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Remarks as Prepared for Delivery
Melvin L. Watt, Director
Federal Housing Finance Agency
2015 Federal Home Loan Banks Directors Conference
May 13, 2015
It's a pleasure to speak to the Directors and executive staff representing the 12 Federal Home Loan Banks (FHLBanks or Banks) again this year. Some of you may recall that last year's FHLBank Directors Conference was the occasion for my first speech as Director of the Federal Housing Finance Agency (FHFA). Since then, I've spoken to a number of other audiences and, I have to confess, not all of them have been as welcoming as you were in my first speech last year. While my speeches and activities related to the FHLBanks may not always get the same amount of public attention (or controversy) as activities or speeches related to our other regulated entities, that in no way lessens the importance of the FHLBanks, nor does it lessen the priority that FHFA places on carrying out its responsibilities related to the FHLBanks.
We all know that the FHLBanks play an important role in housing finance by providing a reliable source of funding, access to the secondary mortgage market and other services to member institutions, especially smaller institutions that have limited access to these services. In addition, the FHLBanks have important statutory obligations related to affordable housing.
Since becoming the Director of FHFA, I have continued to gain an even greater understanding and appreciation for what you do. As I committed last year, I'm making my way to each FHLBank to see your operations first-hand. I've already made it to the FHLBanks of Dallas, Chicago, Atlanta, and New York and, if you count my meeting with the leadership of Des Moines and Seattle at a joint board meeting last year, I'm half way through. These interactions have provided extremely useful perspectives and insight, and I plan to continue these visits and meetings going forward.
Over the last year, a number of important developments have taken place at the FHLBanks and as part of FHFA's regulatory oversight functions I'd like to focus my remarks today on some of them.
Financial Results and Activities
FHFA has been and will, of course, continue to focus our attention on ensuring that the FHLBanks continue to accomplish their housing finance and affordable housing roles, and that they do so in a safe and sound manner. Recent results have been positive.
FHLBank income remains strong. Every FHLBank recorded positive net income for each of the past 13 quarters, and the FHLBanks collectively earned $2.5 billion in 2013 and $2.3 billion in 2014.
Advance volume increased by $73 billion in 2014. While the top 10 borrowers accounted for slightly more than half of that increase, other members showed signs of increasing advance demand as well.
The composition of FHLBank capital continued to strengthen in 2014 as indicated by the accumulation of retained earnings and the decline in mandatorily redeemable capital stock. As of year-end 2014, regulatory capital was $49.5 billion, or 5.4 percent of total System assets, consisting of $13.2 billion in retained earnings, $33.7 billion in capital stock, and $2.6 billion in mandatorily redeemable capital stock.
And the Affordable Housing Program continues to provide valuable resources in support of local housing needs. In 2014, the FHLBanks awarded grants of $238.5 million, which provided assistance to almost 25,000 single-family and multifamily units.
FHFA understands the importance of developing new ways for the FHLBanks to support the housing finance needs of members. FHFA has now approved several mortgage programs that provide participating members alternative means to sell mortgage loans, thereby transferring risk and freeing up capital that members can use to expand credit availability in local communities.
Several of these programs are under the Mortgage Partnership Finance (MPF) umbrella. In 2014, FHFA authorized the Chicago FHLBank to begin the initial phases of the MPF Direct and MPF Government MBS programs. Under MPF Direct, participating members can sell mortgage loans to the Chicago FHLBank, which concurrently sells the loans to a third-party private investor for securitization. Under MPF Government MBS, the Chicago FHLBank purchases government-guaranteed or government-insured loans, accumulates the loans, and pools them into securities guaranteed by Ginnie Mae. Chicago began a pilot launch of these two programs with a limited number of members, and FHFA has recently approved the requests of several other FHLBanks to participate.
FHFA also approved the Topeka FHLBank's request to offer an additional MPF option – Member Mortgage Participations. Under this program, the Topeka FHLBank can sell to its members participation interests in mortgage loans that other members of the Bank originate under the MPF program. FHFA also recently approved, on a pilot basis, the New York FHLBank's request to offer Bank members the opportunity to participate on a mortgage loan trading platform to be operated by a third-party firm. When it is operational, approved FHLBank members who want to sell mortgage loans will be provided access to a secure on-line portal to post information about loans to sell, receive bids, and lock trades. If the pilot test of the activity is successful, it may provide another avenue for adding private capital and liquidity to the mortgage market to benefit the Bank's members.
FHFA's New Business Activity Regulation required these activities to be approved, and FHFA considers the safety and soundness as well as mission issues in undertaking these evaluations. FHFA remains committed to ensuring that this is a robust process, but I am also committed to improving the efficiency and timeliness of decisions in this approval process.
Areas of Focus for FHFA and the FHLBanks
Let me spend a few minutes on some of the specific matters I raised as areas of focus in last year's speech.
Last year I highlighted franchise value as an important consideration. In particular, I noted that franchise value for a FHLBank involves delivering the benefits of System membership to members. These benefits include access to funding, other services that connect members to capital markets, support for the affordable housing and community development activities of their member entities, and a reliable dividend. And the FHLBanks must deliver these benefits in a safe and sound way with adequate capital and with an overall focus on the FHLBank System's mission.
I noted that understanding the factors that lead to changes in advance demand and evaluating the membership composition and long-term ability of your FHLBank to deliver the benefits of System membership remain important considerations in sustaining franchise value. These were certainly some of the fundamental issues considered in the proposed merger of the FHLBanks of Des Moines and Seattle. The Boards of each Bank agreed that a merger would result in a stronger institution that could better serve the needs of members. Members of both Banks voted for the merger by overwhelming margins. FHFA worked closely with the Banks throughout the process, and we will continue to monitor the integration process. In the end, this will be an historic event that both Des Moines and Seattle, as well as FHFA, believe will result in a stronger FHLBank System.
We've also made considerable progress on the Core Mission Assets project that began in 2013. Focusing on your core mission is very much related to safety and soundness, and such a focus is much less likely to cause financial difficulties. As we all know, some of the Banks' investments outside their core mission prior to the housing crisis brought them near economic peril and affected their ability to perform normal FHLBank functions like repurchasing stock. In addition, given the important benefits provided to the FHLBanks as part of their status as government-sponsored enterprises, it is important to develop a framework that links the activities of each FHLBank to its core mission.
To further this effort, as you know, FHFA formed a Joint Core Mission Working Group that consisted of senior FHFA staff and a group of FHLBank Presidents. The Working Group started by asking the basic question: "What should a FHLBank look like?" That led to a sharing of ideas that resulted in an agreement that specifies ratios of core mission assets (which include advances and acquired member assets) compared to consolidated obligations as thresholds in evaluating core mission achievement.
This group then reached agreement on three general categories: ratios at or above the highest threshold indicate that it is clear that a Bank's activities are achieving core mission (i.e. they look like a FHLBank); ratios between the highest and lowest thresholds indicate that other mission activities need to be considered; and ratios below a minimum threshold indicate that more fundamental questions about the activities of the FHLBank need to be addressed.
FHFA expects to issue an Advisory Bulletin based on this core mission framework in the near future. We believe that using this collaborative process to reach agreement about core mission was very useful, and that this collaborative process could be useful in certain other areas going forward.
Another subject about which we are collaborating with you extensively, although not using the Working Group format as we did on core mission, is the affordable housing obligations of the FHLBanks. Those obligations include the Affordable Housing Program (AHP) and the FHLBanks' affordable housing goals.
After almost 25 years, the AHP continues to be a success. Part of that success has been partnering with local institutions that understand the needs of their communities. Last year, I said that FHFA would begin conducting a thorough evaluation of the AHP. During the past year, FHFA staff has reached out to FHLBank Presidents, Community Investment Officers, Advisory Councils, non-profit developers who use the AHP, and others. We asked these stakeholders to identify features of the AHP that we should retain and those that we should reconsider.
In the review process, we identified several successful features of the existing program – such as the AHP Competitive Application Program and the Homeownership Set-aside – which many users said should be kept. But, we also heard that over the years the AHP regulation has become layered with requirements that are well intended but may, however, impede the ability of a FHLBank to meet its District's distinct housing needs, particularly those in rural areas. We've also received a number of practical suggestions that could make the program more efficient.
We agree with AHP program administrators and users that the AHP should be modernized and we are carefully evaluating the information we received from our outreach. We expect to use this input to develop a Notice of Proposed Rulemaking that will allow more formal input and allow us to get to a better Affordable Housing Program.
Several FHLBanks have also initiated a discussion with FHFA about the affordable housing goals, which are required by statute. These affordable housing goals were promulgated for the FHLBanks by FHFA in 2010. That regulation established a threshold amount of $2.5 billion in mortgage purchase activity before the housing goals would apply. As I understand it, a number of the FHLBanks have stayed below the threshold amount because of their uncertainty about how the goals would be applied. That is not a desirable outcome, either for your members or for serving the affordable housing needs of your communities. Therefore, FHFA plans to consider alternatives that will not close off FHLBank members' access to liquidity yet will meet the intent and spirit of the law, assuring that very-low, low- and moderate-income households and communities have access to credit and affordable housing. We will look forward to receiving your continuing input in this process.
I also want to say a few words about minority and women inclusion, which I also mentioned in last year's speech.
FHFA has specific statutory responsibilities to ensure diversity and inclusion both within FHFA and at our regulated entities. Through FHFA's Office of Minority and Women Inclusion (OMWI), and throughout the agency as a whole, FHFA is committed to fully meeting our statutory responsibilities in this area.
FHFA recently finalized a minority and women inclusion regulation covering the FHLBanks. After releasing a proposed rule for public comment last year, FHFA has now finalized new reporting requirements for the FHLBanks about the demographic composition of the Banks' boards of directors. The regulation also requires the FHLBanks to report on their outreach activities to encourage the consideration of diverse candidates for board positions. This additional information will allow FHFA to better assess trends in the FHLBanks' board diversity, in addition to facilitating continued dialogue between FHFA and the FHLBanks about how to enhance their board diversity outreach efforts.
Of course, minority and women inclusion is about more than just collecting information. FHFA is interested in meeting our statutory responsibilities in a systematic and strategic way. To do so, FHFA is developing a Strategic Plan for OMWI to outline our broad approach to furthering diversity and inclusion both within FHFA and at our regulated entities. FHFA will release this Strategic Plan later this year, and we look forward to ongoing discussions with the FHLBanks and other stakeholders about how FHFA can best define and achieve our objectives. I was delighted to hear from our OMWI Director that at a recent FHLBank conference in Indianapolis fruitful discussions are already taking place that demonstrate a growing commitment to helping us achieve greater inclusion of minorities and women in all aspects of our operations.
Finally, I dare not conclude my remarks without saying a few words about a topic that I suspect is on everybody's mind – the proposed membership rule. In last year's speech, I alerted you that we may need to address concerns about captive insurers when I said: "Captive insurance borrowing and membership in the FHLBank System raises a number of possible issues related to safety and soundness and access to the System." I noted further that "you will certainly be hearing more about this as we move forward." Well I guess I was right – I'm sure we've all heard a lot more about it since we issued our proposed membership rule last year. That rule set forth a proposal on membership eligibility for captive insurers, as well as other aspects of membership eligibility such as the one-time mortgage asset tests. And, we've certainly heard a lot from you and from many others – over 1,300 comments in response to the proposed Rule.
In my view, the process is working the way it should work. Congress established the FHLBanks to achieve a particular public purpose, and FHFA has a statutory responsibility to regularly evaluate how that purpose is being met within the constructs of the FHLBank Act. FHFA is continuing to evaluate the comments we received and we will come to a resolution as quickly as we can prudently do so. I recently received a letter from the Bank Presidents advising me that the Presidents have created a working group related to captive insurer membership issues and suggesting the formation of a joint working group for captive insurance membership issues similar to our core mission working group. While I responded that it would not be timely or appropriate to form such a joint working group in the middle of a formal rulemaking process, we will certainly welcome any additional thoughts that are developed through the Bank Presidents' working group as we continue our work to reach a final rule.
Let me conclude by thanking you for the important roles you are playing in keeping the FHLBank System strong and vibrant. That is our shared goal. You can count on FHFA to continue to consider your viewpoints carefully on the issues I've discussed today and on all other matters going forward. I look forward to working with you in our joint effort to ensure that the FHLBanks continue their operations in a manner that is both safe and sound and consistent with their mission.
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