused on Fannie Mae and Freddie Mac) — Fed Chairman Alan Greenspan posed this measure as a means of controlling the risk at Fannie Mae and Freddie Mac, whose portfolios of mortgage-backed securities have grown dramatically over recent years. Chairman Baker raised this issue within the context of specifically authorizing FHLBanks to issue mortgage-backed securities.
• Applying the Bank Secrecy Act to GSEs — House Oversight and Investigations Subcommittee Chairwoman Sue Kelly (R-NY) raised this issue.
• Including the Farm Credit System in the GSE bill as advocated by the ICBA and the ABA.
• Putting conditions on the utilization of a line of the GSEs' line of credit, suggested by Chairman Baker.

II. House Capital Markets Subcommittee Holds FHLBank Oversight
    Hearing — Hears Testimony from FHLBank of Pittsburgh
    Member Bank

On March 9, the House Capital Markets Subcommittee held a hearing on FHLBanks and GSE reform. The first panel was Federal Housing Finance Board (Finance Board) Chairman Ronald Rosenfeld. The second panel comprised Dave Hehman, president of the FHLBank of Cincinnati, who was representing the Council of Federal Home Loan Banks; Joseph F. Conners, EVP and CFO of Beneficial Savings Bank; and two other FHLBank members from Virginia and Massachusetts. The hearing was generally a very positive one for the FHLBanks with several subcommittee members expressing support for the FHLBank System.

Mr. Conners' testimony covered the role the FHLBank of Pittsburgh plays in supporting Beneficial's ability to serve its customers. He also articulated a number of points for Congress to consider as it moved forward on the legislation. These points included:

• The safety and soundness regulator of the FHLBanks should have the appropriate regulatory tools to ensure safety and soundness and should also have the flexibility to allow the FHLBanks to develop new products over time to respond to future member needs.
• Legislation should not impede the ability of FHLBanks to access capital markets, or cause the cost of FHLBank borrowing to increase.
• The unique nature of the FHLBank System, with twelve independently operated cooperatives, must be preserved in any new regulatory structure. It is also important that Congress ensure that the SEC recognizes these unique features as the FHLBanks register with the SEC.

Selected Opening Statements:

Chairman Baker: He stated strong support for the System but observed that the rate of growth at FHLBanks over the past years has been significant and that taxpayers are exposed to a contingent liability. He praised the services that FHLBanks provide in terms of accepting the newer forms of collateral as provided in Gramm-Leach-Bliley, although he said that many banks were not really aware of all the programs available at FHLBanks. Chairman Baker also said that "joint and several" can distort the market's perception and thwart market discipline. He suggested that each FHLBank should be required to issue some sort of paper once a year (such as subordinated debt) that would enable the market to evaluate each FHLBank on its own credit.

Rep. Paul Kanjorski (D-PA): He reiterated his view that FHLBanks should not be in the bill since the Finance Board is an adequate regulator with most of the powers being sought for the Office of Federal Housing Enterprise Oversight. However, he acknowledged that FHLBanks will be part of the legislation which must recognize the unique nature of the System and not negatively affect the cost of funds. He also spoke of the importance of governance and his support for appointing directors in a timely manner, increasing director compensation and extending director terms. He also expressed concern about how SEC registration might "interplay with the joint and several liability of the System."

Rep. Barney Frank (D-MA), ranking Democrat of the full House Financial Services Committee: He stated his support of the FHLBank System and urged that the legislation must not disrupt the System. He cited the Affordable Housing Program (AHP) as one of the few areas today that has money flowing into housing. He expressed appreciation for the efforts of FHLBanks of Pittsburgh and Boston as well as Sovereign Bank in dealing with affordable housing issues following Sovereign's acquisition of a Massachusetts bank. He said that he was looking at legislation, not multi-district membership, which would deal with inter-district Bank mergers and the AHP.

Rep. Mike Fitzpatrick (R-PA): He cautioned that GSE reform must not hinder efforts to support homeownership, and that the new regulatory structure must recognize the differences of the FHLBank System.

Chairman Rosenfeld made the following points in his statement:

• The Finance Board is working to ensure that SEC registration is completed.
• On Seattle: "For several years, the Seattle Bank had been seeking growth and profitability by building a portfolio of purchased mortgage loans and mortgage-backed securities to supplement earnings from the advance business. As so often happens during periods of rapid growth, the Seattle Bank paid less attention to sound risk management practices than it should have."
• Interest rate risk monitoring is at the top of the Finance Board's supervisory agenda.

The following points of interest were covered in the Questions and Answers:

AHP for Fannie Mae and Freddie Mac: Both Rep. Frank and Chairman Baker said they would be working on this.

Existing FHLBank Mortgage Programs: When asked by Rep. Joe Baca (D-CA) if FHLBanks should be in the mortgage business, Chairman Rosenfeld said that "maybe in moderation"… that they were looking at that and that some level of risk was OK. The chairman said the decision to be in the mortgage programs currently authorized was up to each FHLBank, but if operation of the program raised safety and soundness concerns, the Finance Board would act.

FHLBank Securitization: Chairman Rosenfeld noted on several occasions that Congress should make the determination as to whether or not FHLBanks should be able to get into securitization. Rep. Baker asked, if FHLBanks would be able to securitize mortgages, should there be a limit on the amount of those securities in which FHLBanks could invest. Chairman Rosenfeld said that certainly was an option which should be left to Congress.

Economic Development Authority: Rep. Kanjorski asked if there were a need to expand authority for FHLBanks to get involved in economic development. Chairman Rosenfeld said there was a two-fold problem. First, bankers needed to be educated about the desirability of making these loans, and then there had to be a demand among borrowers for these types of loans.

Appointed Directors: In the face of several questions from members within the FHLBank of Atlanta's district, Chairman Rosenfeld said that appointed directors were very important and that, if Congress did not act, the Finance Board would have to move forward with a process to appoint directors. He said that, if legislation was not enacted fairly soon, the Finance Board would take action in a matter of months.

Receivership: Rep. Ed Royce (R-CA) noted that some obligations of FHLBanks were not joint and several, such as derivatives transactions with counterparties. He asked if FHLBanks should be required to share more information with one another. Chairman Rosenfeld said that more information was being shared, that it should be voluntary, and that mandating sharing could get into some inappropriate areas.

An Additional Outside Audit: Chairman Rosenfeld said that no determination had been made at this time about the need for an additional outside audit.

III. Rosenfeld Confirmation Moves Forward

On March 9, the Senate Banking Committee unanimously voted to confirm Ronald Rosenfeld to be chairman of the Federal Housing Finance Board. He currently is serving as chairman under a recess appointment. The full Senate is expected to confirm Rosenfeld before they depart for the Easter recess.

IV. Bankruptcy Reform Passes the Senate

Long-stalled bankruptcy legislation passed the Senate on March 10 and the House Judiciary Committee passed identical legislation yesterday, with the expectation that the full House will pass the legislation in April. The bill includes cross-netting language that the president's Working Group on Capital Markets (from the Clinton administration) and the Federal Deposit Insurance Corporation (FDIC) have advocated as necessary in dealing with bankrupt counterparties in derivatives transactions.

V. Sarbanes Announces Retirement

Sen. Paul Sarbanes (D-MD), ranking Democrat on the Senate Banking Committee, has announced he will not seek a sixth Senate term in 2006. As things now stand, that would mean that Sen. Chris Dodd (D-CT) would assume the position of ranking Democrat in the next Congress.

VI. Deposit Insurance Reform Activity

Bipartisan leadership of the House Financial Services Committee introduced deposit insurance reform legislation that is identical to a bill that died in the Senate due to disagreements over future coverage limits.

This is the third Congress that will be attempting to reform the nation's deposit insurance. The major features of the new proposal are a merger of the Bank Insurance Fund with the Savings Association Insurance Fund, an increase in the insurance limit for individual accounts from $100,000 to $130,000 and indexing of future coverage, and an end to the 23-basis-point "rate cliff" that would impose stiff new premiums if the insurance funds fall below a given reserve ratio. The legislation would give the FDIC greater flexibility than it has now to manage an insurance fund's reserve ratios.

The House Financial Institutions Subcommittee held a hearing on March 17. Sens. Chuck Hagel (R-NE) and Tim Johnson (D-SD) are expected to introduce a similar measure in the Senate in the near future.