FHFA proposal prioritizes affordable housing over access to liquidity

Editor's Note: Earlier this year, Kristina K. Williams, president and CEO of the Federal Home Loan Bank of Des Moines, spoke to bankers attending the Bank Holding Company Association's Spring Seminar about changes to the FHLB system, which have been proposed by the Federal Housing Finance Agency through its report, "FHLBSystem at 100: Focusing on the Future." Following are her comments, edited for concision and clarity..Formed in 1932, the FHLB system has over 6,500 members across the United States, primarily commercial banks. We have a lot of collateral — about $3.3 trillion — supporting any business with the Home Loan Banks. We think about them as a stabilizing force in the financial system. We were the first ones in the global financial crisis, or when covid hit, or last March, that pumped money into our member institutions when it was needed. Other sources came later, but we were there and were the first responders. We've done this for over 90 years, and never had a loss on a loan to any one of our member institutions..In March 2023, the Home Loan Bank system funded $675 billion in advances in that first week. We raised $90 billion on the Monday following SVB's failure, and $300 billion of new money in the two weeks immediately following. We got repaid on all of those advances. .If you looked at the GAO report on the Home Loan Bank activity during that time, it would tell you we did exactly what we were meant to do, and we didn't cost the deposit insurance fund one nickel. We expand and contract as our members need us to. .So what is this review at 100? Our regulator, the Federal Housing Finance Agency, decided that the Home Loan Banks should have a review of their mission. They spent over a year; they held 19 regional roundtables. There were a lot of letters sent in from our member institutions. They were really asking questions about "is the Home Loan Bank fulfilling its mission?".Our mission says we should provide liquidity for home ownership. Congress didn't amend the Home Loan Bank Act until 1990; that was the first time we actually set aside any money for affordable housing. With FIRREA, we started to give 10 percent of our earnings toward affordable housing through regulatory initiated programs..What should you expect now that the report's out? It's a page turner, trust me. I've read it several times; it's quite long and quite vague. We're going to study this. For now, if you are a Home Loan Bank member, it's business as usual and there's a long timeline. .How long will things be out there until they are enacted, by way of the FHFA? If the White House changes, the director of the FHFA usually changes and then the direction of their theories usually change as well. I'm not making any presidential election predictions, I'm just stating the connection. .So there are things that they could do through supervision, things they could do through rulemaking, and things that they could do with the help of Congress. .Congress would have to pass certain laws to change things and frankly you may be asked to weigh in on all these issues. It depends on how significant they are and what the impact to your membership might be. .I have five key points I would ask you just to be aware of..When you joined the home loan bank a long time ago there were tests to get in. Do you have residential mortgage assets on your balance sheet? For depositories, it's a 10 percent test, unless you are a community financial institution with less than $1.4 billion in assets, and then you didn't have to meet that requirement. Well, in this report it says we should have an ongoing test, not just one to get in. So every quarter you need to be able to demonstrate you still have 10 percent of your assets in residential mortgages. So is that mortgage loans? Is it mortgage backed securities? Does that include multi-family? I don't have any idea because it doesn't say. Depending on how they cut that test and what size institutions they include in that test, it could be very impactful for our membership base and could affect your ability to actually access Home Loan Bank funding when you need it.One of the other things that we find troublesome is the suggestion that they want to limit the amount of large debt issuances. Kind of like what we did in March of 2023 when the financial system needed that liquidity. They want to limit that because they're afraid of what would happen if maybe that all went to one member. Well it didn't go to one member, it went to 6,500 members across the United States. We manage our own debt issuances all the time, so we really see no need for them to address or to try to control how much debt we issue at any point in time. We're concerned we might not be able to fund advances if they tell us you can't issue that debt.They want us to strengthen risk management and the creditworthiness evaluation of our members. And this comes directly out of March 2023. All of our members have primary regulators, and that's not us. So primary regulators do safety and soundness exams. We don't. We're a collateralized lender. So yes, we come and check your collateral, we check the pledge, those kinds of things. But we don't do a safety and soundness exam. We do rate members, kind of like you rate your loan portfolio, one through 10 or whatever your scale is. We do that. They want us to revise the definition of a long-term advance. Why is that important? Today a long-term advance is five years. We'll do an advance from overnight to 30 years, fixed variable amortizing structures. What they want to do is change that long-term definition from five years down to one. And the reason that would be dramatic to our members is because you need to have residential mortgage assets to support it specifically identified and allocated. If we had to get that specific, we'd need to see specific loan listings to support that long term advance definition in one year, which greatly hampers your ability to do any good asset liability management with term funding. They've said that the Affordable Housing Program allocation should be at least 20 percent and maybe higher. Let's talk about our commitment to housing. We do 10 percent now. That started in 1990 through regulatory required programs. The other one is affordable housing grants and that's a longer process. We've got a down payment product to help people pay for their down payment, and now we have a rate relief program that will help them make their mortgage payments. Those two combined are very impactful for families trying to get their first home..Where do I think the FHFA is going with this report? They've actually said three things so far. .They'd like to clarify the System's mission. We think they'll do that through a rule-making process, but we don't know what it's going to say. They didn't talk to the Home Loan Banks at all. They went around and talked to everybody else. So exactly what it's going to say, we're not sure. They've said they are going to align eligibility requirements for different types of members. What does that mean? Is that where the 10 percent ongoing test might come in? Maybe. Will they make it different for community financial institutions versus a large bank? Will they make their criteria different? I don't know. We have insurance company members. What about them? Are they going to be treated differently?The last one is streamlining all of the regulations and paperwork related to our affordable housing programs. We would very much welcome that. Make it simpler. Get rid of as much process as you can. That would be awesome. And that actually was a recurring theme in all of the letters and roundtable discussions throughout the whole process.