* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Demystifying the Federal Home Loan Banks:
Survey
Document related concepts
Payday loan wikipedia , lookup
Household debt wikipedia , lookup
Moral hazard wikipedia , lookup
Peer-to-peer lending wikipedia , lookup
Financialization wikipedia , lookup
Yield spread premium wikipedia , lookup
Mortgage broker wikipedia , lookup
Interbank lending market wikipedia , lookup
Credit rationing wikipedia , lookup
Interest rate ceiling wikipedia , lookup
Securitization wikipedia , lookup
United States housing bubble wikipedia , lookup
Syndicated loan wikipedia , lookup
Federal takeover of Fannie Mae and Freddie Mac wikipedia , lookup
Transcript
Demystifying the Federal Home Loan Banks: We’re Your GSE By David Feldhaus Demystifying the FHLBanks Here is a little known fact that could make a big difference to your credit union: Of the three Government Sponsored Enterprises created by Congress to encourage homeownership, only one is a cooperative. The Federal Home Loan Banks (FHLBanks), founded in 1932 during the Great Depression to promote economical housing finance, today exist to support homeownership as well as to serve a critical role as a reliable source of short-term liquidity and long-term funding for our member financial institutions in all economic cycles. m The fact that each of the 11 regional FHLBanks is owned by our member institutions, and operated on their behalf, fundamentally differentiates our organization from other entities. Credit unions understand well how our cooperative structure allows us to serve as “trusted advisors” for our members. We share the same passion to assist our members with their financial challenges and help them better serve their communities as you do with your members. Added to this is our GSE status, which enables us to reliably provide low-cost financial products and services to them. Together, these features make the FHLBanks a powerful partner for your credit union. July 2015 - PIPELINE 19 Demystifying the FHLBanks The 11 FHLBanks across the country collectively serve about 7,300 members including credit unions, banks, thrifts, insurance companies and Community Development Financial Institutions (CDFIs). Credit unions are the fastest growing membership component, accounting for 1,272 or 17% of all FHLBank members as of the beginning of the year. Why are they joining? Increasingly, many recognize the capabilities we have and how we can benefit their institutions. Some join and immediately plan to borrow from us or sell mortgages to us. Others join with no intention of ever using us–and that’s OK too. For them, we are a “break glass in case of emergency” contingency plan that allows them to sleep better at night. Either way, there is value in belonging to a GSE cooperative. What’s in a Name? We may lack a cute, easy-to-remember name like the other housing GSEs—Fannie Mae and Freddie Mac— but our name speaks to our historical mission and purpose. Each word denotes an important characteristic. “Federal” reflects our Congressional origin and public mission that provides the implicit backing from the U.S. government, allowing us to raise funds at the lowest possible cost. This perception of government support in the bond market also ensures we can issue debt whenever the U.S. Treasury can, making us an incredibly reliable source of liquidity no matter what the economic conditions. The liquidity crisis of 2008 convincingly demonstrated our worth. We were able to provide our members with continuous, daily access to the global bond markets, even as their other sources of wholesale liquidity dried up. “Home Loan” speaks to the importance of our traditional housing finance mission to promote and encourage Figure 1 homeownership. Today, however, Congress has expanded our mission to facilitate broader lending for community financial institutions in areas such as small business, agriculture and agri-business, as well as support for community development activities. Finally, as lenders, each of us is a “bank,” but as memberowned cooperatives, we are operated to earn a reasonable return for our members, but not to maximize profits at their expense. Members must purchase stock to initially join and buy additional stock to capitalize their borrowings, for which they receive dividends. All FHLBank stock is bought and sold at par–it never trades. When members repay their borrowings, they can have their additional stock repurchased by their FHLBank, which often occurs on the same day. This structure allows us to expand and contract our balance sheet as our members’ needs demand, but remain safely and soundly capitalized at all times. In essence, the FHLBanks serve as financial intermediaries linking “Wall Street to Main Street.” By issuing debt in the global capital markets, we channel low-cost funding from investors around the world to our members in local communities. Although most people have never even heard of the Federal Home Loan Banks, we are quietly operating behind the scenes as a crucial part of the “plumbing” that helps the U.S. financial system ensure liquidity and funding is available when needed. A Decentralized System, Uniquely Bound Together Historically, there have been 12 FHLBanks with districts that follow state lines. Due to the recent voluntary merger of the Des Moines and Seattle FHLBanks, the first such combina- FHLBank System Credit Union Members and Borrowings 20 PIPELINE - July 2015 During the housing and economic crisis, the Federal Home Loan Banks demonstrated their ability to meet the credit needs of members by increasing the amount of FHLBank advances to credit unions by $27.2 billion between Q1 2007 and Q3 2008. After declining as loan demand fell, today the level of advances to credit unions is again rising as more credit unions choose to join the FHLBanks and borrow from them. Demystifying the FHLBanks Figure 2 FHLBank Districts Eleven FHLBanks serve districts that include all states, D.C. and 4 U.S. territories. tion in 83 years, today 11 FHLBanks serve the 50 states, the District of Columbia and 4 U.S. territories. Membership is determined by the state in which members are chartered. It is important to note that each FHLBank operates as a separate entity; we are not branches of each other. Each has its own board of directors, management, culture and views reflecting the regional differences of their members. As a result, you should inquire with the FHLBank serving your district about the specific products and services they offer, because they do vary. That said, we do talk to each other continually, comparing notes and experiences, leading many of our products and services to be very similar. We also share a common regulator, the Federal Housing Finance Agency, which encourages a certain level of commonality. Additionally, we are bound together through an unique mandate that each FHLBank is jointly and severally responsible for the debt of the others. This means that if one FHLBank were not able to repay its bond obligations for any reason, the other FHLBanks would be required to ensure the debt is paid in full. This feature gives investors in our bonds an added measure of security, providing the lowest possible cost of funding. It also insulates American taxpayers from the unlikely event of a government bailout because the cost of one, or even several, FHLBank failures at the same time likely would be absorbed by the other FHLBanks. This unique tie encourages communication among the FHLBanks. We in Chicago want to know what is happening at our sister FHLBanks and they want to know what we are up to. It is a unique, self-policing system that works well for us, our members and the country. What Products and Services are Offered? All FHLBanks offer a menu of loan products with a wide variety of terms and structures to provide members with same-day, low-cost funding and help them mitigate interest rate risk. Historically, our main product has been loans, called “advances,” that can be simple or structured, depending on a member’s needs. For lenders who portfolio their mortgages and other loans, FHLBank advances can be an ideal product to help match the duration of assets to liabilities. A significant benefit of advance funding is the ability to customize the loans for each member. Maturities can range from overnight to 30 years. Interest can be fixed or floating. Repayment schedules can be bullet or amortizing. If needed, advance structures can incorporate options such as caps, floors, collars, swaps, swaptions or other features to suit a member’s specific requirements. Perhaps as importantly, expert FHLBank staff is available to consult with members about these features. They can discuss not only the market implications, but the accounting consequences as well. As employees of a member-owned cooperative, their only goal is to tailor a solution that works best for you. To fully understand how advances work, you need to be aware of the prominent role that collateral plays. Unlike most lenders, our loans must be over-collateralized at all times. Borrowers are required to pledge high-quality collateral, such as 1-4 family mortgages, agency MBS and Treasury bonds, with a value in excess of their borrowings. The amount of the haircut depends on the quality of the collateral, which can be swapped out or topped up, if needed. FHLBanks are always in a secured position and we monitor the collateral value closely to ensure it is sufficient. Largely because of this, no FHLBank has ever lost money lent to a member in 83 years of existence. As a GSE lender, credit losses are not part of our core lending business. Collateral also comes into play regarding the price of an advance. As a cooperative, we seek to offer all members the same interest rate on a given day for a given term. Weaker mem- July 2015 - PIPELINE 21 Demystifying the FHLBanks bers who pose a greater credit risk receive the same rate as stronger members. However, the amount of the required collateral may be increased, and the method of securing it may be heightened, such as by listing or by requiring physical delivery of the documents. Beyond advances, the FHLBanks also offer products such as letters of credit that provide members a low-cost and efficient way to attract and secure agreements with third parties. Letters of credit are a way to leverage our Aaa/ AA+ long-term debt credit rating at a competitive price to help their communities. They can be used to provide liquidity by serving as an alternative form of collateral to secure municipal deposits. They can also be used to provide financing opportunities through credit enhancement to support an affordable housing or community development project. The FHLBanks also offer a wide array of products and tools to directly support the affordable housing and community lending initiatives of our members. These include down payment assistance grants to low–and moderate–income homebuyers, grants to finance affordable rental and ownership housing, low-cost credit programs to assist in the development and revitalization of communities, disaster relief programs, and revolving loan funds to economic development projects. Each FHLBank has different products designed for its region, but the intent is the same. These products demonstrate how the FHLBanks are able to harness the financial capabilities of a GSE within a cooperative structure to deliver economical and reliable financing solutions for our members. Your regional FHLBank can be a powerful partner as you seek to serve the financial needs of your members and your community. These programs were begun to help community lenders retain more of the value of their mortgage originations. Lenders, particularly smaller lenders who know their customers better than any GSE can, have traditionally originated very high-quality fixed-rate mortgages. However, they often were not able to realize their full value when they sold them into a secondary market that priced the loans largely based on the volume delivered, rather than their credit quality. As the only other housing GSE, the FHLBanks are ideally situated to add competition to this market. We are able to raise funds at the same rates, or even slightly better rates, as our sister GSEs, and as tax-exempt cooperatives, we can offer our members the most competitive price for their mortgage loans. However, the FHLBank mortgage programs have an interesting twist consistent with the our cooperative structure: participating members have the opportunity to share the credit risk of the loans they originate with their FHLBank and get paid for it. Members sell the loans to the FHLBanks through one of the mortgage programs, alleviating members of the interest rate risk. But in the traditional products, participating members are paid by their FHLBank based on the credit performance of their loans, rather than paying guarantee fees to compensate someone else to take the credit risk. The programs use slightly different structures to essentially do the same thing. Participating members using the tradi- The FHLBanks also offer a wide array of products and tools to directly support the affordable housing and community lending initiatives of our members. Figure 3 Mortgage Program Participation, by FHLBank Mortgage Programs That Reward Lenders for Their Credit Decisions Among the more recent products the FHLBanks have begun offering are programs designed for members wishing to sell mortgage loans rather than hold them in portfolio. First begun in the 1990s by our FHLBank in Chicago, today all of the FHLBanks offer one of two mortgage programs to their members as alternatives to the secondary mortgage market. The Mortgage Partnership Finance® (MPF®) Program is currently available to members of nine FHLBanks, while the Mortgage Purchase Program (MPP) is offered by two FHLBanks. While the structures of these programs differ slightly, they both allow participating members to originate, sell, and service (if they choose) fixed-rate residential mortgage loans. Often, these programs are the only option available for low-volume lenders that have difficulty accessing the secondary market. Without these programs, many members would not be able to offer their customers long-term, fixed-rate mortgages. 22 PIPELINE - July 2015 All of the FHLBanks offer a mortgage program for members wishing to sell loans in the secondary market. Many of the FHLBanks have been offering these products since the late 1990s. Demystifying the FHLBanks tional MPF products receive monthly fees that vary depending on the product. A First Loss Account (FLA) is established to absorb expected losses, after the borrowers equity and any Primary Mortgage Insurance. Participating members credit enhance their loans to the equivalent of a AA-rate mortgage bond, for which they receive monthly credit enhancement (CE) fees. These CE fees can be reduced or eliminated to compensate for losses in the FLA, depending on the product. Members bear any further losses, to the AA level, by directly reimbursing the FHLBank. Catastrophic losses beyond this level are the responsibility of the FHLBank. Additional MPF products have been developed to address members’ risk-based Figure 4 It is important to contact the regional FHLBank serving your area. Program and product availability can vary. capital positions and other portfolio management strategies. The MPP uses a different approach to share the risks: the FHLBank establishes a Lender Risk Account (LRA) at the time the loans are sold. Funds not used to absorb losses are disbursed to the member over a predetermined schedule. The use of the LRA structure and payment schedule are capitalfriendly to MPP sellers. Regardless of the approach, all of the MPF and MPP risk-sharing products allow members to bifurcate the risks of their loans and better allocate them between originators and investors. Amore efficient mortgage financing is the result.” MPF® Program Loan Performance FHLBank members know their customers and understand local market conditions. They are in the best position to ensure their customers receive mortgages appropriate for their financial situations. As a result of this knowledge and the risk-sharing partnership of the MPF Program, the credit performance of MPF loans have been significantly better than the industry average for conventional loans, both before and since the financial crisis. July 2015 - PIPELINE 23 Demystifying the FHLBanks Options Without Risk Sharing The FHLBanks are working to provide members with more channels to the secondary mortgage market for the mortgage loans they wish to sell. The MPF Program also has developed several products that allow members to sell their loans to other investors without a risk-sharing structure. For example, the MPF Xtra® product allows members to sell conventional, conforming loans through the MPF Program to the FHLBank of Chicago, which in turn sells the loans to Fannie Mae in a back-to-back transaction. Aggregating larger volumes of loans from across the FHLBank System affords the opportunity for better loan execution. A similar back-to-back structure between the FHLBanks and Redwood Trust, called MPF Direct, allows members to sell their nonconforming, jumbo loans to $1.5 million. And our new MPF Government MBS product allows members to sell FHA, VA, USDA Rural Housing Service and HUD Section 184 tribal loans to their FHLBank for placement into Ginnie Mae securities. These products are designed to give members more choices by providing numerous channels for their loans into the secondary market, helping them to better serve homebuyers. Servicing for most MPF loans is performed by the participating members who sell them. Remittance options can include actual/actual, schedule/schedule or single remittance, depending on the product. Additionally, members usually can choose to sell loans servicing-released, if they wish. In that case, the servicing transfers to a third party provider that has agreed not to cross sell to the borrower. Finally, be aware that some MPF products that involve sales to other investors, such Figure 5 A Cooperative for Cooperatives— We’re Your GSE I hope I have cleared away enough mystery about the FHLBanks to convince you to take the next step and talk to your local FHLBank about what they can do for you. We were created to help local financial institutions, like yours. As cooperatives, we exist to help our members and their communities by delivering economical and reliable funding products. As GSEs, the FHLBanks can be powerful partners, in good times and especially in bad. I encourage you to find out for yourself. Please visit www.fhlbanks.com to determine which FHLBank could service your credit union and to learn about their membership requirements. For more information about MPF Products visit www.fhlbmpf.com. David Feldhaus is Senior Vice President, External Affairs with the Federal Home Loan Bank of Chicago. This content is a condensed version of “Taking the Mystery Out of the Federal Home Loan Banks,” a presentation Dave shared at recent ACUMA Workshops. You can contact Dave at [email protected]. Mortgage Partnership Finance, MPF and MPF Xtra are registered trademarks of the Federal Home Loan Bank of Chicago. MPF Traditional Product Credit Loss Structure 24 PIPELINE - July 2015 as MPF Direct, do not allow the servicing to be retained; only servicing-released sales currently are permitted. The risk-sharing structure of the traditional MPF products establishes a First Loss Account to absorb expected losses, after the borrowers’ equity and any Primary Mortgage Insurance. Participating members credit enhance their loan to the “AA” level, for which they receive monthly “CE fees.” These fees can be reduced or eliminated to compensate for losses in the FLA, depending on the product. Members bear any further losses, to the “AA” level, by reimbursing the FHLBank. Catastrophic losses beyond the “AA” level are the responsibility of the FHLBank.