That’s the Federal Home Loan Banks, the 12 regional US government-sponsored enterprises charged with providing loans to some 8,000 member banks.
The FHLBs have gained some prominence in the recent financial crisis, despite their own funding issues, as the two biggest GSEs, Fannie Mae and Freddie Mac, went into conservatorship last year. Indeed the FHLB system actually increased their lending in the crisis, helping their members finance their mortgage holdings at a time when ‘normal’ banks were reticent to to do the same.
There was some suggestion in the 2008 Housing and Recovery Act (HERA) that the FHLBs should go a bit further and start securitising their mortgage assets, in a similar way to that of Fannie and Freddie. The Federal Housing Finance Agency, which oversees the GSEs and the FHLBs, was commissioned with the task of undertaking a study, published on Thursday, on the issue.
Here’s the intro of the FHFA report:
Considerable uncertainty surrounds the future of mortgage securitization in the United States, including the role of Fannie Mae and Freddie Mac, the role for the government, the types of products the industry will offer, the supply and demand for those mortgage-backed securities (MBS), and the nature of future regulation. These unknowns make it difficult to assess the merits of allowing the FHLBanks to securitize mortgages. Despite these uncertainties, the FHFA has drawn general conclusions with respect to mortgage securitization and the FHLBanks.
According to the paper, allowing the FHLBs to securitise their assets would enable the group to purchase a larger volume of conforming mortgages from their member banks. That would increase the availability of mortgage credit from members participating in the programme — helping ease some of the constraint induced by the conservatorship of Fannie and Freddie. It would also increase competition with the GSE’s — further lowering mortgage rates.
However, as the title of this post should suggest, the FHFA has found against the HERA proposal, citing the banks’ inexperience with securitisation, potential start-up costs, market risks, proposed accounting changes, and the question of what type of credit enhancement or guarantee the securities would hold.Here, then, is the FHFA’s conclusion:
Based on FHFA’s study and findings regarding FHLBank securitization, and the recent calls for regulatory reform, I do not recommend permitting the FHLBanks to securitize mortgages at this time. Rather, the FHLBanks may continue to use programs such as MPF Xtra to serve as a conduit for mortgage purchases from their members to a third party that can securitize those mortgages. The potential for FHLBank securitization of mortgages should be considered after the Treasury Department and the Department of Housing and Urban Development, working with FHFA, develop recommendations on the future of Fannie Mae, Freddie Mac, and the FHLBank System, and in light of financial market conditions at that time.