United States Government Accountability Office

Washington, DC 20548 

June 22, 2007 

The Honorable Christopher Bond 

Ranking Member 

Subcommittee on Transportation, Housing and Urban Development, and Related 

Agencies 

Committee on Appropriations 

United States Senate 

Subject: Federal Home Loan Banks: Too Soon to Tell the Potential Impact of Excess 

Stock Rule on the Affordable Housing Program

Dear Senator Bond: 

Affordable housing organizations and Federal Home Loan Bank (FHLBank) members 

have raised concerns that a Federal Housing Finance Board (FHFB) rule limiting

excess stock could adversely impact FHLBank earnings.1

 In particular, concerns 

have been raised regarding the FHLBanks’ Affordable Housing Program (AHP), which 

subsidizes the cost of affordable housing with funds from the 12 FHLBanks, all of 

whom are required to contribute a minimum of 10 percent of their prior year’s net 

earnings to the program, subject to a minimum annual combined contribution of $100 

million.2

 You asked us to examine the impact of FHFB’s rule making on AHP. 

Specifically, this report describes (1) the results of FHFB’s rule making and the 

provisions of the final rule on excess stock, and (2) the potential impact of the final 

rule on AHP. On May 22, 2007, we provided your staff with a briefing on the results of 

our work. Enclosure I is an updated version of the briefing we provided. 

 1

Excess stock is stock that is held by a member and exceeds that member’s required minimum 

investment in FHLBank capital stock. 

2

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, §

721, 12 U.S.C. 1430(j)(5). 

Page 1 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Background 

In March 2006, FHFB issued a proposed rule that would require each FHLBank to (1) 

maintain a minimum level of retained earnings, (2) limit the amount of excess stock it 

could have outstanding, and (3) cease payments of dividends in the form of stock 

(referred to as stock dividends). However, in the final rule issued in December 2006, 

FHFB did not include a retained earnings requirement but did include limits on 

FHLBanks issuing excess stock and paying stock dividends. 

The FHLBank System was created by the Federal Home Loan Bank Act of 1932 as a 

government-sponsored enterprise (GSE) to support mortgage lending and related 

community investment. Through AHP, the 12 FHLBanks subsidize the cost of 

affordable owner-occupied and rental housing targeted to individuals and families 

with very low, low, and moderate incomes.3

 From 1990 through 2006, FHLBanks 

awarded a total of nearly $3 billion in AHP funds through member institutions, such 

as community banks, for a wide range of affordable housing projects. For 2006 

specifically, FHLBanks awarded a total of about $315 million in AHP funds. 

Final Rule Places Limit on FHLBanks Issuing Excess Stock and Paying Stock 

Dividends 

The FHFB adopted a final rule in December 2006 limiting the ability of FHLBanks to 

create member excess stock under certain circumstances. The key features of the 

proposed rule were a limit on excess stock at each bank to one percent of its total 

assets, an absolute ban on the payment of stock dividends and sales of excess stock 

to members, and a requirement that banks with outstanding excess stock greater than 

one percent of assets develop a plan to reduce their excess stock to one percent. The 

effect of the final rule is that it limits the ability of FHLBanks to issue new shares of 

excess stock and pay stock dividends once the amount of outstanding excess stock 

reaches a threshold of 1 percent of a FHLBank’s total assets. 

The final rule addresses FHFB concerns about how excess stock could affect the 

FHLBanks System’s mission. FHFB officials stated that FHLBanks have used cash 

from the sale of member excess stock to support capital market investments. They 

also noted that while some level of such investment is appropriate for liquidity and 

other purposes, high levels of excess stock can create an incentive for FHLBanks to 

create large portfolios of investments that are meant to provide a return on the 

excess stock, but which do not necessarily further the FHLBank System’s public 

purpose of supporting mortgage lending and related community investment. 

The FHFB also addressed safety and soundness concerns in its rule making. Since 

FHLBanks have generally redeemed excess stock upon the request of a member, 

 3

AHP subsidizes the cost of owner-occupied housing for individuals and families with incomes at or 

below 80 percent of the area median income, and rental housing in which at least 20 percent of the 

units are reserved for households with incomes at or below 50 percent of area median income. The 

subsidy may be in the form of a grant or a below-cost, or subsidized, interest rate on a secured loan

from a FHLBank to a member lender. 

Page 2 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
FHFB officials do not believe that member excess stock is a stable source of 

capitalization, particularly when it is used to capitalize long-term assets, and because 

FHLBanks could experience large-scale repurchase (stock redemption) requests in a 

short period of time. FHFB officials also stated that while investments funded 

through the issuance of excess stock are intended to generate bank income, they add 

risk to a bank’s balance sheet and must be managed appropriately in order to be 

profitable. Further, other factors, such as the type of investment and degree of 

leveraging, also affect the level of earnings generated by each FHLBank’s investments 

through excess stock. 

Too Soon to Tell Potential Impact of Excess Stock Final Rule 

The final rule may have an impact on the FHLBanks’ AHP, but FHLBank and trade 

group officials stated it is too early to tell. Officials at two FHLBanks told us that the 

final rule could limit the ability of FHLBanks to increase capital over time since 

FHLBanks can no longer pay stock dividends or issue excess stock once they reach 

the 1 percent threshold. Paying cash dividends in place of stock dividends lowers the 

amount of funds available to generate income through FHLBank investments. Since 

FHLBanks are required to contribute 10 percent of the prior year’s net earnings to 

AHP, lower levels of FHLBank investments could lower net earnings, which in turn 

reduce FHLBank contributions to AHP. As of the end of September 2006, four 

FHLBanks had excess stock with a value greater than 1 percent of total assets, and 

one of these was paying stock dividends. This FHLBank paid a total of $205 million 

in stock dividends to members during 2006. According to the FHLBank’s officials, if 

this amount had been paid in cash dividends, the resulting reduction in annual AHP 

funding would have been about $1.2 million since the bank would have had lower 

levels of investments to generate income. Overall, FHLBank and trade group 

officials we interviewed said it is too early to tell what the exact impact of the final 

rule on AHP will be. FHLBank officials stated that it is too early to make an accurate 

assessment whether FHLBank capital growth may decrease, by how much, and to 

what extent this could affect earnings and contributions to AHP. Trade group 

officials stated there has not been a noticeable impact on AHP subsidies for projects, 

but the situation could change based on what happens to the banks over time. 

Agency Comments and Our Evaluation 

We provided a draft of this report to the Chairman of FHFB for his review and 

comment. We received informal comments that are summarized in this section. We 

also received technical comments that we incorporated into the report where 

appropriate. In its comments, FHFB stated that our description in the report that it’s 

too soon to tell the potential impact of the excess stock rule repeats, without 

independent analysis, arguments made by certain FHLBank officials and trade group 

representatives. Further, FHFB stated that the estimate presented in the report of the 

potential reduction in AHP contributions at one FHLBank depends on a number of 

assumptions, including a fixed leverage ratio, the pricing of products, and the types of 

investments the FHLBank makes. FHFB also noted that this estimate amounts to less 

than 1 percent of AHP funding by all the banks in 2006. In the absence of a rule in 

place over a period of time that limits the issuing of excess stock to members, we 

Page 3 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
lack a basis for determining to what extent the rule may affect each FHLBanks’ use of 

excess stock in financing investments, and to what extent earnings could be affected 

by those investments. While the final rule places limits on excess stock, we believe 

that the impact of actions taken by FHLBanks to date based on the rule cannot be 

determined given that the rule has been in effect only since the end of January 2007. 

Further, in our report, we note that various factors, including the degree of leveraging 

and type of investment, affect the level of earnings generated by investments made 

through the sale of excess stock. Finally, the estimate of the potential reduction in 

AHP contributions we report is for one FHLBank. Rather than making a direct 

comparison to either system-wide or FHLBank specific AHP funding, we provided the 

2006 level of system-wide AHP funding in the background section of our report. 

FHFB also noted that two FHLBanks had income problems arising from mortgage 

loans capitalized by excess stock and were operating under written agreements in 

2006, and that this capitalization of long-term assets was one of the concerns it 

addressed in restricting excess stock. We inserted in our report that one of the 

primary concerns FHFB had in its formulation of the rule is the capitalization of longterm assets. 

Scope and Methodology 

To describe the results of the FHFB’s rule making and the provisions of the final rule 

on excess stock, we obtained and analyzed information on FHFB’s rule making for 

the proposed and final rule. We also reviewed comment letters submitted by 

FHLBanks and trade associations addressing the proposed rule and interviewed 

FHFB officials. To describe the potential impact of the final rule on the FHLBanks’ 

AHP, we reviewed documentation on the possible impact of the final rule on the AHP. 

We also interviewed officials from two FHLBanks, one of which was the most 

affected by the rule, and officials from three trade associations—the Council of 

FHLBanks, the Mortgage Bankers Association, and the National Low-Income Housing 

Coalition. We conducted our work from February 2007 through June 2007 in 

accordance with generally accepted government auditing standards. 

- - - - - - - - - - - - - - - - - - 

We are sending copies of this report to the Chairman of the Subcommittee on

Transportation, Housing and Urban Development, and Related Agencies, Senate 

Committee on Appropriations; the Chairman and Ranking Member of the 

Subcommittee on Transportation, Housing and Urban Development, and Related 

Agencies, House Committee on Appropriations; and the Chairman of the FHFB. We 

will also make copies available to others upon request. In addition, the report will be 

available at no charge on the GAO Website at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me at 

(202) 512-8678 or shearw@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs can be found on the last page of this report. Major 

Page 4 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
contributors to this report were John Wanska, Assistant Director; Tarek Mahmassani; 

Barbara Roesmann, and Paul Thompson. 

Sincerely yours, 

William B. Shear, 

Director, Financial Markets and Community Investment 

Enclosure 

Page 5 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program 

Potential Impact of Excess Stock Rule on the Federal Home

Loan Banks’ Affordable Housing Program

Briefing for:

The Honorable Christopher Bond

Ranking Member, Subcommittee on Transportation, Housing 

and Urban Development, and Related Agencies

Committee on Appropriations

United States Senate 

May 22, 2007

Page 6 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

2

Overview

 Introduction

 Objectives

 Scope and Methodology

 Background

 Discussion of Objectives

Page 7 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

3

Introduction

 Through the Affordable Housing Program (AHP), the 12 Federal Home Loan

Banks (FHLBanks) subsidize the cost of affordable owner-occupied and rental 

housing targeting individuals and families with very low, low, and moderate

incomes.1

 From 1990 through 2006, FHLBanks awarded a total of nearly $3 billion in AHP 

funds through member institutions for a wide range of affordable housing 

projects. 

 By statute, each of the 12 FHLBanks is required to contribute at least 10 

percent of its previous year’s net earnings to AHP, subject to a minimum annual

combined contribution by the 12 banks of $100 million.2

1. AHP subsidizes the cost of owner-occupied housing for individuals and families with incomes at

or below 80 percent of the area median income, and rental housing in which at least 20 percent

of the units are reserved for households with incomes at or below 50 percent of area median

income. The subsidy may be in the form of a grant or a subsidized interest rate on a secured

loan from a FHLBank to a member lender.

2. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, § 721, 12 U.S.C. 1430(j)(5).

Page 8 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

4

Introduction

 Affordable housing organizations and FHLBank members have 

raised concerns that a Federal Housing Finance Board (FHFB)

rule limiting FHLBank member excess stock (stock that is held by

a member that exceeds that member’s minimum investment in

FHLBank capital stock) could adversely impact FHLBank 

earnings, and consequently funding for the FHLBanks’ AHP.

 The FHFB issued a proposed rule in March 2006 that would have

required each FHLBank to maintain a minimum level of retained

earnings, limit the amount of outstanding excess stock it could 

have, and prohibit FHLBanks from paying dividends in the form of

stock (referred to as stock dividends).

 The December 2006 final rule did not include a retained earnings

requirement; the rule primarily focused on limiting the ability of

FHLBanks to issue new shares of excess stock and pay stock 

dividends. 

Page 9 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

5

Objectives

1. Describe the results of FHFB’s rulemaking process and the 

provisions of the final rule on excess stock.

2. Describe the potential impact of the final rule on the AHP.

Page 10 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

6

Scope and Methodology

 Obtained and analyzed information on the proposed and final 

rule, the AHP, and the potential impact of the final rule on the

AHP.

 Reviewed comment letters submitted by FHLBanks and trade 

associations about the proposed rule.

 Interviewed officials from FHFB and two FHLBanks, one of which 

was the most affected by FHFB’s final rule.

 Interviewed officials from three trade associations:

 Council of FHLBanks

 Mortgage Bankers Association

 National Low Income Housing Coalition

 We conducted our work from February 2007 through June 2007 

in accordance with generally accepted government auditing 

standards.

Page 11 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

7

Background

 The FHLBank System (the System) was created by the 

Federal Home Loan Bank Act of 1932 as a governmentsponsored enterprise (GSE) to support mortgage lending 

and related community investment.

 The System comprises 12 FHLBanks with more than

8,000 member financial institutions, and the Office of

Finance, which issues debt on behalf of the FHLBanks.

 Each FHLBank is a separate, government-chartered,

member-owned corporation.

 As GSEs, FHLBanks are able to borrow in capital 

markets at favorable rates and provide secured loans,

known as advances, at favorable rates to their members.

Page 12 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

8

Background

 FHFB is the regulator for the FHLBank System. 

 FHFB ensures that the 12 FHLBanks:

 Operate in a safe and sound manner;

 Carry out their housing and community development

finance mission;

 Remain adequately capitalized; and 

 Are able to raise funds in the capital markets.

Page 13 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

9

Background

 The Financial Institutions Reform, Recovery, and 

Enforcement Act (FIRREA) of 1989 established AHP and

expanded the FHLBank System's mission to include 

affordable housing and community development lending.

 AHP requires each FHLBank to subsidize the financing of

eligible low-and moderate-income housing and FIRREA 

sets priorities for use of these advances among eligible

projects. 

Page 14 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

10

Background

 Over the years, AHP has provided assistance to groups such as:

 Low- and moderate-income homeowners and first-time

homebuyers;

 Very low-income residents of rental housing;

 Residents in rural communities; and

 Residents in urban areas.

 AHP funds are awarded through FHLBank members under two 

programs.

 AHP competitive program:

 Members submit applications on behalf of sponsors and 

developers of affordable housing projects.

 Projects must meet certain eligibility requirements and 

those that achieve the highest scores on their

applications obtain funding.

Page 15 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

11

Background

 AHP homeownership set-aside program:

 Each FHLBank may set aside up to the greater of $4.5 

million or 35 percent of its AHP funds each year to assist

low- and moderate income-households in purchasing 

homes, provided that at least one-third of each FHLBank’s

set-aside allocation is made available to assist first-time 

homebuyers. 

 The FHLBanks allocate funds to members that in turn use

them to make grants to eligible households.

 Set-aside funds may be used for down payment, closing 

cost, counseling, or rehabilitation assistance.

 In 2006, FHLBanks awarded a total of about $315 million through 

both programs, with the competitive program accounting for about

$265 million.

Page 16 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

12

Excess Stock Rulemaking

 Excess stock defined:

 The members of each FHLBank must buy stock in the 

FHLBank, usually redeemable at par or face value, as a 

prerequisite for obtaining advances and other FHLBank 

services.

 Excess stock is any FHLBank stock held by a member that 

exceeds that member’s required minimum investment in

capital stock.

Page 17 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

13

Excess Stock Rulemaking

 In the past, FHLBanks have issued excess stock and paid stock

dividends to members.

 Members may receive tax benefits from stock dividends 

versus cash dividends.

 FHLBanks are able to use cash from the sale of excess stock

and from paying stock instead of cash dividends to finance 

investments that provide another source of income.

Page 18 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

14

Excess Stock Rulemaking

 Rationale for rule (mission concerns):

 FHFB had concerns about FHLBanks using member

excess stock to support capital market investments, such 

as mortgage backed securities and other investments,

that;

 Exceeded the level of such investments required for

liquidity and other purposes; and

 Did not necessarily further the FHLBank System’s

mission. 

Page 19 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

15

Excess Stock Rulemaking

 Rationale for rule (safety and soundness concerns):

 FHLBanks have generally redeemed excess stock upon

the request of a member, and therefore FHFB did not

believe that member excess stock was a sufficiently 

stable source of capitalization for FHLBanks, particularly 

because FHLBanks could experience large-scale 

repurchase (stock redemption) requests in a short period 

of time.

 FHFB also believed that while FHLBanks have a 5-year

statutory redemption period for Class B stock (6 months 

for Class A stock), waiting the entire 5-year period to

honor the redemption request could be interpreted by 

members as a sign of a weak financial position, which 

could precipitate more redemption requests.

Page 20 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

16

Excess Stock Rulemaking

 Rationale for rule (safety and soundness concerns):

 FHLBanks that use excess stock to capitalize long-term 

investments with significant market risk may not be able to

sell the investment, in response to a redemption request

prior to the 5-year waiting period, without realizing a loss in

market value.

 FHFB officials also explained that while FHLBanks may

expect investments through excess stock to generate Bank

income, these investments bear risk, and consequently 

excess stock has to be invested appropriately to be 

profitable.

 In addition, FHFB officials cited other factors, such as type

of investment and degree of leveraging, that can also affect

the level of earnings generated by each FHLBank’s 

investments through excess stock.

Page 21 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

17

Excess Stock Rulemaking

 The proposed rule would have placed limitations on

member excess stock:

 Limited the amount of member excess stock that a 

FHLBank could have outstanding to 1 percent of its total

assets.

 Required a FHLBank with excess stock greater than 1 

percent of assets to submit a plan to FHFB describing 

how the FHLBank would come into compliance.

 Prohibited a FHLBank from paying stock dividends

regardless of how much excess stock it had outstanding 

and issuing any additional shares of excess stock to

members. 

Page 22 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

18

Excess Stock Rulemaking

 The proposed rule also would have required each FHLBank

to achieve and maintain a minimum level of retained

earnings. 

 The retained earnings provision would have also barred 

FHLBanks not meeting the minimum level from

distributing more than 50 percent of net income as 

dividends, unless permitted by FHFB.

 The retained earnings provision was not included in the

final rule due to concerns by FHLBanks, their members, 

and trade groups that it would adversely affect the value 

of FHLBank membership.

 FHFB officials stated that they plan to address the retained

earnings requirement in the future, but not earlier than 2008.

Page 23 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

19

Excess Stock Rulemaking

 Main provisions of the final rule that became effective on January 

29, 2007:

 A FHLBank may not issue new shares of excess stock once

the value of its total excess stock is greater than 1 percent of

its total assets.

 A FHLBank also may not pay stock dividends once its total 

excess stock is greater than 1 percent of its total assets.

 FHLBanks with excess stock below the threshold are not

limited in issuing additional excess stock or paying stock

dividends, unless doing so would result in the value of the 

bank’s excess stock exceeding 1 percent of its total assets.

 FHLBanks with excess stock exceeding the 1 percent barrier 

are not required to develop a plan to bring their level into

compliance, but may not increase their level of excess stock.

Page 24 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

20

Potential Impact of Excess Stock Rule

 As of the end of September 2006, four FHLBanks had 

excess stock with a value greater than 1 percent of total 

assets, and one of these was paying stock dividends.

 Officials at two FHLBanks told us that the final rule could 

limit the ability of FHLBanks to increase capital over time

because:

 When a FHLBank exceeds the 1 percent threshold, it

can no longer pay dividends in the form of stock.

 Paying cash dividends lowers the amount of funds 

available to generate income through FHLBank 

investments, such as mortgage-backed securities that

could generate earnings over time.

Page 25 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

21

Potential Impact of Excess Stock Rule

 FHLBank and trade group officials we interviewed said this 

could have an impact on AHP.

 Since FHLBanks are required to contribute a minimum of 

10 percent of net earnings to AHP, lower levels of 

FHLBank investments could lower net earnings, which in 

turn reduce FHLBank contributions to AHP.

Page 26 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

22

Potential Impact of Excess Stock Rule

 For example, during 2006, one FHLBank paid $205 million in 

stock dividends to members. 

 According to the FHLBank’s officials, if this amount had been

paid in cash dividends, the FHLBank would have realized 

lower net income for the year since the money would not have 

been available to invest in interest-earning assets.

 Based on the bank officials’ estimates, the resulting reduction 

in annual AHP funding would have been about $1.2 million.

 The FHLBank in the example is the only one that as of

September 2006 had excess stock that exceeded 1 percent of

total assets and was paying a stock dividend. This FHLBank can 

no longer issue excess stock or pay stock dividends until the

value of its excess stock drops to 1 percent or less of its total 

assets.

Page 27 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

23

Potential Impact of Excess Stock Rule

 As of September 2006, three FHLBanks had excess stock 

that exceeded 1 percent of total assets but were not paying 

a stock dividend to members.

 Had the final rule been in effect during 2006, these three 

FHLBanks would have been prohibited from issuing 

additional excess stock.

Page 28 GAO-07-878R Federal Home Loan Banks Excess Stock Rule 
Enclosure I: Potential Impact of Excess Stock Rule on the Federal Home 

Loan Banks’ Affordable Housing Program (cont’d.)

24

Potential Impact of Excess Stock Rule

 FHLBank and trade group officials we interviewed said it

was too early to tell what the exact impact of the final rule on

AHP will be.

 FHLBank officials stated that while the final rule could 

reduce the ability of banks to increase capital, it is too 

early to make an accurate assessment whether

FHLBank capital growth may decrease, by how much, 

and to what extent this could affect earnings and 

contributions to AHP.

 Officials from two trade groups stated that the final rule 

has not had a noticeable impact on AHP subsidies for

affordable housing projects, but that this could change 

since the rule has only been in effect since the end of

January 2007.

(250332) 

Page 29 GAO-07-878R Federal Home Loan Banks Excess Stock Rule

 
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