[Federal Register Volume 62, Number 26 (Friday, February 7, 1997)]
[Notices]
[Pages 5828-5831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3191]
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FEDERAL HOUSING FINANCE BOARD
Hearings on Pilot Programs Recently Authorized To Be Established
at the Federal Home Loan Banks (FHL Banks) of New York, Atlanta, and
Chicago, and the Provisions in the Financial Management Policy (FMP)
Governing Investments Supporting Housing and Community Development
AGENCY: Federal Housing Finance Board.
ACTION: Notice of public hearings.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is hereby
announcing a public hearing on pilot programs recently authorized to be
established at the Federal Home Loan Banks of New York, Atlanta, and
Chicago and the provisions of the FMP governing such activities.
DATES: The public hearing will be held on Monday, March 10, 1997,
beginning at 9:00 a.m. Written requests to participate in the hearing
must be received no later than Wednesday, February 19, 1997.
ADDRESSES: The hearing will be held at the Office of Thrift Supervision
Amphitheater, 1700 G Street, N.W., Washington, D.C. 20552. Send
requests to participate in the hearing, written statements of hearing
participants, or other written comments to Elaine L. Baker, Executive
Secretariat, Federal Housing Finance Board, 1777 F Street, N.W.,
Washington, D.C. 20006. The submission may be mailed, hand delivered,
or sent by facsimile transmission to (202) 408-2895. Submissions must
be received by 5:00 p.m. on the day they are due in order to be
considered by the Finance Board. Late filed, misaddressed, or
misidentified submissions may affect eligibility to participate in the
hearing.
FOR FURTHER INFORMATION CONTACT:
Kerrie Ann Sullivan, External Affairs Specialist at (202) 408-2515 or
John K. Hardage, Deputy Director of Congressional Affairs at (202) 408-
2980, Federal Housing Finance Board, 1777 F Street, N.W., Washington,
D.C. 20006.
SUPPLEMENTARY INFORMATION: The Finance Board is interested in the views
of System members, community groups, trade associations, federal or
state agencies and departments, elected officials and others on the
pilot programs recently authorized to be established at the Federal
Home Loan Banks of New York, Atlanta, and Chicago, and the provisions
of the FMP governing such activities. A summary follows:.
In General
As provided by the Financial Management Policy (FMP) of the Finance
Board, the FHLBanks may invest in housing and community development
assets, provided that prior to entering into such investments, the
FHLBank:
(a) Ensures the appropriate levels of expertise, establishes
policies, procedures, and controls, and provides for any reserves
required to effectively limit and manage risk exposure and preserve the
FHLBank's and the System's triple-A rating;
(b) Ensures that its involvement in such investment activity
assists in providing housing and community development financing that
is not generally available, or that is available
[[Page 5829]]
at lower levels or under less attractive terms;
(c) Ensures that such investment activity promotes (or at the very
least, does not detract from) the cooperative nature of the System;
(d) Provides a complete description of the contemplated investment
activity (including a comprehensive analysis of how the above three
requirements are fulfilled) to the Finance Board; and
(e) Receives written confirmation from the Finance Board, prior to
entering into such investments, that the above investment eligibility
standards and requirements have been satisfied.
New York
The Federal Home Loan Bank (FHLBank) of New York has been
authorized to establish a $250 million Community Mortgage Asset
Activities pilot program. Under the program, the FHLBank will purchase
from members participation interests in one-to-four family residential,
multifamily, construction, and community development mortgage loans
that would benefit families and neighborhoods meeting the income
targets established for the Community Investment Program (CIP)--that
is, housing for families whose incomes do not exceed 115 percent of
median income for the area, and loans to finance community and economic
development projects in neighborhoods where 50 percent of the residents
earn at or below 80 percent of the area median income.
The FHLBank's objective is to enhance the capacity of its members
to meet underserved community financing needs, and to strengthen the
commitment of the FHLBank to its housing finance mission. The FHLBank
has indicated that the loans-to-one-borrower regulatory limit often
caps the ability of highly capitalized members, who are skilled in such
lending, to bid 0n affordable housing and community and economic
development projects. By committing to participate in the funding of
such projects with members, the FHLBank would reduce a member's loans-
to-one-borrower level by the amount of its participation, thereby
facilitating the flow of funds to housing and community development
projects that might not otherwise be funded. The FHLBank also
contemplates offering shares of its participation interests in such
loans to other FHLBank of New York members who would not otherwise be
able, due to their size and the size of the project, to engage in such
lending.
The Finance Board's Office of General Counsel (OGC) has reviewed
the FHLBank of New York proposal and has determined that the FHLBank
may purchase such loans and participation interests pursuant to its
authority, under subsections 11(h) and 16(a) of the Federal Home Loan
Bank Act (FHL Bank Act), to invest ``in such securities as fiduciary
and trust funds may be invested in under the laws of the state in which
the (FHLBank) is located.'' The FHLBank of New York has provided a
legal opinion from outside counsel stating that fiduciary and trust
funds may invest prudently in such loans and participation interests
under the laws of the State of New York.
The Finance Board has determined that the pilot program satisfies
the three criteria established by the Finance Board for considering and
approving new mission-related investment activities: (1) the program's
targeting, and the positive impact the program would have on the loans-
to-one-borrower limits of members specializing in such targeted
lending, would facilitate the provision of credit in areas of the
community where funding might not, without FHLBank involvement,
otherwise be available; (2) in facilitating such targeted originations
by certain members, and in facilitating the participation of other
members who might not otherwise be able to engage in such lending, the
program acts to promote the cooperative nature of the Federal Home Loan
Bank System (FHLBank System); and (3) the FHLBank's in-house expertise,
the involvement of its board and senior management in the development
of the program's business plan, policies, underwriting guidelines, and
monitoring and reporting requirements, the intended establishment of
reserves appropriate to risk, and the level of program oversight
contemplated, should ensure preservation of the triple-A rating of the
FHLBank and the System. Program implementation will be contingent upon
conformation by the Finance Board's Office of Supervision that
appropriate program policies, procedures, controls and reserves have
been established.
The following conditions apply to the New York pilot program:
(a) The subject loans shall meet the income targets established for
CIP advances.
(b) The purchase of such loans shall not count toward satisfaction
of the FHLBank's CIP requirements.
(c) The FHLBank shall ensure that the originator of the loan
maintains at least a 20 percent interest in the loan participated, with
higher minimum retention levels required where appropriate.
(d) The FHLBank shall limit participations in construction loans to
an amount no greater than 10 percent of the pilot program
authorization.
(e) The FHLBank shall make an effort to share its participation
interests in such loans with FHLBank members, ensuring that such
members understand their responsibility to undertake due diligence
separate and apart from that performed by the FHLBank.
(f) The board of the FHLBank shall ensure, and certify to, the
existence of appropriate expertise, policies, procedures, and controls
prior to program implementation.
(g) The board of the FHLBank shall establish adequate reserves
prior to program implementation and on an on-going basis.
(h) The board of the FHLBank shall take appropriate precautions, in
structuring program oversight, to avoid the appearance of a conflict of
interest for board directors with direct responsibility for approving
transactions under the program.
(i) The board of the FHLBank shall require monthly program progress
reports from management during the first year of the program (and at
least quarterly reports thereafter), shall file written evaluations of
such reports, and shall provide copies of its evaluations and the
management reports to the Finance Board.
Atlanta
The FHLBank of Atlanta (FHLBank) has been authorized to establish a
$50 million Affordable Multi-family Participation Program (AMPP) on a
pilot basis. The pilot would involve the acquisition by the FHLBank of
financial interests in low- and moderate-income multi-family loans
originated by the Community Investment Corporation of North Carolina
(CICNC). The FHLBank proposes to purchase existing participation
interests from FHLBank members, as well as participation interests in
newly-originated multi-family loans. The idea for the program emanated
from CICNC's membership who indicated that their ability to continue
participating in new CICNC projects can only occur if they are able to
participate out some of their current holdings.
The CICNC, created by the Community Bankers Association of North
Carolina in 1990, is an affordable housing loan consortium whose sole
purpose is to facilitate the availability of long-term permanent
financing for the development of low- and moderate-income housing
across the state. CICNC membership consists of 90 financial
institutions (thrifts and commercial
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banks) with $310 billion in assets, 78 of which are currently members
of the FHLBank of Atlanta. Membership consists primarily of smaller
financial institutions; a majority (77 percent) of consortium members
have assets of under $250 million. Most of the banks and thrifts
located in North Carolina are members of CICNC.
The consortium provides construction/rehabilitation bridge
financing and long-term funding for low- and moderate-income multi-
family projects. Over the past six years CICNC has funded or committed
to fund approximately $45 million for 53 housing developments,
producing 2,645 units of affordable housing. To be considered for a
CICNC loan, at least 51 percent of the units in a project must provide
housing for individuals earning no more than 60 percent of the median
income in urban areas and 80 percent of median income in rural areas.
(In practice, all of CICNC's developments have a majority of occupants
earning no more than 60 percent of area median income, regardless of
whether the project is located in an urban or rural area.) CICNC has
reported no delinquent loans and only two late payments in its six-year
history.
The FHLBank has opined that it has the legal authority to invest in
financial interests through the AMPP pilot. The Finance Board's Office
of General Counsel has reviewed the AMPP pilot proposal and has
concluded that the Finance Board has authority under the Federal Home
Loan Bank Act to approve the FHLBank's proposal.
The Finance Board has determined that Atlanta's proposed AMPP pilot
program satisfies the three criteria established by the Finance Board
for considering and approving of new mission-related activities: (1)
the FHLBank will ensure the appropriate levels of expertise, establish
policies, procedures, and controls, and provide for any reserves
required to effectively limit and manage risk exposure and preserve the
FHLBank's and the FHLBank System's triple-A rating; (2) the FHLBank's
participation will provide long-term affordable multi-family housing
finance that might not otherwise be available, particularly in rural
areas, due to limitations on members' financial capacity to participate
in CICNC projects; and (3) the program will promote the cooperative
nature of the System by enhancing the liquidity and marketabilty of
member CICNC participation interests, which will enable these
institutions to participate in additional multi-family lending
projects. Program implementation is contingent upon confirmation by the
Finance Board's Office of Supervision that appropriate program
policies, procedures, controls and reserves have been established by
the FHLBank.
The following conditions apply to the Atlanta pilot program:
(a) The FHLBank shall ensure that CICNC members retain at least a
20 percent interest in the loan participated, with higher minimum
retention levels required where appropriate.
(b) The majority of interest purchased shall be from FHLBank
members.
(c) To the extent FHLBank members are interested in purchasing
interests in CICNC participations, the FHLBank shall make an effort to
share its participation interest with such members, ensuring that such
members understand their responsibility to undertake due diligence
separate and apart from that performed by the FHLBank.
(d) The FHLBank shall attempt to ensure that members selling
participation interests to the FHLBank use the proceeds to finance new
instruments in CICNC projects.
(e) The board of the FHLBank shall ensure, and certify to, the
existence of appropriate expertise, policies, procedures, and controls
prior to program implementation.
(f) The board of the FHLBank shall establish, prior to program
implementation and on an on-going basis, adequate reserves.
(g) The board of the FHLBank shall take appropriate precautions, in
structuring its program oversight, to avoid the appearance of a
conflict of interest for board directors with direct responsibility for
approving transactions under the program.
(h) The board of the FHLBank shall require monthly program progress
reports from management during the first year of the program (and at
least quarterly reports thereafter), shall file written evaluations of
such reports, and shall provide copies of its evaluations and the
management reports to the Board.
Chicago
The FHLBank of Chicago (FHLBank) has been authorized to establish a
$750 million Mortgage Partnership Finance (MPF) pilot program. The
objective of the pilot program is to unbundle the risks associated with
home mortgage lending and allocate the individual risk components
between the FHLBank of Chicago and its members in a manner that uses
the cooperative structure of the FHLBank System to maximize their
respective core competencies.
When financial depositories currently engaged in home mortgage
lending pool loans they originate for sale into the secondary market,
pay a guarantee fee, and portfolio the MBS created, the risk components
associated with home mortgage lending are misaligned. The depository
institution retains responsibility for marketing and servicing, but
relinquishes control over what it does best--underwriting and managing
credit risk--to the securitizer while it retains risks it is less well-
equipped to manage--liquidity, interest rate, and options risk
associated with funding the MBS. To the extent that the loans are sold
outright, the member divests itself of the interest rate and options
risk, but also of any compensation for managing the credit risk.
MPF envisions providing members with a strategic alternative to
holding loans in portfolio or selling/securitizing them in the
secondary market. The member would continue to be responsible for
functions involving the customer relationship, including all aspects of
mortgage marketing and origination. The novel feature of the MPF is
that the FHLBank would fund and retain in portfolio home mortgage loans
originated, serviced and credit-enhanced by its members. The member
would receive compensation for managing the customer relationship and
the credit risk while the FHLBank would retain the risks it has the
most expertise in managing--liquidity, interest rate and portions risk.
The FHLBank would hold mission-related mortgage assets on its books.
The FHLBank is proposing to fund the home mortgages originated
through its members rather than purchase the loans from member
institutions so that participating institutions may receive a more
favorable risk-based capital treatment than if the member funded and
sold the loans to the FHLBank with recourse.
The FHLBank of Chicago will not fund home mortgages with principal
balances above the conforming loan limits applicable to the secondary
market housing GSEs. Loan originations would result from member credit
decisions within the context of MPF underwriting guidelines and credit
enhancement requirements. It is anticipated that a substantial
proportion of MPF originations will meet the CIP single-family
eligibility standards (115 percent of area median income or below).
The Finance Board's Office of General Counsel (OGC) has reviewed
the Chicago proposal. OGC has determined that MPF is a method of
channeling
[[Page 5831]]
funds into residential housing finance--the statutory mission of the
FHLBank System--in a manner that is similar to, but functionally more
sophisticated than, that which occurs when a FHLBank makes an advance
to a member. OGC has concluded, therefore, that it is reasonable for
the Finance Board to authorize the undertaking of the MPF program by
the FHLBank of Chicago as an activity incidental to a FHLBank's express
statutory authority.
The MPF is designed to insulate the FHLBank from virtually all the
credit risk associated with investing in home mortgages. First loss
credit protection for the MPF loan program would be provided by a
reserve fund established by the FHLBank, to be funded by a share of the
mortgage loan cash flows. The excess spread account would be
established in an amount at least equal to the historical loss
experience on the types of MPF loans originated by the members (based
on historical data over the past five years, this first loss coverage
is likely to range from two to five basis points of mortgage loan
principal).
In return for a fee, MPF participating members would provide second
loss credit enhancement at least equal to the level of subordination
afforded double-A rated mortgage-backed securities. The FHLBank will
determine the amount of the required credit enhancement based on the
characteristics of the mortgages and rating agency modeling
methodology. A recent analysis has shown that over an eight-year
period, investments in mortgage pools rated double-A had zero losses.
Participating members will benefit from their ability to provide
home mortgage loans to more customers on more flexible terms while
realizing fees for mortgage origination, credit enhancement, and
servicing. The FHLBank and its shareholders will be compensated for
managing the interest rate and options risk associated with funding MPF
loans. This cooperative venture could result in increased competition
in the home mortgage loan market.
The Finance Board has determined that the proposed pilot program
satisfies the three criteria established by the Finance Board for
considering and approving new mission-related activities: (1) the
FHLBank's in-house expertise, the involvement of its board and senior
management in the development of the program's business plan, policies,
underwriting guidelines, and monitoring and reporting requirements, the
intended establishment of reserves and member secondary credit
enhancements appropriate to risk, the FHLBank's experience in managing
the interest rate and options risk associated with home mortgages, and
the level of program oversight contemplated, should ensure preservation
of the triple-A rating of the FHLBanks and the FHLBank System; (2) the
financial advantages of the program relative to other funding
alternatives available to members, the capital treatment which will
allow the members to more effectively leverage their equity, and the
program's underwriting standards, which are expected to be more
flexible than those used to originate home mortgage loans on more
flexible and attractive terms; and (3) in providing members with a
strategic alternative that will allow them to compete more effectively
in the housing finance market, the program acts to promote the
cooperative nature of the FHLBank System. Program implementation is
contingent upon confirmation by the Finance Board's Office of
Supervision that appropriate program policies, procedures, controls and
reserves have been established by the FHLBank.
The following conditions apply to the Chicago Pilot Program:
(a) The original principal balances of the subject loans shall fall
within the conforming loan limits applicable to the secondary market
housing GSEs.
(b) The FHLBank shall employ pricing methodology in an attempt to
direct a portion of the program's funding to low- and moderate-income
households.
(c) The board of the FHLBank shall ensure, and certify to, the
existence of appropriate expertise, policies, procedures, and controls
prior to program implementation.
(d) The board of the FHLBank shall evaluate the need for and
establish, prior to program implementation, and on an on-going basis,
any appropriate reserves.
(e) The board of the FHLBank shall take appropriate precautions, in
structuring its program, to avoid conflicts of interest, or any
appearance thereof, for board directors.
(f) The board of the FHLBank shall require at each regular board
meeting program progress reports from management during the first year
of the program (and at least quarterly reports thereafter), and shall
provide quarterly evaluations of the progress of the pilot program to
the Finance Board.
Persons wishing to participate in the hearings should send a
written request to the address listed in the ADDRESSES portion of this
notice, to be received no later than Wednesday, February 19, 1997. A
request to participate in the hearing must include the following
information:
(A) The name, title, address, business telephone and fax number of
the participant; and
(B) The entity or entities that the participant will be
representing.
Depending on the number of requests received, participants may be
limited in the length of their oral presentations. All submissions will
be included as part of the record, including written testimony not
presented orally, although extraneous material may be deleted from the
printed record to reduce printing costs. The Finance Board will notify
those selected to make oral presentations and provide an approximate
time. The Finance Board reserves the right to limit the number of
participants and to select, at its discretion, those persons who may
make oral presentations if more requests are received for participation
than may be accommodated in the time available.
Participants will be required to submit written statements in
advance of the hearing date. These written statements should
incorporate the major points to be presented at the hearings and should
be accompanied by an executive summary of no more than two pages.
Written statements must be received no later than March 3, 1997, and
should be sent to the address listed in the ADDRESSES portion of this
notice. Anyone selected for an oral presentation whose testimony has
not been received by March 3, 1997, may not testify except by special
permission of the Finance Board.
By the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 97-3191 Filed 2-6-97; 8:45 am]
BILLING CODE 6725-01-M
