Pub. 5 2014 Issue 4

www.wvbankers.org 18 West Virginia Banker W e’ve worked with many of you over many years, helping you to serve your customers and communities and advance your individual business strategies. We are proud to represent FHL- Bank Pittsburgh in West Virginia because we understand the value that our co-op brings to your business. And that’s why we want to apprise you of a proposed rule from the Federal Housing Finance Agency (FHFA), published in the Federal Register on September 12. It hasn’t received much media attention, so it’s possible you aren’t yet aware of the proposal or its potential, and serious, impact. The proposed rule imposes ongoing mort- gage asset tests in order to retain member- ship in a Federal Home Loan Bank. Rath- er than the one-time entry requirement that has been in place for decades, these annual tests include a 1 percent ratio of “home mortgage loans” to total assets for all FHLBank members and a 10 percent ratio of “residential mortgage loans” to total assets for non-community financial institution (CFI) members, those at or above $1.1 billion in assets. Members failing these tests could be expelled from membership in their FHLBank. Even though most FHLBank members across the country (and all in West Vir- ginia) would pass the tests, there is reason to be concerned about this proposal. First and most importantly, it removes the cer- tainty that the FHLBanks will be there as a reliable source of liquidity for all mem- bers in all market conditions. Passing the membership tests today is no guarantee of passing in future years (after all, who can predict future housing markets?), and the tests themselves could be increased, as already mentioned in the proposal. These uncertainties introduce a new instability into the FHLBank System, which has worked well for 82 years. This proposed rule could result in addi- tional and conflicting regulatory burdens, most likely an unintended consequence, but troubling nonetheless. You’ve heard your regulators say you should hold fewer long-term mortgages in portfolio, but this rule could encourage you to hold more. Also, regulators require that you have a reliable source of contingent liquidity, which many of you consider to be us at FHLBank Pittsburgh. However, if the rule causes regulators to no longer view us as a reliable source, it seems they could require other, more expensive, liquidity sources. Also embedded in the proposal is how these ongoing tests put additional regula- tory-like burdens on you and oversight re- sponsibilities on us. Winthrop Watson, our president and CEO, has been very clear that he has no desire to have any kind of regulatory role with our membership, and we’re sure you have more than enough regulation already! Housing is at the heart of our business – yours and ours. A housing nexus exists today in the form of pledged collateral. As If you have any ques- tions regarding the rule, please don’t hesitate to contact us: Vince at 412-841-2204 or Larry at 412-41-2075. you well know, the majority of collateral types that are eligible to secure FHLBank advances are housing assets. The proposed rule seems to have overlooked that a pow- erful form of ongoing housing asset tests is in place already. Congress expanded FHLBank member- ship opportunities through legislation in 1989, 1998 and 2008. This FHFA proposal does just the opposite, placing restrictions and burdens on membership requirements, which seems to go against the apparent will of Congress. There’s no question this rule would expel members from the FHL- Bank System – maybe not here in West Virginia, but elsewhere in the country – and in doing so, would reduce borrowing from the FHLBanks and negatively affect overall net earnings. Reduced FHL- Bank earnings would mean a weakened FHLBank System, less liquidity flowing through the economy and less funding for affordable housing grants and other community investment programs. You, along with your boards, operate your banks to be safe, profitable and helpful to your customers and communities. Your membership in FHLBank Pittsburgh helps you do this. We offer reliable, affordable funding along with products and services that you want and need. Strong FHL- Banks, not just Pittsburgh, but across the FHLBank System, are important to you as individual banks and also to the industry and economy. A weakened FHLBank System hurts everybody. Fortunately, the FHFA has invited com- ments on the proposed regulation and has stated that all comments will be consid- ered. Please consider writing a comment letter to: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA39, Federal Housing Finance Agency, 400 Seventh Street SW., Eighth Floor, Washington, DC 20024. Comments can also be sent to the FHFA at: www. fhfa.gov/open-for-comment-or-input. The reference number to include in your email subject line for the proposal is RIN 2590- AA39. The comment period closes on January 12, 2015. n FHFA Proposal Threatens Your Membership in FHLBanks By Vince Moye and Larry Swingle, FHLBank Pittsburgh