MBA Offers Recommendation to FHFA on Federal Home Loan Banks Proposed Rule

The Mortgage Bankers Association, in a letter to the Federal Housing Finance Agency, said it supported the agency’s proposed rule to amend existing Federal Home Loan Bank housing goals but urged agency to monitor the rule’s impact on the FHLB Acquired Member Assets programs.

MBA also recommends that goals meant to spur participation by smaller lenders be modified to recognize the role of credit unions as AMA participants.

The AMA programs allow eligible financial institutions to sell loans directly to their respective FHLBs. MBA expressed concern that the proposed rule could disincentivize FHLBS from continuing their AMA programs.

In the Jan. 31 letter to FHFA General Counsel Alfred Pollard, MBA Senior Vice President of Public Policy and Industry Relations Stephen O’Connor said MBA supports proposed revisions to the FHLB housing goals, as these revisions target regulations that may have limited AMA purchases by the FHLBs in recent years, while also providing greater compliance certainty and simplicity for the FHLBs. MBA recommended, however, that FHFA carefully monitor the impact of the proposed rule once implemented to ensure that it does not incentivize FHLBs to discontinue their AMA programs.

“Effective FHLB housing goals would…promote increased investment by member institutions in affordable housing, while not introducing any features that could jeopardize FHLB safety and soundness,” O’Connor said.

The FHLB mission is “to provide reliable liquidity to member institutions to support housing finance and community investment.” The main channel by which the FHLBs pursue this mission is through the use of advances, or secured loans largely collateralized by residential mortgages. However, the FHLBs also provide alternative secondary market executions for their members as a means of supporting reliable liquidity. The AMA programs, which include the Mortgage Purchase Program and the Mortgage Partnership Finance program, represent such an alternative execution. Through the AMA programs, the FHLBs either purchase and hold mortgage loans originated by their members or purchase these loans and subsequently sell them in the secondary market.

MBA said in general, both lenders and borrowers benefit from a varied and diverse set of secondary market executions. “To the extent these executions can incentivize the origination of loans that support affordable and sustainable housing, they further an important public policy objective,” MBA said. “The need for increased investment in affordable housing is particularly critical given the market conditions that have characterized recent years–limited housing supply, home price appreciation outpacing wage growth, and soaring origination and building costs.

MBA offered the following revisions to the proposed rule:

—Elimination of the $2.5 billion annual threshold to trigger the housing goals. MBA noted since the FHLB housing goals took effect in 2011, there have been only three instances (covering two FHLBs) in which an FHLB exceeded the $2.5 billion annual AMA threshold. “Anecdotal evidence further suggests, however, that a number of FHLBs maintained limits on their AMA programs so as to specifically avoid crossing the $2.5 billion threshold and triggering the housing goals,” MBA said. “If true, these actions would strongly suggest that the FHLBs could have sustained larger AMA programs, as well as greater purchases of affordable housing loans, had the $2.5 billion threshold not been in place.”

MBA expressed concern that without an incentive to keep overall purchases below a particular threshold, the FHLBs should be expected to either increase their total purchases (including affordable housing loans) or shift more of their total purchases towards affordable housing loans. Each of these outcomes would be a positive development. One potential unintended consequence of the proposed rule, however, would occur if the FHLBs’ incentives to avoid the housing goals were strong enough to cause them (or a subset of them) to discontinue their AMA programs. “While we do not view this as a likely outcome, it is critical that FHFA monitor the initial implementation of the revisions to ensure that they are not having this unintended effect. If the revisions have caused a reduction in AMA offerings, FHFA should swiftly revisit this rulemaking,” MBA said.

—Introduction of a prospective housing goal. Another important revision to the existing rule is the proposed use of a prospective housing goal rather than the retrospective goals determined through Home Mortgage Disclosure Act data. MBA said it supports this revision, as a prospective target improves regulatory clarity and allows for better planning on the part of the FHLBs.

—Consolidation of the existing housing goals into a single housing goal. The four separate housing goals contained in the existing rule–three purchase goals and one refinance goal–would be replaced with a single, consolidated goal under the proposed rule. “Given the relatively small volumes associated with the AMA programs to date, there is little value in further segregating these mortgage purchases into more granular categories, as is currently required under the housing goals,” MBA said. “Instead, a single, consolidated goal can adequately capture the contribution of the AMA purchases to affordable housing, while also reducing the compliance burden for the FHLBs.”

—Eligibility of government-guaranteed or -insured mortgages. The proposed rule would also allow AMA purchases of mortgages guaranteed or insured by the Federal Housing Administration, Veterans Administration and Rural Housing Service to be eligible for purposes of satisfying the housing goal. FHFA correctly notes that these federal programs “provide mortgage options that can help lower-income borrowers and borrowers in low-income areas achieve homeownership.” MBA said because these programs are specifically targeted to first-time homebuyers and borrowers who are historically underserved, they represent the types of loans for which the FHLBs should be encouraged to provide enhanced liquidity.

—Introduction of a small member participation housing goal. MBA said establishment of a small member participation goal, by which at least 50 percent of AMA users at each FHLB be institutions with assets of less than $1.173 billion, is justified by FHFA in two ways: it is designed to encourage FHLBs to place a greater focus on small members; and it reflects the conclusion reached by FHFA in the proposed rule that smaller institutions may be more likely to originate loans to lower-income households.

“Given the importance of ensuring that small lenders have equal access to the secondary market relative to their larger counterparts, MBA supports the establishment of a small member participation goal,” MBA said. “We recommend, however, that FHFA consider any adjustments to this goal solely in light of the FHLBs’ responsibility to ensure a competitive balance and a level playing field. Affordability objectives should be pursued through the affordable housing goal-not the small member participation goal.”

—Allowance for alternative housing goals proposed by FHLBs. MBA noted a potential problem with the use of a uniform housing goal for the 11 FHLBs stems from the important differences across the eleven districts of the country. “Variation in demographics and economic and market conditions may make achieving the housing goal more difficult for some FHLBs than others in certain years,” MBA said. “As such, the allowance for FHLBs to propose alternative housing goals is both rational and necessary.”

—Establishment of a three-year phase-in for enforcement of the housing goals. MBA said it supports this provision, noting well-defined and reasonable implementation periods for new requirements on business activities “represent a form of good governance.”