Accounting & Tax

GAO: FHLB Competition For Other GSEs Could Aid Borrowers

New direct mortgage-acquisition programs increase competition. StaffJuly 23, 2001

The Federal Home Loan Bank System’s new direct mortgage-acquisition programs increase competition between the system and Fannie Mae (FNM) and Freddie Mac (FRE), the General Accounting Office said in a not-yet- released report, according to Dow Jones Newswires.

“Such increased competition could provide benefits to borrowers, but also could generate additional risks for the FHLBanks” and taxpayers, among others, said the General Accounting Office, or GAO.

GAO made its observations in a new report distributed on Capitol Hill analyzing the adequacy of the capital structure of the FHLBank System, a government-sponsored enterprise, or GSE, consisting of 12 regional FHLBanks with more than 7,800 financial institution members, says Dow Jones.

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It said the FHLBank System currently is establishing a new capital structure that, if properly implemented, likely will be better than the historic structure.

The FHLBank System was created during the Great Depression to assist housing. It traditionally did so by making relatively low-cost loans, called advances, to mortgage lending institutions. However, in recent years, it has embarked on a program pioneered by the FHLBank of Chicago whereby FHLBanks acquire mortgages in risk-sharing ventures with member institutions and a similar program developed with three other FHLBanks.

GAO said that these programs increase competition in the secondary market with two other housing-related government-sponsored enterprises, Fannie Mae and Freddie Mac, says Dow Jones.

GAO said that “during the course of this assignment, enterprise (Fannie Mae and Freddie Mac) officials we interviewed raised questions about the adequacy of the capital structure of the FHLBank System as it relates to the risks posed by the direct acquisition of mortgages,” and “told us that FHLBank capital is not adequate to support the risks of direct mortgage acquisition.”

But GAO seemed unpersuaded, citing several “countervailing factors” that mitigate such concerns, says Dow Jones.

ed on activity to date, GAO said, direct mortgage acquisition by FHLBanks appears to provide regional diversification and incentives to member institutions for sound mortgage underwriting and servicing through the sharing of credit risks.

e FHLBank System is currently establishing a new capital structure that, if properly implemented, is likely to be an improvement over the historic structure,” GAO said, saying capital will become more permanent and that new risk-based and leverage requirements also will be implemented, according to Dow Jones.

“The new capital structure has the potential to address the risks associated with advances and mortgage acquisitions, because of greater capital permanence, leverage capital requirements, and the development of risk-based capital standards,” said GAO.

“However,” Dow Jones further quotes, “capital requirements will not be finalized until FHFB (Federal Housing Finance Board, the federal agency that regulates the System) approves capital plans developed by the FHLBanks.”

The news service reports that industry insiders are please with the report’s findings, which include a reiteration of an earlier recommendation that a single regulator for all three housing GSEs be created.