Mortgage bankers press for expanded FHLB role

The lesser-known cousins of Freddie Mac and Fannie Mae, the 12 Federal Home Loan Banks, could get some expanded powers under a proposal being circulated by the Mortgage Bankers Association and the National Association of Home Builders.

The two industry groups are hoping that Congress’s pending reform of government-sponsored enterprises (GSEs) can include a small change to how the Federal Home Loan Banks conduct their business. The banks have received comparably less attention in the ongoing debate over GSE reform, which has focused more on how to prevent a recurrence of corporate scandals at Fannie and Freddie.

The change the groups propose would require the new regulator of GSEs to state explicitly that the 12 banks can securitize loans — that is, convert the mortgages they hold into mortgage-backed securities. Fannie and Freddie already have this capability, and groups in favor of the proposal argue that the banks do as well, but that it is less clearly stated and therefore none have actually done it.

Proponents of the change say it will create more competition for Fannie and Freddie in the secondary mortgage market and thus lead to lower rates. They also argue that securitization would make the banks more stable by allowing them to spread risk rather than holding on to mortgages, which can change in value with the fluctuation of interest rates.

“We’ve been advocating that Congress make it clear that the regulator has the ability to allow banks to securitize loans. We think there’s a safety and soundness issue insofar as some Federal Home Loan Banks are doing mortgages,” said Kurt Pfotenhauer, senior vice president of government affairs at the Mortgage Bankers Association. “Over time, a certain quantity of mortgages uses up their capital and exposes them to more risk. By securitizing, they can move risk off the books to mortgage-backed securities.”

However, community banks are wary of tinkering with the Federal Home Loan Banks in the context of GSE reform.

“It’s a new power, and once you open that door to expanding powers someone might want to make fundamental changes to the Home Loan Banks,” said Steve Verdier, director of congressional affairs at the Independent Community Bankers of America. “This is about being more carefully regulated, not expanding powers.”

Both the mortgage bankers and the homebuilders say that the change is not their top priority on GSE reform but that it could be appropriate to include such a measure while Congress is considering GSEs.

The Federal Home Loan Banks themselves are split on the proposal, lobbyists said, with some in favor, some opposed and others up in the air.

GSE reform, focusing primarily on Fannie and Freddie, has emerged as a top issue this year for both the Senate Banking Committee and the House Financial Services Committee. Under the latest proposal, all three types of GSEs — Fannie, Freddie and the Federal Home Loan Banks — would fall under one regulator. The banks currently are regulated by the Federal Housing Finance Board, while Fannie and Freddie are overseen by the Office of Federal Housing Enterprise Oversight.