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Prepared Remarks of Melvin L. Watt Director of FHFA at 2016 Federal Home Loan Bank Directors' Conference


Remarks as Prepared for Delivery

Melvin L. Watt, Director

Federal Housing Finance Agency

2016 Federal Home Loan Bank Directors' Conference

Washington, D.C.

May 24, 2016


Good afternoon and thank you for inviting me again to join you at the Federal Home Loan Bank annual Directors' Conference.

The Federal Housing Finance Agency (FHFA) shares your commitment to ensuring that the Federal Home Loan Banks (FHLBanks) remain a reliable source of liquidity, provide access to the secondary mortgage market, and offer other services for their members, especially smaller institutions.  And we remain committed to ensuring that the FHLBanks accomplish these goals in a safe and sound manner while fulfilling their affordable housing obligations.    

These Annual Directors' Conferences are always a good time for me to talk to you collectively about the current status of our efforts to create a stronger FHLBank System, as well as to discuss issues and challenges that may be on the horizon and ideas we are thinking about to make the system even better.  Our examination teams often discuss our priorities with each FHLBank individually, but this is a good opportunity to address these matters for the system as a whole.   

Federal Home Loan Bank Supervision

Throughout 2015, we continued to see strong financial performance across the FHLBank System. 

  • All eleven FHLBanks were profitable in 2015, which is always a great thing to be able to say.  Net income was strong at $2.9 billion. 
  • In fact, 2015 marked the most profitable year in the history of the FHLBank System, although some of this resulted from unique events, including $688 million in gains from litigation settlements.
  • Strong profitability allowed the FHLBanks to continue building their retained earnings in 2015.  This continued the improvement we have seen since the financial crisis.
  • In 2015, total FHLBank assets increased 6.1 percent to $969.6 billion, driven primarily by increases in advances to members.

FHFA continues to pay close attention to whether the FHLBanks are sufficiently focused on their core mission of providing advances and supporting secondary mortgage market access for member institutions.  Following the collaborative work of the Joint Core Mission Working Group to agree upon appropriate core mission criteria and standards and publication by FHFA of the standards in the Core Mission Achievement Advisory Bulletin last July, the FHLBanks overall have done very well in meeting the preferred standard that was set.  In 2015, the overall percentage of FHLBank consolidated obligations that met the core mission criteria was 74 percent, an increase from the 71 percent at year-end 2014 and, notably, above the 70 percent preferred standard.  While a couple of the FHLBanks are still working their way through the evolving standard toward the preferred standard, they are making progress and have well-considered plans to reach the goal. 

We remain concerned about the extent to which some FHLBanks continue to rely on non-core mission assets to support their earnings.  Again, however, we are making progress.  This is demonstrated by the decline in the overall level of FHLBank assets held in investments from 30 percent at the end of 2014 to 28 percent at the end of 2015.

There are three other areas that I will mention that FHFA continues to monitor closely, the first two of which will be familiar to you since I mentioned them in my comments last year.

First, for those FHLBanks that have large exposures to insurance company members, we continue to encourage you to exercise due diligence to establish conservative haircuts and controls over collateral pledged by them in support of their advances.  While lending to insurance companies remains an important FHLBank activity, the FHLBanks face different risks when lending to these companies compared to other members.

Second, the system as a whole, and some FHLBanks in particular, have advances concentrated to a few large members.  Across the System, the top four borrowers accounted for 24 percent of aggregate advances at the end of 2015.  Business concentration with a small number of borrowers can threaten profitability if one or more of these borrowers suddenly decrease their demand for advances.  Consequently, FHFA will continue to evaluate contingency planning for possible rapid decreases in advance demand at FHLBanks with heavy advance concentrations.  

Third, concerns have recently arisen about and FHFA has started a review of the System's increased usage of short-term funding in the form of discount notes.  At year-end 2015, discount notes constituted 54 percent of outstanding FHLBank debt, compared to 43 percent at year-end 2014 and 39 percent at year-end 2013.  Short-term funding requires more frequent debt rollover than longer-term funding and this could become a safety and soundness issue if liquidity dries up unexpectedly.  

We are aware that the FHLBanks and the Office of Finance are having ongoing discussions about how to address this issue.  FHFA has been engaging in conversations with the Office of Finance and market participants to gather more information about recent changes in debt issuances.  We hope that constructive dialogue among FHFA, the Office of Finance and the FHLBanks will address the concerns and make it unnecessary for FHFA to issue guidance on the topic.  Even with this trend of greater short-term funding, it is important to note that all FHLBanks met their liquidity requirements in 2015 and continue to maintain ready access to the agency debt markets.

Membership Rule and Affordable Housing Oversight

Since I last spoke with you, FHFA finalized the amended membership rule.  We carefully considered the more than 1,300 comment letters that we received from members of the public, including a number from the FHLBanks.  Ultimately, we decided to eliminate the proposed on-going asset test because we concluded that the burdens of implementing the changes proposed on this issue would have outweighed the benefits of the proposed changes.

As you know, however, we decided to finalize our proposed definition of an insurance company to exclude captive insurers.  While this decision may adversely impact some FHLBanks, and certainly some of their members, we continue to believe that the decision we made was the right one and that Congress is the appropriate body to make changes to the statutory membership requirements for FHLBanks.  To date, Congress has not taken any action in response to our final rule.      

For those of you who may be wondering about the status of our ongoing efforts on the FHLBank affordable housing goals and modernization of the Affordable Housing Program (AHP), let me assure you that we continue to make progress.  Our work with the FHLBank Presidents' Housing Goals Working Group has been collaborative and helpful as we consider how best to implement the housing goal requirements in the future.  I got an update from my staff recently and sent them back to think more creatively and "outside the box" about how to make sure the housing goals meet their intended purpose of ensuring that the FHLBanks are incentivized to do their very best to make sure that affordable housing is provided for those who need it most.  We encourage you to help us think creatively about this issue.  I think it's better for us to get this right than to rush the process, but I'm still hopeful that we can announce more details on our plans for overseeing these housing goals later in the year.

Over a number of months, FHFA staff has also held many meetings to listen to and exchange information about how to improve the Affordable Housing Program.  The FHLBank Presidents, the Community Investment Officers (CIOs), the Affordable Housing Advisory Councils, and stakeholders made a number of very thoughtful recommendations to FHFA about how to revise the AHP, and FHFA staff has discussed these suggestions in a number of settings.  My staff has advised me that these have been very productive dialogues, and I want to thank you for this constructive engagement. 

The recommendations we received fall generally into four categories:

  • First, there are some that we unfortunately will not be able to accept because they are inconsistent with the current statute and would require legislative action for us to implement. 
  • Second, there are some that we will be able to implement relatively quickly by issuing a letter clarifying that they are already permissible under our current regulation. 
  • Third, there may be some that we can authorize by issuing revised guidance rather than going through the process of amending our current regulation. 
  • Finally, some of the recommendations will require the more protracted process of developing, proposing and finalizing amendments to our Affordable Housing Program regulation.

Our methodical process of obtaining feedback from the FHLBanks, the Affordable Housing Advisory Councils, and other stakeholders has left us with a number of options to consider, and we are reviewing each recommendation carefully.  Our objective as we attempt to figure out the best way to proceed on each recommendation will be to ensure that AHP remains a successful source of affordable housing funding while removing operational barriers and making necessary updates that reflect today's housing market.  As we do this, we of course must balance our desire to get the changes implemented as quickly as possible with our obligation to get the changes implemented effectively.   

FHFA's Oversight of Diversity and Inclusion at Our Regulated Entities

Let me spend the balance of my time talking in some greater detail about a subject that I have mentioned just briefly each time I have spoken here at your Annual Conference -- diversity and inclusion.  As you are all aware, the Housing and Economic Recovery Act of 2008 places diversity and inclusion responsibilities on all of our regulated entities – the FHLBanks, Office of Finance, Fannie Mae, and Freddie Mac.  Each of these entities is directed to establish an Office of Minority and Women Inclusion and, to the maximum extent possible, utilize minorities, women and minority- and women-owned businesses across all lines and activities of the entities.  Since I became the Director of FHFA, we have been working methodically to develop, and then to start implementing, a roadmap for how we will oversee our regulated entities' fulfillment of their diversity and inclusion obligations. 

I view this as more than a compliance exercise geared toward meeting some kind of minimum standard.  I have mentioned diversity and inclusion in each of my speeches to this group because I want to communicate the importance of seeing diversity and inclusion as integral parts of your efforts to meet your mission, not as an isolated endeavor.  As we see it, this forward-thinking approach is a business imperative, not just an effort to fulfill a statutory obligation.    

So I welcome, and want to express my appreciation for, the open and collaborative attitude with which virtually everyone at all the FHLBanks has approached our focus on diversity and inclusion objectives thus far.  As we continue to build on the success and collaboration to date, we remain aware that there are a number of moving parts in this process.  We understand that the FHLBanks need to establish their plans for diversity and inclusion just as FHFA must continue to articulate and refine our expectations.  In this spirit, let me highlight some of the activities that we have undertaken to date and some things that we will build into our roadmap to help drive integration of diversity and inclusion in a systematic way.

First, after reorganizing FHFA's own OMWI organization, we have devoted a considerable amount of time to gathering information about what our regulated entities are already doing in the area of diversity and inclusion.  To this end, we developed a survey to ask each regulated entity about its existing practices, including its diversity and inclusion organizational framework, strategic planning efforts, supplier and workforce diversity programs, and reporting procedures.  FHFA staff followed up on the responses to the survey by visiting each FHLBank and the Office of Finance to interview officials, a process we are currently finishing with Fannie Mae and Freddie Mac as well.  All of that work was designed to capture information about the current state of each regulated entity's diversity and inclusion program.  This information will be critically important in enabling us to establish benchmarks against which we can measure and evaluate each entity's progress going forward.

Second, consistent with our practice of supervising all aspects of our regulated entities' operations that are important to their success, we expect to examine our regulated entities' diversity and inclusion programs and activities.  Consequently, we are developing diversity and inclusion examination activities that we will integrate into the Agency's supervision program.  We expect to develop examiner guidance, hire and train examiners, and establish consistent examination methods and practices.  Our goal is to ensure that diversity and inclusion examination activities will be part of our regular examination work conducted for all regulated entities in 2017. 

Third, we plan to propose an amended minority and women inclusion regulation that would direct all of our regulated entities to undertake diversity and inclusion strategic planning, either on a stand-alone basis or as part of their overall business strategic planning process.  This will ensure that each regulated entity develops and approves its own comprehensive approach to integrating diversity and inclusion systematically into its business and activities throughout its organization.  Our goal is to publish the proposed amendments for public comment this year. 

Fourth, FHFA is considering whether to provide guidance about incorporating diversity and inclusion in assessing FHLBank executive incentive compensation programs.  We envision each FHLBank implementing diversity and inclusion goals, such as conducting outreach to minority-serving financial institutions, increasing supplier diversity, or implementing organization-wide diversity and inclusion performance management systems.  I applaud the efforts already being undertaken voluntarily by the Chicago, Dallas, and Pittsburgh FHLBanks to tie their executive compensation to specific diversity and inclusion goals.

Finally, FHFA continues to work with all of you on increasing the diversity of the Boards across the FHLBank System.  Last year, we amended our regulation to require each FHLBank and the Office of Finance to report annually on board diversity, including the outreach and strategies used to promote diversity in nominating or soliciting nominees for board positions.  We have already seen some progress.  I also recently signed off on a proposed clarification to our rules governing FHLBank Director and personnel involvement in board elections.  This proposed clarification, which responds to concerns several of you had raised, makes clear that FHLBank Directors or personnel can actively seek out and encourage diverse candidates to run for election, even while Directors and personnel still face other limitations on their involvement in elections.  This proposed clarification should be coming out soon for public comment. 

We are also very encouraged by the Board Diversity Working Group formed by the FHLBanks and headed by Indianapolis FHLBank CEO Cindy Konich.  The Working Group convened its first in-person meeting several weeks ago and, in the coming months, will be examining best practices across the System and considering what new infrastructure or policies are needed to achieve the goal of increasing board diversity.

We view each of you, as well as Fannie Mae and Freddie Mac, as critical partners in FHFA's ongoing oversight of diversity and inclusion practices.  And, going forward, we will of course continue to work with each of you to achieve our shared mission.  Ultimately, it is our hope that our regulated entities will provide leadership on diversity and inclusion for the housing finance industry as a whole.


Let me conclude by thanking you for having me here today and for all the work that you have done to support the nation's housing finance system by creating a stronger and more mission-focused FHLBank System.  Thank you also for your leadership on making diversity and inclusion integral parts of your organizations.  We look forward to regular discussions with you as we continue to make progress on all aspects of our oversight of the FHLBanks.



Media: Stefanie Johnson (202) 649-3030 / Corinne Russell (202) 649-3032
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