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OVERSIGHT OF THE FEDERAL HOME 

LOAN BANK SYSTEM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

OCTOBER 12, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–71 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

RANDY NEUGEBAUER, Texas, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEPHEN LEE FINCHER, Tennessee 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

STEPHEN F. LYNCH, Massachusetts 

MAXINE WATERS, California 

JOE BACA, California 

BRAD MILLER, North Carolina 

KEITH ELLISON, Minnesota 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

October 12, 2011 ............................................................................................... 1 

Appendix: 

October 12, 2011 ............................................................................................... 41 

WITNESSES 

WEDNESDAY, OCTOBER 12, 2011 

Costa, Anthony P., Chairman and Co-Chief Executive Officer, Empire State 

Bank, on behalf of the American Bankers Association (ABA) .......................... 5 

Gibson, Lee R., Chairman, Federal Home Loan Bank of Dallas, and Chairman, Council of Federal Home Loan Banks ...................................................... 7 

Morrison, Hon. Bruce A., former Member of Congress, former Director of 

the Federal Housing Finance Board, and Chairman, Morrison Public Affairs 

Group .................................................................................................................... 10 

Zimmerman, Timothy K., President and Chief Executive Officer, Standard 

Bank, on behalf of the Independent Community Bankers of America 

(ICBA) ................................................................................................................... 8 

APPENDIX 

Prepared statements: 

Costa, Anthony P. ............................................................................................. 42 

Gibson, Lee R. ................................................................................................... 50 

Morrison, Hon. Bruce A. .................................................................................. 68 

Zimmerman, Timothy K. .................................................................................. 77 

(1) 

OVERSIGHT OF THE FEDERAL HOME 

LOAN BANK SYSTEM 

Wednesday, October 12, 2011 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 1:02 p.m., in room 

2220, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Fitzpatrick, 

Pearce, Posey, Hayworth, Canseco, Fincher; Capuano and Waters. 

Also present: Representatives Garrett and Grimm. 

Chairman NEUGEBAUER. We are waiting on a couple of Members 

and we will get started here shortly. BlackBerrys are down in the 

Capital. It has locked the whole city down. 

This hearing of the Oversight and Investigations Subcommittee 

of the Financial Services Committee will come to order. 

Today’s hearing is on oversight of the Federal Home Loan Bank 

System. Without objection, I ask unanimous consent to allow Mr. 

Garrett, who is not a member of this subcommittee but is a member of the full Financial Services Committee as well as the chairman of the Capital Markets Subcommittee, to join us. 

Without objection, it is so ordered. 

Someone asked why we are having an oversight hearing on the 

Federal Home Loan Bank System? Well, for a couple of reasons. 

One reason is that we haven’t had one in 51⁄2 years. Lately, we 

have been waiting until there is a crisis and then we have oversight hearings. And a lot of people think maybe this is not the time 

to be doing oversight, but maybe you ought to do oversight in front 

of issues instead of in a trailing manner. 

And the other reason is that the Federal Home Loan Bank System is a trillion dollar entity. It has a huge impact on liquidity in 

the marketplace, and has served a function in housing and other 

areas by providing liquidity for banks. 

So it is an important piece of our financial System and obviously 

it is an opportune time to have a little bit of an update. I think 

one of the things that obviously there has been a lot of discussion 

about GSEs. And the Federal Home Loan Banks are, in fact, GSEs. 

So one of the issues that I think we will want to hear more about 

today is that really the core mission of the Federal Home Loan 

Bank System in the past was to provide advances, as they are 

called, to their member banks. 

2 

But when we started looking at the balance sheets of some of 

these entities, we found out that a lot of them, in fact, hold more 

investments and things other than advances, other than they do in 

advances. 

So the question is, has the Federal Home Loan Bank System gotten away from their core mission statement? And one of the 

things—not to draw an analogy here but to go back and revisit 

Freddie Mac and Fannie Mae, a lot of people feel that where 

Freddie and Fannie went wrong was that they got away from their 

core mission and tried to be some things that maybe they shouldn’t 

have tried to be. 

Obviously, we want to talk today about what is the core mission 

of the Home Loan Banks, and are they following that mission. And 

I think the other question is, is that System operating in an optimum way? Because obviously the efficiency of the System has a 

huge impact on the cost of capital to the members, and so, obviously that is an important thing, particularly in this environment. 

I think that this is an excellent opportunity for a couple of 

things: one, for our distinguished committee members to learn a little bit more about the Federal Home Loan Bank System, and for 

us to get an update; and to get into some discussions about what 

is the direction forward for the banks as well. 

So I appreciate our distinguished witnesses today, and we look 

forward to some healthy discussion here. 

With that, it is a great segue to turn it over to Ranking Member 

Capuano for his opening statement. 

Mr. CAPUANO. Ditto. I am looking forward to hearing from you 

guys. 

Chairman NEUGEBAUER. And I would now recognize Dr. 

Hayworth for 1 minute. 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

And it is particularly important, I think, sir, that we think about 

the role and the future of the Federal Home Loan Banks—and it 

is so appropriate that Chairman Garrett is here—because as we 

consider the role of the GSEs and how we can mitigate the potential negative effects that unfortunately the expansion of the GSE’s 

mission statement beyond what they were able to do. 

As we consider how we backed the GSEs out of their undue influence on the economy, what role would the Federal Home Loan 

Banks play? And how can we make sure that our community 

banks, who are focused on their customers, their clients, and their 

communities—how can we make sure that we are helping them 

and not hurting them to perform a crucial role? So I look very 

much forward to what our panelists have to say. 

And I want to thank you again, sir, for holding this hearing. 

Chairman NEUGEBAUER. I thank the gentlelady. 

And now, Mr. Fitzpatrick is recognized for 2 minutes. 

Mr. FITZPATRICK. I would like to thank the chairman, Mr. Neugebauer, for holding this oversight hearing today to discuss and examine a number of issues surrounding the Federal Home Loan 

Bank System. 

I would also like to welcome a fellow Pennsylvanian, Tim Zimmerman, appearing here today on behalf of ICBA. Tim not only 

serves as chairman of the ICBA Bank Task Force, but also as 

3 

chairman of the Legislative Committee of the Pennsylvania Community Bankers. 

So thank you for your service. 

The Federal Home Loan Banks could well be called the quiet 

GSE. They are typically in the background meeting their primary 

statutory mission of providing liquidity to member banks across the 

Nation. 

Just because they are quiet does not mean that they are not important. I hear from bankers all the time throughout my district 

about the importance of the Federal Home Loan Banks. 

As we see from our witnesses’ testimony today, community bankers often use the Home Loan Bank loans to structure their loans 

in markets to meet credit needs. Local bankers safely making loans 

to their customers certainly is central to building a strong economy. 

I also hear from leaders in the area of affordable housing in my 

district about how important the affordable housing program is. It 

is not just the downwards, but the bringing together of the various 

local governments, community bankers, the affordable housing program individuals, and the nonprofits that is important, not just in 

my district in Pennsylvania, but in districts throughout the Nation. 

So as we move forward on GSE reform and devise a new mortgage finance System in this country, good actors should not be 

lumped in with bad ones. We must be deliberate in our actions to 

ensure our constituents that they have access to capital. 

And as we have seen with Dodd-Frank, all too often the unintended consequences of Washington’s actions represent backwards 

steps, unfortunately not always forward steps. 

Clearly, our community banks have a vital partnership with the 

Federal Home Loan Banks. And we all need more investments in 

our districts. 

So this hearing will help us to gather information to form an understanding of how we protect taxpayers, while ensuring that the 

banks contribute to our economic recovery. 

I look forward to the testimony here today, and I thank the 

chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Texas, Mr. Canseco, for 1 minute. 

Mr. CANSECO. Thank you, Chairman Neugebauer, and thank you 

for calling this very important meeting. 

After learning the hard way about Government-Sponsored Enterprises 3 years ago, no stone that enjoys an implicit backing by the 

Federal Government should be left unturned by the Congress. 

Federal Home Loan Banks play a sizeable role in our financial economy with assets of over $800 billion as of June. 

And many financial institutions, particularly community banks, 

have come to rely on funding from the Home Loan Banks, as was 

highlighted during the financial crisis of 2008. 

With the Home Loan Banks having such a significant role in our 

financial sector, Congress must examine closely the operations of 

these institutions to ensure that they are functioning safely and 

soundly, and not putting the financial sector, or especially the taxpayer, at risk. 

I look forward to hearing from our witnesses today on this very 

important matter. 

4 

Thank you, Mr. Chairman, and I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Garrett is recognized for 1 minute. 

Mr. GARRETT. I also thank the chairman for holding this very important meeting, and ditto as well. 

I recognize the very important role that the Federal Home Loan 

Bank System has played in the past, and currently plays in the 

Nation’s housing and finance System, basically providing access to 

capital markets, especially to many of our local banks. 

And while they perform their core mission, providing advances as 

well, I think, during the financial crisis, I still believe there is always room for review and improvement. 

After the collapse of Fannie and Freddie, there was widespread 

agreement, I think, on both sides of the aisle that it is really inappropriate to have American taxpayers implicitly back the institutions and their debts. The consensus view, I think, is that government guarantees should either be on the books, transparent, and 

budgeted for or they shouldn’t exist at all. 

So I think the recent credit downgrade of the U.S. Government 

by S&P, followed by the downgrade then right after of Federal 

Home Loan Banks, is something of a signal of the market’s perception of whether or not the Federal Home Loan Bank is either explicitly backed by the taxpayer or not. 

So it just raises a number of questions, I think, that we have to 

look at. There is not going to be an easy answer to this, but it is 

essential that we have that discussion. 

And I thank the chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And I believe that is everybody. 

I would remind all Members that your opening statements will 

be made a part of the record. 

I am now going to introduce our witness list, and I am going to 

yield back to the gentlewoman from New York to introduce Mr. 

Costa. 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

Mr. Anthony Costa has over 44 years of distinguished community 

banking service in the mid-Hudson Valley. His B.S. degree is in accounting. 

And since July of 2004, he has been chairman and CEO of Empire State Bank, which was organized and opened in July of 2004. 

It is now a $160 million company serving the mid-Hudson and 

Staten Island areas. 

Mr. Costa has also held executive positions at First Interbank 

Corp as president and chief operating officer from 1990 to 1994, 

and at Mid-Hudson Savings Bank, which is a wholly-owned subsidiary of First Interbank Corp. 

He was president and CEO of Intercounty Savings Bank from 

1970 until 1990 when Intercounty and Mid-Hudson Savings Bank 

merged together under the First Interbank Corp logo. 

He has also served—or is currently serving on the boards of directors and/or committees for a number of community-related and 

professional organizations including the Mid-Hudson Family 

Health Institute, the People for People Fund, the Institute for Family Health in New York City, the New York Banker’s Association, 

5 

the Benedictine Hospital, the American Bankers’ Association, and 

the Bishop Dunn Memorial School. 

Thank you so much, Mr. Costa, for being with us today. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

We also have: Mr. Lee Gibson, chairman of the Federal Home 

Loan Bank of Dallas, and chairman of the Council of Federal Home 

Loan Banks; Mr. Tim Zimmerman, president and chief executive 

officer of Standard Bank of Pennsylvania, on behalf of the Independent Community Bankers of America; and the Honorable Bruce 

Morrison, former Member of Congress, and former Director of the 

Federal Housing Finance Board. 

I remind each of you that your written statements will be made 

a part of the record, and you will be recognized for 5 minutes to 

summarize your testimony. 

And with that, I will recognize Mr. Costa. 

STATEMENT OF ANTHONY P. COSTA, CHAIRMAN AND COCHIEF EXECUTIVE OFFICER, EMPIRE STATE BANK, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA) 

Mr. COSTA. Thank you, Chairman Neugebauer and Ranking 

Member Capuano. 

My name is Anthony Costa, and I am chairman and CEO of Em- pire State Bank, which is a $165 million asset community bank in 

New York’s Hudson Valley. 

I also served as chairman of the Federal Home Loan Bank Committee at the American Bankers Association. And I thank you for 

the opportunity to testify today. 

The Federal Home Loan Bank System plays a vital role in mortgage financing and economic development in communities throughout the United States. And its importance cannot be overstated. 

Many of our loans at Empire State Bank could not have been made 

were it not for our Federal Home Loan Bank. 

Congress and the regulators will soon consider changes to the 

secondary mortgage market and to Fannie Mae and Freddie Mac. 

It is critically important that any reform of the secondary mortgage 

market protect the traditional business of the Federal Home Loan 

Banks and access to liquidity by their members. 

Failure to do so will have a detrimental effect on mortgage funding and homeownership for many years to come. 

During the recent financial crisis, the Federal Home Loan Banks 

played a critical role for bank members. As the crisis took hold and 

credit markets froze, the Federal Home Loan Banks were the first 

available source of funding for banks like mine at a time when it 

was most needed. It allowed us to continue to serve our communities even in the face of extreme difficulties. 

As members had more need for liquidity, Federal Home Loan 

Banks increased advances from $650 billion at the beginning of the 

crisis, to over $1 trillion at its peak. The demand for liquidity has 

diminished, and now advances are below pre-crisis levels. 

This proves the flexibility of the System and demonstrates its 

ability to withstand crisis. In 8 decades and through numerous financial crises, the Federal Home Loan Banks have never incurred 

a credit loss on an advance. 

6 

The Federal Home Loan Bank System does more than just liquidity management. It also runs two important programs that 

provide housing and economic development for low- and moderateincome communities: the Affordable Housing Program; and the 

Community Investment Program. 

The Affordable Housing Program is one of the largest private 

sources of funds for affordable housing in the United States. 

Through this program, banks can fund projects that otherwise 

might never be carried out. 

These projects serve a wide range of community needs. Many are 

designed for seniors, the disabled, homeless families, first-time 

homeowners, and others with limited resources. More than 726,000 

housing units have been built using the Affordable Housing Program funds, including 457,000 units for very low-income residents. 

The Community Investment Program offers below-market-rate 

loans to banks like mine for long-term financing to low- and moderate-income families. The program is a catalyst for economic development because it supports projects that create and preserve 

jobs, and helps build infrastructure to support growth. 

Banks like mine have used the Community Investment Program 

to fund owner-occupied and rental housing, construct roads, bridges 

and sewer treatment plants, and to provide small business loans. 

The program is especially appreciated in rural areas where resources are limited. 

Since 1990, the Community Investment Program has lent over 

$61 billion for a variety of projects, resulting in an estimated 

200,000 jobs. 

Recently, the Administration and regulators have proposed ill-advised membership and benefit changes that would make it more 

difficult for all financial institutions to access the funding available 

through the Federal Home Loan Banks. The changes would devalue membership for existing Federal Home Loan Bank members 

and discourage potential members from joining. 

These proposals, if adopted, would have a deeply negative impact 

on the ability of Federal Home Loan Banks to carry out important 

programs like the Affordable Housing Program and the Community 

Investment program. They should be rejected. 

In conclusion, the Federal Home Loan Bank System is strong because of the diversity of its membership. Without the Federal 

Home Loan Banks, community banks would not be able to reliably 

meet demand and there would be less funding available to improve 

low- and moderate-income communities. 

As Congress considers reforms of the mortgage markets, it is crucial that the important role of the Federal Home Loan Bank System be preserved. I would be happy to answer any questions. 

[The prepared statement of Mr. Costa can be found on page 42 

of the appendix.] 

Chairman NEUGEBAUER. Thank you, Mr. Costa. 

Mr. Gibson? 

7 

STATEMENT OF LEE R. GIBSON, CHAIRMAN, FEDERAL HOME 

LOAN BANK OF DALLAS, AND CHAIRMAN, COUNCIL OF FEDERAL HOME LOAN BANKS 

Mr. GIBSON. Good afternoon, Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee. 

My name is Lee Gibson, and I am chairman of the Council of 

Federal Home Loan Banks, as well as chairman of the Federal 

Home Loan Bank of Dallas. I am also the chief financial officer of 

Southside Bank, a $3 billion community bank with headquarters in 

Tyler, Texas. 

Mr. Chairman, I would like in the time I have today to describe 

why the Federal Home Loan Banks are essential to the future of 

not only my community bank, but to all community banks across 

the country. 

Federal Home Loan Banks are cooperatives. We are 100 percent 

owned by our members, comprised of nearly 7,800 financial institutions. By design, our capital structure does not subject us to the 

growth and income pressures that publicly-traded corporations 

face. 

Community financial institutions rely on us as a source of funding for financing housing, jobs, and economic growth in their communities. Both large and small lenders are likely funding lending 

in your community with the help of their Federal Home Loan 

Bank. 

We have been around for over 80 years, in good times and bad. 

Through the Nation’s most recent financial turmoil, the Federal 

Home Loan Banks passed this significant stress test and once 

again proved to be a model that works. When the crisis unfolded 

and other funding sources disappeared, we were the only source of 

liquidity available for many of our members. 

We owe our stability and long record of successfully fulfilling our 

mission to our unique business model and cooperative structure. 

Our core business is issuing what we call advances. We borrow 

funds from all over the world and provide those funds to our members in the form of fully-secured loans. 

For the vast majority of our members, these advances are the 

only access they have to the global credit markets. Federal Home 

Loan Bank advances lower the cost of extending credit to Americans. 

They are the primary way that the Federal Home Loan Banks 

serve as a mechanism for economic stability in America. All advances are secured by eligible collateral and the purchase of capital 

stock. Members must meet strict collateral, capital, and credit 

standards that are continually monitored. 

Our cooperative structure also demands that we focus intently on 

capital. In fact, we recently voluntarily entered into a joint capital 

enhancement agreement to further strengthen the System. Each 

Home Loan Bank will now, on a quarterly basis, allocate 20 percent of its net income to a separate, restricted retained earnings account. 

Our commitment to affordable housing and community development is both proven and strong. Working with our members, we 

have helped more than 2 million American families in the last 20 

8 

years, through more than $61 billion in long-term financing, and 

nearly $4.5 billion in direct grants. 

Each Home Loan Bank is regionally focused and controlled, allowing it to be responsive to the specific credit needs of the communities that its members serve. 

It is a System that functions well. That is why the Administration’s February report to Congress, which included several proposed changes to our unique structure, concerns me greatly. I believe these proposals would disassemble the model that American 

communities and their local lenders have relied upon for years. 

Mr. Chairman, I want to speak to the committee for a moment 

as a community banker. In a time when so many of our institutions 

are in need of repair, we have a community banking System in 

America that works. 

It works because as local lenders, we know our communities expect us to do business in a responsible way, and to remain focused 

on the needs of our own communities. Our community banking System also works because it can rely on a critical partner, the Federal Home Loan Banks. 

America’s Federal Home Loan Banks may be invisible to the 

community banker’s customers, but the Federal Home Loan Banks 

are there for our customers every day. 

I urge you in considering the Federal Home Loan Banks to preserve and protect their proven value to the Nation’s community 

banking System and the Americans we serve. 

Mr. Chairman and members of the committee, the Federal Home 

Loan Banks are a model that works. It is a structure that must not 

be changed. 

Thank you, Mr. Chairman, for the opportunity to speak to you 

today, and I look forward to taking any questions the subcommittee 

may have. 

[The prepared statement of Mr. Gibson can be found on page 50 

of the appendix.] 

Chairman NEUGEBAUER. Thank you, Mr. Gibson. 

Mr. Zimmerman? 

STATEMENT OF TIMOTHY K. ZIMMERMAN, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, STANDARD BANK, ON BEHALF 

OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA 

(ICBA) 

Mr. ZIMMERMAN. Good afternoon, Chairman Neugebauer, Ranking Member Capuano, and members of the subcommittee. 

My name is Tim Zimmerman, and I am president and CEO of 

Standard Bank, a $435 million sized community bank 

headquartered in Monroeville, Pennsylvania. Standard Bank is a 

member of the Federal Home Loan Bank of Pittsburgh. 

I also serve as chairman of ICBA’s Federal Home Loan Bank 

Task Force. I am pleased to represent ICBA’s nearly 5,000 members today at today’s hearing about the Federal Home Loan Bank 

System. 

I welcome this opportunity to share Standard Bank’s experience 

with the Federal Home Loan Bank of Pittsburgh, which is broadly 

typical of community banks nationwide. 

9 

The 12 regional Federal Home Loan Banks are a critical resource 

to community banks, the vast majority of which are members of the 

Federal Home Loan Bank System. Federal Home Loan Banks help 

community banks like mine better serve our communities and compete with too-big-to-fail institutions in our markets. 

They demonstrated their value during the recent financial crisis 

when they continued to provide liquidity through advances after 

other parts of the credit markets shut down. As Congress debates 

the future of the housing finance System, I urge you to preserve 

the role of the Federal Home Loan Banks. 

Community banks value Federal Home Loan Bank membership 

primarily for the access to advances they offer. Standard Bank, for 

example, currently holds $33 million in advances, an amount that 

has recently fluctuated widely with economic conditions. 

Federal Home Loan Banks offer advances in a variety of maturities and customized terms for their members. These advances are 

made possible by the Federal Home Loan Banks’ strong credit rating and access to the world credit markets, access that is not practical for a community bank. 

Community banks use advances to fund mortgages and other 

types of loans to manage the substantial interest rate risk associated with holding longer-term fixed-rate loans in portfolio. Some 

community banks use advances to adjust the duration of their liabilities to better match their assets and manage risks. 

Additionally, short-term, on-demand advances can be used to 

provide liquidity and manage cash flow. Most community banks 

qualify as community financial institutions, and are therefore able 

to collateralize advances with small business and agricultural loans 

in addition to residential mortgages. 

The broader mission of the Federal Home Loan Bank distinguishes them from Fannie Mae and Freddie Mac, which are focused exclusively on residential mortgage lending. 

Many rural bank members of the ICBA report that the Federal 

Home Loan Bank advances are absolutely essential for their ability 

to remain competitive in agricultural lending, in particular, longterm fixed-rate loans of 10 years or more would be nearly impossible for a community bank to make without the use of Federal 

Home Loan Bank advances. These loans cannot be funded with 

short-term deposits because of interest rate risk. 

Federal Home Loan Bank advances help bankers meet the cyclical challenges inherent in agricultural lending and play a critical 

role in helping the rural economy to prosper and remain vibrant. 

Agricultural lenders use advances to fund their short-term agricultural production loans. During peak season demands, as much as 

50 percent of such lending is supported by advances. 

ICBA strongly opposes the current Federal Housing Finance 

Agency proposal that would re-impose a mortgage lending test on 

Federal Home Loan Bank members. The Gramm-Leach-Bliley Act 

lifted the mortgage asset test for community financial institutions, 

which is significant for rural lenders that have few residential 

lending opportunities that greatly benefit from Federal Home Loan 

Bank membership. 

In addition to advances, Federal Home Loan Banks offer a range 

of other valued services including community investment programs 

10 

and correspondent programs. The mortgage partnership finance 

program of secondary market options for members is especially important to Standard Bank. 

We sell all of our fixed-rate loans with a term of more than 15 

years to the Federal Home Loan Bank of Pittsburgh to avoid interest rate risk exposure. Without this option, we would not be able 

to make the long-term fixed-rate loans our customers expect, and 

we would not be able to compete with large banks. 

While many community banks continue to sell primarily to 

Fannie Mae and Freddie Mac, the MPF programs of the various 

Federal Home Loan Banks are an important alternative source of 

secondary market access. 

As Congress and the Administration consider changes to the 

housing finance System, we urge you to preserve the significant 

role of the Federal Home Loan Banks, which help community 

banks serve the mortgage, small business, and agricultural lending 

needs of their communities, and remain competitive with the large 

banks and tax advantage farm credit System. 

There is no reason to tamper with the model that has worked 

well since inception, and proved its critical value during the recent 

crisis. The Federal Home Loan Banks must be kept distinct from 

Fannie Mae and Freddie Mac. 

ICBA opposes proposals to merge them. 

While community banks have benefited from existing Federal 

Home Loan Bank secondary market programs, the primary business of Federal home banks must remain advances. 

Thank you again for convening this important hearing. 

We appreciate the opportunity to discuss the Federal Home Loan 

Banks, and how important they are to community banks. And I am 

also very happy to answer any questions. 

[The prepared statement of Mr. Zimmerman can be found on 

page 77 of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

Mr. Morrison? 

STATEMENT OF THE HONORABLE BRUCE A. MORRISON, 

FORMER MEMBER OF CONGRESS, FORMER DIRECTOR OF 

THE FEDERAL HOUSING FINANCE BOARD, AND CHAIRMAN, 

MORRISON PUBLIC AFFAIRS GROUP 

Mr. MORRISON. Thank you, Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee. It is an 

honor and a pleasure to be here, and I thank you for inviting me. 

I am here to express personal views based on experiences that 

I have had with the Federal Home Loan Bank System. And I am 

very happy to answer any questions that Members may have. 

In my written testimony, I covered a number of different topics 

related to the System. I will focus on a few of these in my oral testimony. 

‘‘Liquidity’’ is one of those words we use all the time. We don’t 

really notice its value until it is gone. Lehman Brothers is a wonderful example of what happens when liquidity fails and you get 

markets that don’t work. 

11 

The banks have provided liquidity to members in all kinds of 

markets. They were set up to be a liquidity source for S&Ls in 

1932. This is a Herbert Hoover program. 

You don’t hear many of those being discussed. But it has been 

a success ever since. 

It was the first intervention by the government in facilitating 

housing lending, and it has been a success in that regard for all 

of its 80 years. 

It certainly was tested on that score during the recent financial 

crisis, and it responded admirably. 

There were some questions raised on the Hill about its work, 

about all the money that flowed out. But the fact is that it flowed 

out, and it also flowed back, because of the very favorable security 

position that the banks have. 

So from that perspective, the banks can be very proud of their 

performance. 

It has a co-op structure. That is extremely important. One of the 

things that happened in Fannie and Freddie was the conflict between investors, who cared only about profits, and a public mission 

that the taxpayers were standing behind. 

That conflict is absent in the bank System; its members are competitors. So whatever benefit they get from Federal backing, in 

terms of cost of funds, tends to pass through to customers because 

of competition. 

That is a good thing. And that is a useful structure to understand. 

The bank System has more than just just community bank members. Everyone who talks about the bank System talks about the 

value to community banks. And I think that value is indisputable. 

I think the liquidity that is provided for longer-term assets for 

community banks, going back to the S&Ls of the 1930s, is one of 

its proudest achievements. 

The fact is, however, when you look at its balance sheet, and ask 

who got the advances, you will find a very high percentage of them 

went to very large financial institutions. 

And the question is—where does that fit? Is it something that 

should exist? Should it be in any way restricted? Should it be in 

any way targeted? 

I have some thoughts about that. But let me first say that one 

of the things that reflects the success of the banks is their performance in the affordable housing program. But it is also a very small 

program. 

It is $150 million to $200 million a year. This is an $800 billion 

to $1 trillion System. That is a small amount of money compared 

to the size of the System. 

But the money has been used very well, and has been targeted 

in two areas: investment in low-income, multi-family housing developments; and in downpayment matching programs for single 

family purchases by low- and moderate-income people. Both of 

those have been great successes. 

I regret the fact that the completion of the Refcorp payments did 

not lead to an increase in investment in the affordable housing program because, frankly, it is one of the jewels of the System. 

12 

I would also comment that I was a member of this committee 

when this program was created in 1989, and the banks were all 

against it. 

The fact is that it was forced on them. But I don’t think there 

is a single bank that would give it up today, so sometimes Congress 

is ahead of the crowd—maybe not usually. 

As I mentioned, the banks’ performance in response to the crisis 

was admirable. 

But there are fiscal pressures on the banks. These are fiscal 

pressures from the amount of capital that they hold, the dividends 

they seek to pay, and the low yield that is represented by advances. 

That fiscal pressure does get them into other kinds of assets. And 

their private mortgage-backed security holdings have gotten them 

into trouble, and have cost them. 

It wasn’t their fault that the triple-A ratings didn’t mean tripleA. They aren’t the ones that mis-rated these assets. But the temptation to bulk up on profitable assets is not independent of the 

structure that exists. And it deserves discussion. 

Finally, with respect to the future, there is the implied guarantee—Congressman Garrett referred to it. But the implied guarantee, in my opinion, is something we shouldn’t have. 

If we are going to have a government guarantee, it should be 

paid for up front, and it should be regulated up front. Implied guarantees mean if things go bad, taxpayers write a check. And there 

is nothing against which to draw. 

I think that is a mistake. And I think that you asked the question, going forward, how will this work? 

Will there be explicit guarantees for Federal Home Loan Bank 

debt? 

You can get rid of debt for Fannie and Freddie. You don’t really 

need to have portfolios. 

But advances are assets. And you have to have liabilities to fund 

them. So the debt question and implied guarantee is right in front 

of you in the Federal Home Loan Banks. 

Finally, big and small, how much should the System be available 

to very large holding companies? 

My view is that there is a value to their participation, a financial 

value. But if they are going to participate, their advances should 

be limited to backing those kinds of assets that could not otherwise 

be supported, like whole loans for housing, and perhaps certain 

kinds of economic development loans, rather than general liquidity. 

And we are at the general liquidity end of the spectrum right now. 

Thanks for the opportunity to comment on these matters, and I 

look forward to your questions. 

[The prepared statement of Mr. Morrison can be found on page 

68 of the appendix.] 

Chairman NEUGEBAUER. I thank the panel, and will now recognize members for 5 minutes for questions, starting with myself. 

Mr. Gibson, I think in your written testimony, you mentioned advances represent the core of the Federal Home Loan Bank business. 

I want to quote you something that FHFA Acting Director 

DeMarco recently said. 

13 

He says advances at 52.4 percent of assets barely exceed half of 

the System’s combined assets. At six Federal Home Loan Banks, 

investments exceed 40 percent of assets. At four of these Federal 

Home Loan Banks, investments exceed advances. 

He says this is not a sustainable operating condition at the Federal Home Loan Banks. It appears we look through that, that these 

entities have changed their business model from being an advance 

business to also being an investment business. 

Someone used the term—are we turning our Federal Home Loan 

Bank into hedge funds? 

So what is the correct—have the banks strayed from their core 

mission? And as I think was pointed out by Mr. Morrison in his 

public record, a number of the banks in the System got into the 

mortgage-backed security business. And it was painful. 

Had they not been in that business, would they be healthier 

banks today? 

Can you give me your impression on what is the appropriate 

amount of investment activity for a bank? And why do they need 

to be in the investment business? 

Mr. GIBSON. Yes, sir. I would be glad to answer that. 

Basically, it goes to the scalability of the System. As I think it 

was mentioned, advances grew from roughly $640 billion second 

quarter, end of second quarter 2007, to a little over $1 trillion, the 

third quarter ended 2008. 

With that, additional capital came into the System. Advances 

were extremely high at that point in time, and there were some additional investments that were bought because we have certain investment limits. 

We are limited on tax and investments we can buy. We are also 

limited on percentages of investments that we can buy. 

Now, we are down to $428 million in advances at the end of second quarter 2011. And due to the scalability, a lot of those investments have not rolled off at this point in time. If we stay at that $428 million, the level of investments is going 

to shrink. And we are going to see a more sustainable percentage 

of investments to advances. 

But the investments also act to help us in a number of ways. It 

helps us with that scalability issue from the standpoint that it provides us additional earnings. For instance, right now, we only have $428 billion in advances. 

It provides us additional earnings so that we can keep in place a 

structure that we need at the banks, risk managers, auditors, 

things of that nature, so that if we needed to scale back up in the 

next 5 quarters to over $1 trillion, we need to make sure we have 

those things in place. 

So it acts and it is a buffer. But it also goes to the scalability. 

And right now, yes, we have shrunk and we do have additional investments. It is something that will roll off over time. 

Chairman NEUGEBAUER. Along with that scalability, and I have 

heard, I think, several of the panel use that term, the question is, 

and there has been some discussion about this, do we need 12 Federal Home Loan Banks to do the function? And would there be 

some scale achieved by some consolidation to fewer banks rather 

than keeping that infrastructure in place for 12 regional banks? 

14 

Mr. Zimmerman, you look like you want to jump in on that one. 

Mr. ZIMMERMAN. I can jump in on that one. 

I think my answer to your direct question would be that I believe 

there is a strong argument that there should be 12, or at least 

more than one Federal Home Loan Bank. 

Clearly, if you are only talking about whether it is less expensive 

to have one super structure, the answer is yes. 

But it is the same reason I have more than one office. Whether 

I have 10 offices in my bank, and we can serve the communities 

that we are in better by having people closer to the community, understanding those communities, and familiar with the customers 

and things like that. 

And I think the same thing goes for the Federal Home Loan 

Banks for a couple of reasons. First, for the same idea that the 

Federal Home Loan Bank of Des Moines has a different customer 

base, and they have different needs than the Federal Home Loan 

Bank in Atlanta does, for example. 

And so there is a better understanding in those banks. And they 

can serve their constituency better. 

Also, because of having the regional structure, as the economy 

changes and there is a particular problem in one part of the economy like we have seen, not in this latest crisis, but in the oil patch 

days, which I am sure you are familiar with, it works to help sustain the System. 

And as you know, the Federal Home Loan Banks are all jointly 

and separately liable, so it kind of works together to help balance 

all that out. So I really strongly believe that we are much better 

with a structure that has a regional base. And 12 may not be the 

absolutely perfect number, but I am very sure that one isn’t the 

right answer. 

Chairman NEUGEBAUER. Thank you, and now the ranking member, Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Gentlemen, thank you. 

I think the Home Loan Banks do an excellent job overall. And 

I just want to say thank you on behalf of my constituents and myself for what you have done. 

I do have a couple of questions. I want to start with the last one, 

the advances that are made. 

I understand why you went up. I have to be honest. I am not 

sure why you have cut it 30 percent below what you were before 

the problem. 

I say that because the truth is for me, I am trying to find any 

way I can to encourage anybody and everybody to get off the bench 

and get our economy moving again. 

And the Federal Home Loan Bank, in my opinion is a key player 

there. You are not the only one, but you are a key player. 

And you are talking $212 billion less than you had out in the 

market before the problem. Now, I understand the problem. 

But from what I have seen, you have survived the problem probably better than anybody. And therefore, how do I get you to get 

it moving again? 

15 

I need you to get that money back out to your local banks so they 

can get it out to homeowners, and small businesses, and everybody 

else to help get this economy moving. 

What do we have to do to beg? 

Mr. GIBSON. I would be glad to take that question. 

Right now, I know as a community banker in Tyler, we are overrun with deposits. And it is not a situation that we were having 

back in 2007. 

Right now, American citizens are looking for asset classes to put 

their money in, and they are not finding asset classes they are satisfied with. So they are sticking the money in the banks. And the 

banks are growing in deposits by leaps and bounds. 

I happen to be very fortunate to be in a part of the country that 

hasn’t suffered quite as much as many of the other parts of the 

country. But I can tell you that people are a little leery of going 

out and expanding business at this point in time with all of the uncertainty that is out there. 

And so we are— 

Mr. CAPUANO. At the same time, I won’t speak for my colleagues 

but I have heard it from numerous Members of Congress, including 

myself, I hear it all the time, particularly from small businesses, 

that they can’t get access to the capital that they need. 

And there is some disconnect here. If you have the money to 

lend, and I have people who want to borrow it, how do I make a 

marriage? 

Mr. GIBSON. I know at our bank, we would love to make loans. 

That is what we want to do. 

Mr. CAPUANO. Come to Boston. 

Mr. GIBSON. Come to Boston, okay. 

Mr. CAPUANO. We will open up a branch. We will get you going— 

Mr. GIBSON. The issue is we don’t know how to do banking in 

Boston. And we are not familiar with the area. And that is why— 

Mr. CAPUANO. We will teach you— 

Mr. GIBSON. —the community banks in Boston, I think, are probably better suited to make those loans than a bank in Tyler, Texas, 

because we stick to our knitting in East Texas, and know that market. 

We don’t know the Boston market. 

But, to your point, we are flush with cash right now. We are not 

trying to run depositors away, but gosh we are paying nearly zero 

on the money, and they are still bringing it in. 

We can’t loan it out fast enough. And the demand is just not 

there. We can’t force our customers to borrow money. 

And so the Home Loan Bank by default is ending up in a situation where the banks need less money than they did, significantly 

less money— 

Mr. CAPUANO. You are telling me that it is not a result of the 

FHLB policy; it is a result of the market? 

Mr. GIBSON. It is a result of the market, yes, sir. 

Mr. CAPUANO. Mr. Zimmerman? 

Mr. ZIMMERMAN. That is exactly right. 

If you take my bank as an example, my bank is the most profitable. We have the happiest customers when we are making a lot 

16 

of loans. And most of the money that we have at the bank is out 

in loans because that is the highest yielding asset that we have. Right now, I have a $435 million bank. I have over $100 million 

in liquid assets. I don’t want it to be that way. There is a lack of 

loan demand. 

The Federal Home Loan Bank is a member-driven organization, 

so my Federal Home Loan Bank account rep wants me to borrow 

from him. And I have $100 million in cash waiting to make loans 

right now. I am not going to borrow. Our history is in 2007, we had $25 million worth of advances that we had outstanding. As the crisis worsened, and our cash went down—because we were pretty highly lent 

out at that point in time—when we finally got to September of 

2008, we had $51 million worth of borrowings from the Home Loan 

Bank. 

So that is this idea of scalability. 

When it was going from $650 billion to $1 trillion, that was partly because of my bank. And if you take the same thing and apply 

it to other banks around the country—so we are not in normal 

times. And there isn’t loan demand out there. 

And I hear this too. But I can tell you in Pittsburgh, we are trying to make loans every day. We are advertising for loans. 

We are going to meet small businesses. We are trying to convince 

them. But even my best customers are so unsure about the economy that they aren’t willing to take that commitment and buy the 

next new machine, or add on to their business. It is the overall economic environment. 

And so what you are seeing as too much liquidity at the Federal 

Home Loan Bank, is what I see as too much liquidity at my bank. 

And it directly affects them because I am not borrowing. 

Mr. CAPUANO. It is not that I see too much liquidity. I see too 

many people sitting by the sidelines. And I am trying to get as 

many people as I can to get into the game. And the way you just 

described it, you are not the problem. You want to get in the game 

too. 

So I am just trying to help you guys loan money. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman, Mr. Fitzpatrick, is recognized for 5 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

I want to follow up on the chairman’s comment earlier, and his 

questions about what is the right number of banks in the System. 

Mr. Costa, as you know, the Federal Home Loan Banks are jointly and separately liable for the debts of the other banks in the System. 

Are you concerned at all that the Home Loan Banks in other districts may be taking unnecessary risks, thereby placing the bank 

in your district in some jeopardy? 

Mr. COSTA. As a banker, my profession is being concerned. So we 

spend a lot of time being concerned. 

But I would say from my involvement with the Federal Home 

Loan Bank System, it is a very well-run System. All the banks are 

aware, and have become more aware since 2008, with what ‘‘jointly 

17 

and severally’’ actually means. And there is, I would say, a heightened awareness across-the-board. 

I don’t believe that any of the banks feel that we should not have 

those banks around. I think there has been some talk about some 

banks possibly merging together. But as far as I know, that has 

never gone beyond informal discussions. 

I believe that the System works, and it has worked for 80 years. 

And we are all well aware of the responsibilities that each bank 

has jointly as well as severally. 

I don’t see any—certainly in the New York district, which is a 

very strong district, I have never heard any talk of overriding concern. Concern, yes, but not an overriding concern that we should 

consolidate out some of the banks. 

Mr. FITZPATRICK. So, not enough of a concern that you would actually make a suggestion that something should be done to make 

certain that risks staked by other banks might have an impact or 

recommendation. 

Mr. COSTA. I would say yes. 

Mr. FITZPATRICK. Do any other panelists have any recommendations? 

Mr. MORRISON. Let me just make a comment about consolidation. 

Lots of people have talked about consolidation over the years in 

theoretical terms. This is a cooperative. 

Consolidation would save some money, but the members have 

never thought it was worth saving that money to give up certain 

other advantages. I don’t think it is something to be imposed from 

the top. I think it is something that if the members believe that 

they want consolidation, it should be facilitated. 

And I think the statute is not as good as it could be if that were 

to come about. But the idea that Congress, or the regulators, would 

dictate that it would be better if there were 8 rather than 12 would 

be a mistake. We can all have those opinions, but ultimately the 

opinions that count are the members. 

Now as far as risk, I think there is risk, and it should be discussed. And it has mostly to do with investments. 

But advances are about the safest assets there are in the financial System. So in terms of risk between banks, I think it is pretty 

well regulated in that regard. 

Mr. COSTA. I am sorry. 

I would also point out that the Home Loan Banks are really cooperatives. And as such, we are looking over each other’s shoulders 

all the time. 

Everybody is looking at everybody else. So there is very little investing going on out there that is not under the purview of other 

banks and other members of those banks. 

Mr. GIBSON. Whether 12 is the right number or what the right 

number is, Congress has given us the ability to voluntarily merge. 

I know in the case of Dallas, we did have merger talks with another bank. They did not come to fruition, but I know that our 

board would certainly entertain a merger if that made sense. 

The thing I will tell you, though, is that having a number of 

banks mitigates the risk. Because one of the things I look as a community banker, and as a board member on the Home Loan Bank 

is concentration of risk. 

18 

If you put all of this together in one organization, then it is going 

to look like some of the other agencies that had problems. This 

way, we are able to mitigate the risk among 12 different management teams that approach things just a little bit differently. 

So I think that is an important thing to take into consideration 

also. 

Mr. FITZPATRICK. Congressman Morrison, can you talk a little bit 

more about the affordable housing component of the Home Loan 

Banks? How do you believe the programs have performed and do 

we need to make any adjustments? 

Mr. MORRISON. I think they performed very well. I think that the 

only criticism I would have of them is that they are not big enough. 

They are uniquely member-driven and community-driven among 

all of the housing programs that are supported by government or 

by government-assisted entities. And in that flexibility, they have 

worked very well with community housing organizations. 

There are two things they have done that have not been done 

nearly as well by anybody else. First, to provide quasi-equity in the 

area of very low-income multi-family housing, and they have done 

that as no one else has given flexibility to developers that they 

can’t get anywhere else. 

And second, they created a single family program where matching grants with savings became the driving force. And that is one 

of the most constructive things you can do for low-income people 

who want to acquire a home is to get them in a savings program 

to build up their own equity, and to build up a pattern of savings 

so they will be able to sustain the home. 

Those are two things that they have done very well. I would like 

to see the program bigger, and I think it could be bigger. But it 

is up to Congress and the banks. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. Thank you. 

Now, the gentlewoman from New York, Ms. Hayworth? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

Mr. Costa and Mr. Zimmerman, if I could ask you, just about the 

magnitude, if you will, of the FHLB’s importance in your plans and 

your dealings with your client universe. 

If FHLB’s role were to become more limited, what would you do? 

And Mr. Costa maybe you can take this first, and then Mr. Zimmerman? What would you do as an alternative? What would you 

seek as an alternative in terms of access to funds? 

Mr. COSTA. When you say a more limited, I presume talking 

about advances? 

Certainly, it is an important part of our operation and our thinking that the Home Loan Bank is there to provide a smooth-out for 

us of—you can’t always predict when deposits will come in, how 

fast they will come in. 

As Mr. Zimmerman said earlier, deposits are flowing in now, but 

sometimes they aren’t flowing in. And investments, when they are 

there, need to be acted on. 

Things change constantly and if you are unable to act, so the 

ability to go to the Home Loan Bank, get an advance, carry out 

your project, and then as deposits come back in fund away the 

Home Loan Bank advances, helps to smooth that out. 

19 

There are other ways of doing it, but they are limited. Some of 

them are capital dependent. Some of them restrict particularly 

smaller institutions such as myself. 

We were talking earlier about the importance or lack thereof of 

the larger banks being involved. The larger banks provide the ability for the whole System to borrow at the most favorable rate. 

If they were limited or out of the System, I don’t know if the 

Home Loan Banks could perform at the same level and do the 

kinds of things they are doing. 

So I think they are vitally important. 

Would we find other ways to do it? Yes. 

Would they be as effective? I doubt it. 

Dr. HAYWORTH. Thank you, sir. 

Mr. Zimmerman? 

Mr. ZIMMERMAN. That is my thought too. Basically, I can tell you 

in the case of my bank, without the Federal Home Loan Bank, 

there is no way that I could access the money markets. 

We are $435 million. That is not even a dot on the spectrum in 

terms of—if I went to the rating agencies and said I want you to 

rate my bank, they would laugh at me. 

Basically, they can’t take the time. And so, I can’t get a rating. 

So I can’t issue a debt instrument or anything like that at my 

bank and get money at nearly the cost that the Federal Home Loan 

Bank can raise it. 

What happens is the consumers are the ones who benefit because 

when I get an advance at a very, very good rate, and I then lend 

that money out to whether it is a small business, or residential 

housing, or whatever it is, the consumer benefits from that low 

rate. 

So I am able to be more effective and pass that savings on. 

And the rest of your question is, where would I go? 

I would probably have to go to one of the larger banks. Like in 

my market, PNC Bank is the dominate player. 

I could go and offer up collateral and borrow money from PNC 

Bank, but there is no way that I would be able to get money at 

the same rate that I get it from the Federal Home Loan Bank. 

And again, I am here representing ICBA. There are over 7,000 

community banks in the United States, and most of them don’t 

have the ability to go get money in the money markets. 

You take the Federal Home Loan Bank away, all those people 

won’t have access to low-cost money. It would make us very, very 

uncompetitive. We would have a very difficult time competing with 

these larger banks that basically dominate most of the markets. 

So I can’t really emphasize how important it is to have those advances available. And for the reasons that the other gentleman 

said, to smooth out when deposits are great, that is fine. You don’t 

need advances. 

But when you don’t have the deposits, the consumers are making 

these decisions. We are not making decisions for them. The consumers decide on their own when they feel safe, and when they 

don’t feel safe. That has a lot to do with when they give us deposits 

and when they don’t. 

Dr. HAYWORTH. Thank you. 

And Mr. Chairman, I yield back. 

20 

Chairman NEUGEBAUER. Thank you. I appreciate that. 

Mr. Capuano? 

Mr. CAPUANO. Thanks, Mr. Chairman. 

Mr. Morrison, I want to follow up a little bit more on the affordable housing aspect. It is my understanding that the FHFA has 

suggested that the Federal Home Loan Bank punch up the amount 

of money put into the affordable housing program. 

Is that correct? 

Mr. MORRISON. I actually don’t know if they have done that. 

At the time that the affordable housing program was created, 

two obligations were imposed on the banks. Essentially, 10 percent 

of their earnings for the affordable housing program, and what became 20 percent of their earnings for paying down a portion of the 

Refcorp bonds that paid for the S&L bailout. Because of an accelerated schedule that was in Gramm-Leach-Bliley, they have now paid 

off that Refcorp obligation. 

A choice was made to invest those funds in a retained earnings 

account. It could have been invested in the affordable housing program or in an economic development fund similarly. 

I don’t know that anybody has asked for that to happen. I regret 

that it wasn’t done, because I think those funds were being used 

for public purposes. And they have now been diverted to essentially 

private purposes by building up the capital of the banks. 

I don’t think there is anything wrong with building up the capital of the banks, although I have questions about the capital structure. But I think that the banks were able to discharge the public 

function with 30 percent of their earnings, and I think it is disappointing that we have lost some of that. 

Mr. CAPUANO. Mr. Gibson, am I correct in my understanding 

that there has been a suggestion or proposal to strengthen the affordable housing component? 

Mr. GIBSON. In terms of the percentage, I am not aware of anything that is forthcoming out of the agency. But I could be mistaken on that. I am just not aware of it. 

What I will say is that when we made the decision to go into the 

capital enhancement initiative, we had just come through the 

greatest crisis since the Depression. I think we all learned a number of lessons, and one is you can’t have too much capital. 

And— 

Mr. CAPUANO. I have nothing against capital— 

Mr. GIBSON. Right. No, I understand. 

And so we— 

Mr. CAPUANO. But I do think that there are limits to it too, in 

a thoughtful business sense. 

Mr. GIBSON. Agreed. The other thing—and our capital—what we 

have agreed to do is take 20 percent of the profits until we reach 

1 percent of assets. So it is not like we are going to continue to 

grow that to some huge percentage number. 

The other thing I will tell you is that the 10 percent is a required 

amount, and that is the minimum. 

I know at the Dallas bank—I can only speak for what we do 

there—we exceed the 10 percent. We put in new programs all the 

time. They go beyond the 10 percent. 

21 

We just had a program approved whereby we are going to have 

a program to assist Purple Heart recipients since 9/11 who have 

come home with injuries, in order to help them rehab any housing 

that they are going into, expand doors, pull bars, things of that nature. 

So we have done things like that outside of our 10 percent commitment. 

And I can give you many other examples. 

When Hurricane Katrina hit—Louisiana is in our district. We allocated, I think it was, $5 million additional monies for that. 

So we go beyond the 10 percent. The 10 percent is just a minimum. And we do a lot of good things in affordable housing. 

Mr. CAPUANO. Thank you. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. The gentleman from Florida, Mr. Posey, 

is recognized for 5 minutes. 

Mr. POSEY. Thank you, Mr. Chairman. 

Each of you used the term ‘‘liquidity’’ extensively. And unlike the 

gentleman from New Jersey, where the answer you gave the gentleman from New Jersey, in my area, there is a lack of liquidity 

on the streets, because of a lack of a desire of lenders to loan the 

money. 

There is plenty of demand. 

We have attempted to look at shoring up liquidity. And one of 

the ways we attempted to do that is by restraining overzealous efforts by regulators. 

I won’t ask their view about that, because the bankers who talk 

to me, every single one of them without exception have told me 

how they have been beat up by regulators. But they are scared to 

death of retribution, so I can’t use their names. 

And that is understandable. There are no laws on the books now 

to stop the retribution. There are no laws on the books to stop the 

abuse. 

We have a bipartisan attempt under way to invoke a little common sense. And that is what I am going to ask for your comments 

on. 

We would like to have a loan which has never been delinquent 

in the past 6 months, even 1 day or 1 minute late, defined by the 

historical definition of a performing loan. 

And for at least 2 years to recover from this crisis, forbid the regulators from putting performing loans on an actual basis. 

They could still investigate him for fraud. They can still do whatever they wanted to do. 

They just couldn’t suck the liquidity out of the bank—like any 

negative thoughts about that you may have. 

If any of you know a downside to doing that—I am not asking 

you to support it. I would just like you to tell me if you know of 

a downside to that, while we happen to have you all here. 

Mr. ZIMMERMAN. I will start. 

I think that unfortunately, some of these problems are just going 

to take time. 

And I think the best thing, rather than getting very specific 

about what is a performing loan, and what isn’t a performing loan, 

22 

I think there just needs to be common sense at the regulatory level 

that basically says, look, these people know what they are doing. 

It is not like you wake up one morning and take a stupid pill— 

Mr. POSEY. I want to cut you off. We have had 2 years of hearings of regulators, and they say, yes, we are going to use common 

sense. But there is absolutely no forbearance. 

So if you modify a loan, it is going on that accrual. If the parents 

make a loan for their children, it is going on an accrual. 

If corporation A makes a payment for corporation B, it is going 

on an accrual. 

And if we think, in our infinite wisdom, that this hotel where you have $800,000, 30 percent loan to value ratio, that has never been 

1 day late in the 6 years, if in our infinite wisdom, we feel they 

should not be able to actually make that payment, we are going to 

put it on that accrual. 

That is what I would like you to address. 

Mr. ZIMMERMAN. To your point, there is an interesting difference 

though. In the residential lending area, the regulators are encouraging banks to forgive debt, to take funds, take a loan where they 

own $100,000 and say, if you can only afford $80,000, we will forgive $20,000 worth of the debt. And now, you owe $80,000 and we 

will reset your payment. 

That is all okay. It is not a classified loan. You don’t get written 

up for it or anything like that. 

Over on the small business and commercial side, it is exactly 

what you stated, Congressman. If you do anything that is in anywhere near that, it is a problem. 

It is a classified loan. It is an impaired loan. There is all kinds 

of extensive reporting you have to do. 

And again in those cases, they are making us classify loans that 

aren’t even delinquent. Because like you said, they feel that the 

borrower may not be able to make the payments. 

So there is a strange dichotomy where what is okay to work with 

customers, give them forbearance, get them on a repayment plan 

where they can catch up is okay on the residential side. It is not 

okay on the commercial and small business side. 

And so back to your point, Congressman, if you want to get 

things moving, I think that is an area where there could be some 

attention given. And let us make it okay to work with all the borrowers, not just some of them. 

Mr. POSEY. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Fincher? 

Mr. POSEY. I think Mr. Costa wanted to respond. 

Mr. COSTA. I just wanted to say that following up on Mr. Zimmerman, there is now coming out new TDR, troubled debt restructure, guidance. Best practices, as the regulators call it, that requires you to treat any loan with any change whatsoever in it as 

a TDR, unless you can prove otherwise. 

So that puts a pretty big damper on how everybody looks at 

things. It is an ongoing and very real problem. 

Mr. POSEY. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Tennessee, Mr. Fincher? 

23 

Mr. FINCHER. Thank you, Mr. Chairman. 

Mr. Gibson, do Federal Home Loan Banks consider risks when 

making advances? And if so, are interest rates on advances adjusted to make advances relatively more expensive for member 

banks? 

Mr. GIBSON. We are—the first thing I would say is we are a coop. And so we treat everybody equally. 

We do evaluate the risk. And where we are evaluating the risk 

is in the collateral. 

So if someone brings collateral that is not quite the quality that 

someone else brings, then we are going to loan them less dollars 

on that collateral, as opposed to the better collateral over here 

where we will loan more dollars. 

So that is where we equalize it. The pricing is the same for everybody, because we are a co-op. 

Mr. FINCHER. Less quality? What do you mean by less quality? 

Mr. GIBSON. Let us say that it is maybe not as liquid a loan. 

Maybe it is raw land. 

We may haircut that significantly more than we would a single 

family loan that is much more fungible in the marketplace, and we 

can apply a better value to. 

Mr. FINCHER. Okay. If interest rates on advances are not adjusted, are other terms altered in some way to take risk into account? 

Mr. GIBSON. Yes. If a member becomes a troubled member, we 

will continue to advance to them, as long as they have acceptable 

collateral. But the maturities begin to shorten. 

And so we do shorten those maturities. We are not going to allow 

them to take out a long-term advance. We are going to make it a 

short-term advance. 

If they become more—and when I say troubled, it could be somebody that has become a three-rated bank. They are not on the 

verge of being closed, but they certainly aren’t a one or two-rated 

bank any more. 

So there are different levels that we go to in the collateral requirements. And, yes, we do make adjustments there. 

Mr. FINCHER. Mr. Morrison? Do you have any comments? 

Mr. MORRISON. Yes. I don’t think that the way in which the 

banks manage advances is a problem. I think their credit policies 

and their monitoring of collateral are generally very good. 

And I think that kind of credit problem has never been central, 

and that is why they have never lost anything on an advance. 

There was a time when there was a conflict of interest when the 

Federal Home Loan Bank board was both the regulator of institutions, also the insurer, and also the supervisor of Federal Home 

Loan Banks. And in that world, there were conflicts and lending 

was done to support regulatory objectives. And that conflict was removed from the System in 1989. 

Since then, the banks, I think, have been very straightforward 

in there. So there are differences in pricing, but they reflect volumes of lending more than they reflect credit quality. And they cut 

people off except with consent of FDIC or another regulator when 

they go below a certain credit standard. 

Mr. FINCHER. Thank you. 

24 

I yield back, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now the gentleman from New Mexico, Mr. Pearce, is recognized 

for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

I will just address this to any one of you. When we start having 

difficulties in the regional co-op, what are the corrective measures 

that you see taking place as we get deeper into the problem area? 

Mr. GIBSON. Are you speaking at a specific regional bank? 

Mr. PEARCE. No. If we have a specific regional bank that begins 

to get— 

Mr. GIBSON. Okay— 

Mr. PEARCE. —underwater, and they begin to accumulate more 

of the loans they have given, taken, whatever that are not performing. 

So what do you see happening then to the operating unit? 

What corrective measures— 

Mr. GIBSON. There is— 

Mr. PEARCE. —has been dividends, what do they do? 

Mr. GIBSON. Yes. There are a number of things they do. First, 

they look to the primary collateral that they loaned against. Then, 

they look to the super lien status that they have for additional collateral. 

Then, they look to that member’s capital stock, because we are 

kind of the original skin-in-the-game group. And usually they are 

going to have capital stock for their activities somewhere in the 

range of 4.25 percent. 

We are going to look to that capital stock. Then we are going to 

look to the earnings in that specific bank—one of the 12. The earnings and the retained earnings to cover any issues that comes up. 

And then we look to the capital stock in that area. 

Prior to getting to that point, you would see suspension of dividends. You would see suspension of stock buybacks in that region. 

And then— 

Mr. PEARCE. Have we seen any of those things taking place? 

Mr. GIBSON. We have seen in some of the banks, yes, suspension 

of dividends and suspension of stock buybacks, that is correct. 

We have not ever reached the point where we get to the actual 

capital stock of that specific bank’s capital stock for their members. 

If it happened to go beyond that, then we jump to the joint and 

several, and we have all of those issues that we go back to among 

the 11 banks. 

Basically, the System is structured so that we should never suffer a loss at the System level, by one bank that would ever cause 

us to have to take any taxpayer funds. And we have never had to. 

Mr. PEARCE. There is the possibility, though, that causes us to 

ask questions up here. 

Mr. GIBSON. No, I understand. 

Mr. PEARCE. Mr. Zimmerman, you said that there is no other access to capital. If you took at a look at the entire System, all 12 

regional banks, how much dollars and margin, how much profit, if 

you want to call it that, did they have at their peak period? 

Forget right now because we are kind of in a strange period, but 

just roughly. 

25 

Mr. ZIMMERMAN. Congressman, I don’t have that information 

readily available to me. 

Mr. PEARCE. Is it $1 billion, $10 billion, $100 million— 

Mr. ZIMMERMAN. It is just that the System ran—I can tell you 

that the System ran very profitably and allowed reasonably large 

sums of money to go into affordable housing and things like that. 

Mr. PEARCE. But it ran very profitably. 

Mr. ZIMMERMAN. Yes— 

Mr. PEARCE. —which is the key in— 

Mr. ZIMMERMAN. Right. 

Mr. PEARCE. So with all due respect, if—and you are saying that 

you couldn’t find this liquidity, you are saying, let us say it is $1 

billion. 

You don’t think there are enough players out there that would 

go after $1 billion net profit if the regional banks were not there. 

That is— 

Mr. ZIMMERMAN. I think I had better understand— 

Mr. PEARCE. Okay, sorry. 

Mr. ZIMMERMAN. In my case, I could borrow money from somebody besides the Federal Home Loan Bank. I think the key point 

is I can’t borrow it at that low of a rate. So let us just say the 

Home Loan Bank will lend me money and we will forget about today’s rates, because they really don’t really make a lot of sense. 

But let us just say that they would lend me money at 4.5 percent. It is very likely that if I went to PNC Bank, with essentially 

the same collateral that I used with the Federal Home Loan Bank, 

I could pay 100 or 200 basis points more for the same money. 

And then again, what happens is when I lend that money to my 

borrower, I have to charge them a higher rate. So it is— 

Mr. PEARCE. Okay, I understand where you are going. Let us 

back it up. 

But you are dealing in a System that has a market player in that 

slot? 

Mr. ZIMMERMAN. Right. 

Mr. PEARCE. You are telling me that if the FHLB was not there, 

that you don’t think that you would want to find that $1 billion 

worth of profit and go organize a group to slide in there and loan 

at the same things, make the advances at the same rate. 

I just don’t— 

Mr. ZIMMERMAN. I don’t think I could form a group that could go 

into the money markets and be a AAA borrower, and get money at 

the rate that the Federal Home Loan Bank can get it. I think that 

is the rub here. 

You can go in and get funds, depending on the size and scale and 

things like that. But the key issue here is this AAA or really AAA 

rating. 

Mr. PEARCE. Yes— 

Mr. ZIMMERMAN. And you can’t replicate that. Forming a group 

or another co-op probably wouldn’t have the same high credit quality. And my guess is that it wouldn’t be able to raise money at 

those extremely low rates. 

Mr. PEARCE. Yes, okay. 

I see my time has expired, Mr. Chairman. 

26 

At the end of the day, you have to ask if it won’t happen in the 

market, why are we guaranteeing it from taxpayer funds? 

I think that the model sounds like it makes money. I think that 

somebody would open up. But we really do—I am one who hates 

that we are sitting here bailing out Fannie Mae and Freddie Mac. 

Mr. ZIMMERMAN. But remember, the group we are talking about 

was not bailed out. They have never taken a dime— 

Mr. PEARCE. No, I understand— 

Mr. ZIMMERMAN. —from the government. And remember, the 

money the customers, the American citizens, actually benefit from 

this because all of our customers, all the community banks that are 

making loans out there every day using Federal Home Loan Banks 

as the source of funds, those loans we make are at lower rates. And 

so there is all every day citizens, every day benefiting from the fact 

that this System exists, that this co-op— 

Mr. PEARCE. I don’t take issue with that. We have had to look 

at that implicit guarantee. I think that is—thank you, Mr. Chairman, I have extended too long. 

I am sorry. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from New Jersey, Mr. Garrett? 

Mr. GARRETT. Thanks, Mr. Chairman, and I thank the panel. 

I have heard everyone say what a good job the Home Loan Banks 

have done. And I agree that they have done well and weathered 

the storm well. 

And to the point, Mr. Gibson, both here and in your written testimony, you said the same thing, that things are going well. 

But we do note some notable exceptions out there and we read 

about in Chicago and Seattle and Des Moines and elsewhere where 

they are having problems. 

So maybe there is some room for improvement. I know in your 

testimony you talked about how you have a little bit of a push back 

to what the Administration has said, and the FHFA has said as far 

as their recommendations. 

So if you push those aside, do you have any recommendations for 

improvements to the Federal Home Loan Banks? 

Mr. GIBSON. I think you have to—the one thing I would say is, 

yes, I acknowledge that a few of the banks do have some issues. 

Those issues are primarily related to the private label mortgagebacked securities which were AAA rated at the time they were 

issued. They are working though those issues. 

The System has remained profitable throughout this. 

In terms of recommendations to improve the System, there are 

always opportunities. Nobody is perfect. 

So, yes, there are opportunities. 

But what we would encourage is that the model and the structure be looked at carefully because it is very interdependent. And 

if you change one thing it could have unintended consequences 

somewhere else, and maybe not prove to be quite as successful as 

we move through all these different economic cycles. 

Mr. GARRETT. Okay, I get that. And if you have any specific ones, 

we would love to have—myself, and I am sure the committee as 

well. 

27 

Does anyone else have any specific recommendations that you 

would like to set forward today? 

Yes. So one of the reasons might be because I think in your testimony you say that well over the history, there haven’t been any 

losses with regard to the advances, right? 

Mr. GIBSON. That is correct. 

Mr. GARRETT. Now my understanding, and that might be in part 

because vis-a-vis the FDIC—what you all have, is what, a super 

lien position, right? 

Mr. GIBSON. That is correct. 

Mr. GARRETT. But for that super lien position, when you have 

some of these larger loses where the FDIC had to step in such as 

IndyMac, in which case what, the taxpayer effectively is on the 

hook there. 

For example, let us use that one. Had you not had—not you— 

but not had the super lien position, would there have been losses 

absorbed by the member banks as opposed to the FDIC and the 

taxpayer? 

Mr. GIBSON. I think the key there is that we only loan against 

quality of collateral. If the quality of collateral is not there, we 

don’t loan against it. 

Mr. GARRETT. At IndyMac, there was significant 

overcollateralization, right? That was the problem, 220 percent. 

And so with the in that case, I guess it was the problem. 

Mr. GIBSON. Had we— 

Mr. GARRETT. I know— 

Mr. GIBSON. Yes, they are— 

Mr. GARRETT. I get you. 

Mr. GIBSON. —they are not in my footprint, so I don’t know all 

the particulars about IndyMac. But my guess is that if we did not 

have the super lien position, and we simply had the specific collateral that the number of advances would have dropped precipitously. 

The reason IndyMac closed in the end was not credit, it ended 

up being a liquidity run. We are required by statute to work with 

their primary regulator when they run into those liquidity issues. 

The Federal Reserve, by law, cannot loan to a five rated bank. 

So, the Home Loan Banks are the only option. 

And, one of the things the FDIC does well is arrange orderly liquidations. We are the only source to be able to help the FDIC arrange orderly liquidations. 

Mr. GARRETT. So the FDIC position of the super lien is beneficial 

to the FDIC? 

Mr. GIBSON. I do not know what the FDIC’s position is. 

Mr. GARRETT. I wouldn’t— 

Mr. GIBSON. But I would say— 

Mr. GARRETT. —I wouldn’t think so. We are talking about another area where they accuse us of trying to set up a super lien 

position. And they don’t usually like that. 

Mr. GIBSON. But I would say that we only loan against quality 

assets. We do not encourage bad lending. Because if you— 

Mr. GARRETT. I understand. 

Mr. GIBSON. —have bad lending, we are not going to loan you 

any money against it. 

28 

Mr. GARRETT. I will throw it to Mr. Morrison on that point, and 

also—I see my time is just about wrapping up—as far as how do 

you put the subsidy onto the balance sheet which it seems would 

be something that you would be favorable doing, right? 

Mr. MORRISON. Yes. I would say first, I think you are absolutely 

right in your analysis that the super lien does shift the burden of 

the loss to somewhere else. And that is why it was passed in 1987 

because the S&Ls had losses. 

And there was a decision to benefit the banks over the insurance 

fund. 

Mr. GARRETT. I get that. 

Mr. MORRISON. And so that conflict does exist. 

I think the banks are not profitable lenders. I think that it is a 

rare case where this problem arises, but it does arise. And they 

have had some very big failures like WAMU. 

So this is a real issue in terms of the FDIC. If you ask anybody 

who has been in a credit competition with the FDIC, you will find 

out that the FDIC has very powerful statutes. And you may have 

perfected loans and you may find out that you are not perfected. 

So there is a reason for it. It is a practical matter. 

I wouldn’t suggest that you change it. But I would just suggest 

that the rhetoric about never having a loss is sometimes stated 

with a little bit too much force. 

And in terms of the guarantee, I don’t think we should have, as 

a country, pledges on behalf of the taxpayers that are not funded 

up front. And I think there is an argument for having explicit guarantees. 

People can disagree about that, but if you are going to have 

them, I think you ought to have to pay for them up front like we 

pay for FDIC up front. 

And so I think that either you make it explicit, you score it, and 

you collect money for it, or you shouldn’t have a guarantee. 

And that takes you back to what Mr. Zimmerman was talking 

about. Could you have a private System that would work? Or is the 

margin that is the benefit of the implied guarantee—or the 25 or 

50 basis points gained in the marketplace—what it takes to make 

the System run. 

I don’t know the answer to that. I think it would be a scary experiment because you might lose the community bank focus. 

But I think that if you are thinking about explicit guarantees, 

you ought to think about community banks. And you ought to 

worry a little bit about Wells Fargo, and Bank of America, and all 

these other large institutions which are perfectly good institutions, 

but also represent a big piece of the balance sheet of the Federal 

Home Loan Banks, and should they get the subsidy. 

Mr. GARRETT. Thanks. I appreciate that. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now, the gentlelady from California, Ms. Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I want to ask a question that you may not feel is directly related 

to what you do. But I am concerned about all of these REOs out 

there. 

29 

Right now the banks have on their books thousands upon thousands of Real Estate Owned properties, or REOs, similarly between 

FHA, Fannie Mae, and Freddie Mac. 

The government owns about 300,000 REOs. 

Do you have any thoughts about the best way to dispose of these 

assets? 

Do we need to create something like the Resolution Corporation? 

And is there a role for the Federal Home Loan banks to play if 

such an asset disposition structure was created? 

Anybody? Somebody? 

Mr. ZIMMERMAN. Again, you asked, so I think that it would be 

very difficult to set up an organization and to fund it and staff it 

and so forth. The amount of expense and the delay in time of trying 

to do that, until you actually got a result, would be very, very difficult. 

I, unfortunately, think—and I touched on this a little bit ago— 

that it is going to take more time because the market needs to 

work. And these properties need to work their way through. 

Unfortunately, there were a lot of people who got houses, bought 

homes not for the right reasons necessarily, and so those are out 

there. They couldn’t afford them. Now, they are an REO, as you are 

pointing out. 

And it is going to take a while for the market to absorb that, but 

the market will absorb it. It will work its way through. 

And it is just like trying to accelerate that by creating some kind 

of other structure like the Resolution Trust Corporation, I think 

would have problematic results, because— 

Ms. WATERS. But let me ask you this. Over the past several 

months, I keep hearing about groups that want to purchase all of 

these nonperforming assets. 

And they say, ‘‘We want to rehab them. We want to keep people 

in them. We will rent and maintain them as rental units. And then 

we will have rent-to-buy.’’ 

We think that it made good sense to take these nonperforming 

assets and turn them into performing assets. 

And they keep talking about how they have the money, that they 

have individuals who have come together who have put together a 

pot of money to do this. And I hear nothing from anybody about 

a response to this. 

Have you been hearing this? 

It is something like what PennyMac did after the guys left from 

over at the bank that was purchased—Countrywide. Remember 

when Countrywide—? 

Some of the guys who were high up in Countrywide, they first 

left and they created something called PennyMac. And they were 

supposed to do this kind of thing. 

And then I heard nothing. It just kind of fell apart. 

Mr. ZIMMERMAN. I think it is a viable solution. 

If there are groups and they want to buy assets—and I can tell 

you, again, from personal experience, if a group came to my bank 

and said they wanted to buy my real estate-owned properties from 

me in a group, I would tell them I would meet with them anytime, 

anywhere, to talk about—seriously—because if they have money 

and they want to do it—because I am a banker. 

30 

I don’t manage properties. I don’t rehab properties. I am not an 

expert at that. I don’t know exactly the best way to do that. 

So if I could give it to somebody who can— 

Ms. WATERS. It has to be discounted though. 

Mr. ZIMMERMAN. They do. And of course, then it becomes the 

price. 

And so my suspicion is that some of the groups that you may be 

hearing from want to buy some of these properties at such deep 

discounts that you just can’t let the properties go for that price. 

Ms. WATERS. But it is negotiable isn’t it— 

Mr. ZIMMERMAN. Giving them away. 

Ms. WATERS. Can’t you negotiate that? 

Mr. ZIMMERMAN. Yes. 

Ms. WATERS. Given that you have all these properties that are 

underwater anyway, they are not what they were when the mortgages were written on them. 

There seems to be some room here— 

Mr. ZIMMERMAN. There is— 

Ms. WATERS. —in order to write this down, that people could 

come to some agreement. But I see no movement in this direction 

anywhere. 

Mr. ZIMMERMAN. And all I can tell you from the bankers’ perspective is that we are not experiencing people coming to us with 

real money wanting to do this. I can personally say no one has approached us— 

Ms. WATERS. Can I send you some people who keep coming to 

me, telling me about these? 

Mr. ZIMMERMAN. I can’t— 

Ms. WATERS. So you can hear their stories. 

Mr. ZIMMERMAN. I have some real estate owned, and I would love 

to talk with them, so send them my way. 

Ms. WATERS. All right. I need to get rid of them, bugging me, because I don’t know what to do about it. 

Mr. MORRISON. Congresswoman? 

Ms. WATERS. I am sending them to you. 

Mr. MORRISON. Congresswoman? 

Ms. WATERS. Thank you. I yield back the balance of my time. 

Mr. MORRISON. Congresswomen, let me just make a comment. 

I was around here when we did RTC and RTC worked. It was 

under a Republican President, so it is not some left-wing idea. 

It is something that requires a mandate. And it is not going to 

work voluntarily. Quite frankly, all of the emergency mortgage relief programs that we have had have operated on a voluntary basis, 

and they frankly haven’t worked. 

And it is unfortunate because we have a lot of Americans suffering. So the question is, is there enough consensus up here to create a mandatory solution? 

If there isn’t that consensus, then you are going to rely on the 

market to come up with a solution. And I frankly think that is 

where the problem is. 

Ms. WATERS. Thank you. 

Chairman NEUGEBAUER. We are going to do another round as 

Members would like to do that. 

So I am going to start. 

31 

One of the recommendations recently from Treasury, as it relates 

to the Federal Home Loan Bank System, was that some of the larger banks are taking advantage. We have had a lot of emphasis on 

community banks. And I come from an area where we have more 

community banks than we have large banks. 

But I think, Mr. Morrison, you alluded to this—is why should 

these guys that would be your alternative if there wasn’t a Federal 

Home Loan Bank, why should they be eligible to come in and leverage off of the borrowing rates or the home loan System. 

Because I understand, and I don’t have those numbers in front 

of me, but I think when I was getting briefed that 70 percent of 

the advances or maybe 80 percent of the advances or to about 20 

percent of the members and that there is—of those numbers, a lot 

of large banks. 

So what is the benefit of letting the large financial institutions, 

is the Treasury Secretary made sincere, maybe not value add? 

Mr. GIBSON. I will be glad to start on that one. 

First, it is mission-consistent. One of the missions of the Home 

Loan Bank is to provide funding for housing. 

Our top 10 borrowers, which I think would encompass the large 

banks that we are talking about, represent 38 percent of the borrowing at the end of June 30th, I believe. 

These institutions represented 68 percent of the mortgage originations in 2010. So it is definitely mission-consistent. They are 

heavily involved in housing in this country. 

Second, they act in the scalability issue to reduce the cost for 

community banks. And they do that in a number of ways: one, by 

having the spread on the advances that are out there; and two, 

they allow us the access to the global markets. 

The global markets wouldn’t be as deep and as liquid for the 

Federal Home Loan Banks without the size of the issues that we 

have outstanding. The earnings that they help provide build the retainer and help build the capital structure. 

And then the last, and I think one of the really key things is that 

we have, in the mechanism, built-in corporate governance structure 

that does not allow them to have a disproportionate voting. We 

take the total number of members in a State, the total number of 

shares, and we divide that, and that is the maximum number of 

shares any institution can vote. 

So in my case, Southside typically would have about 200,000 

votes. I am limited to 30,000. And that is the maximum that anybody has of any of the large institutions. 

So I think it is critical that we keep the large members because 

it acts to help the small community banks and provide the affordable lending all through the entire country. 

Chairman NEUGEBAUER. Mr. Costa, and I think, Mr. Zimmerman, you both said that when you are able to borrow at a cheaper 

rate from your advances, that you had that opportunity to pass 

that along to your customers. 

The question is, is the advance rate at all of the 12 Federal 

Home Loan Banks or is it the same rate, in other words if I was 

going to borrow from, say, Chicago, and I was going to borrow from 

Dallas. Would I be paying the same rate if I am a bank? 

32 

Mr. COSTA. I do not believe that the rates are exactly the same. 

The rates are probably fairly close, but each of the banks price 

their own advances. We don’t get involved in price-setting or anything of that nature. 

So each of the banks do have a little bit different pricing, but all 

the banks provide funding at a competitive level, because if they 

go too far outside the bounds, then there might be another source 

for one specific type of borrowing that they could borrow. 

But no, I don’t believe they are all exactly the same. 

Chairman NEUGEBAUER. And don’t we have banks that are multiple members of a number of regional banks, that they are not just 

a member of one? 

Mr. GIBSON. We do. And in the case—some of these top 10 borrowers may belong to 2 or 3 different member banks. And that actually acts, once again it goes back to the concentration risk. The 

risk is spread among several banks, and there are several bank 

management teams looking at those. 

Another key benefit is that if the large bank happen to be represented in one area, then all the profits from that and the affordable housing dollars would only flow to that one area, when most 

of those banks have tentacles that reach all across the country. 

So it helps to spread the costs and it also helps to spread the 

benefits to the members all across the country. 

Chairman NEUGEBAUER. Would anybody else like to comment on 

that? 

Mr. MORRISON. Yes, Mr. Chairman. I would say everything that 

Mr. Gibson said is correct. 

But there also is a substantial subsidy that is flowing to the largest banking institutions in the country. And that is a policy judgment for the Congress. 

In my written testimony, I suggested a way to square that circle 

to allow those institutions access when there is a very specific kind 

of illiquid asset being supported, as opposed to just supporting the 

liquidity of those very large institutions. 

There are benefits in terms of pricing, and there are benefits in 

terms of disciplining the System. Probably it would be better if all 

of the big institutions were spread around the 12 banks and there 

wasn’t any competition for getting the big members in. 

But it is a value judgment at the end. And I think that many 

Members here in other contexts, if they saw the subsidy to the particular institutions, would be disquieted by it. And I think people 

should at least understand it and decide whether or not they want 

to target it better. 

Chairman NEUGEBAUER. Thank you. 

You are recognized, Ms. Hayworth. 

Dr. HAYWORTH. Gentlemen, as you know, the Financial Services 

Committee spends quite a bit of its time, rightly so, on DoddFrank. And I am wondering what, if any, anticipated burdens you 

see on yourselves, on community banks, on the relationship or the 

functioning of the relationship you have with FHLB or the functioning of FHLB related to Dodd-Frank? 

I will throw that out to all the members of the panel. 

Mr. GIBSON. I will start. 

33 

Dodd-Frank—it is hard when you go through a crisis like we 

went through, it is hard to say, ‘‘Gosh, we don’t need any additional 

regulation.’’ 

I think there needs to be a cost-benefit analysis, though. In the 

case of the Home Loan Banks, our regulatory costs have tripled in 

the last 10 years. 

I guess what I would say is we need to make sure we have smart 

regulation, not just additional regulation. So I would just leave it 

at that. 

The costs are just going through the roof. And they are going 

through the roof at my community bank also, and I will let the 

other gentlemen speak to their instances. 

Mr. ZIMMERMAN. Yes, I can pretty much ditto that. 

If you wonder about a concern to get the economy moving, one 

of the big concerns is can we afford all the regulation that we are 

supposed to be able to handle and buck up to? 

Because more and more and more doesn’t mean we are going to 

prevent a problem or whatever. And I totally support the idea that 

there should be smart—you have to have regulation. 

But we are regulating community banks particularly down to the 

point where there is barely room to breathe. That is not how you 

get the economy going. And that is not how you lend money out. 

Mr. MORRISON. I just have to take a moment of personal privilege to say that the tripling of the regulatory cost of the bank System came precisely after I left my job as chairman of the Finance 

Board. 

Perhaps because when I was chairman, and I got to set how 

much we were going to charge, I had experience up here, and I 

couldn’t imagine just willy-nilly increasing the cost without having 

a sense of accountability. 

I, frankly, think that the regulatory costs that have been imposed on the bank System have been unnecessary at the scale at 

which they have been increased because the regulatory focus 

should, I think, be more targeted. And it probably shouldn’t cost 

quite so much as it does. 

It is easy when you are in the business of both setting the spending and the taxing to do what is easy and comfortable, and increase 

both. But I think Members up here would have a different view if 

they were sitting in the Chair. 

Mr. COSTA. I would just like to say, as the smallest guy up here, 

our bank is probably the average size ABA member out of all the 

banks. And the regulation doesn’t take into account at all the size 

of an institution. 

So the need for me to comply is really burdensome because of my 

size. It costs me just as much money to comply as it does a $3 billion bank, relatively speaking. And we just don’t have the room for 

that. 

So it has become a real burden for the average size community 

bank across the country, not just me. 

Every time I go to a meeting, whether it is here or in some other 

part of the country with the ABA, everybody is saying the same 

thing, ‘‘This is killing us. Where does this end? How do we do this?’’ 

They don’t know how to do it. 

So it is a real problem. 

34 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

I yield back. 

Chairman NEUGEBAUER. Mr. Posey? 

Mr. POSEY. Thank you, Mr. Chairman. 

I believe Mr. Morrison hit the nail on the head when he said the 

solution is more about accountability than it is new regulation. 

Ken Lay, for plundering Enron, went to prison. Bernie Madoff, 

although he had to basically turn himself in because the SEC 

wouldn’t track him down, ended up in prison. 

I am sure there were some people in financial institutions who 

were, at the very least, culpably negligent in causing a great harm 

to this economy, to this country. 

To my knowledge, although I hear whispers and rumors of investigations, nothing has surfaced yet that has been significant. There 

has been no accountability for the wrongdoing that they did to 

harm their stockholders, their employees. 

One would think—I think the common prudent person on the 

street would think that certainly that would be considered racketeering, certainly they had to use telephone, mail, other ways of 

communicate more than one thing. And somewhere, we have some 

people going after the people who perpetrated these great damages 

and inflicted this great financial injury on our country and our citizens, tracking them down and trying to bring them to justice. 

I think that is the final accountability. I don’t think when we 

have talked about it before, were to be ever smart enough to have 

a law to stop somebody from profiteering in every conceivable manner. 

It is just the law of probability that says it’s moot. But history 

has shown—and if we had time we could walk through the instances that when there was prompt and severe punishment for 

what these people have done, that stops the practice from repeating itself more than anything else. 

So I am sorry for the regulations that you all have to suffer as 

we try and overcompensate for having not done the right things in 

the beginning. But I don’t think all the regulations in the world are 

going to stop the bad guys from scheming and trying to take advantage of honest people and honest companies. 

I think the only way we are going to do that is when we hold 

them accountable for that. 

So any comments you have on that would be appreciated. 

Mr. ZIMMERMAN. I couldn’t agree more. It is this idea of when 

you look at where the problems were and then what the solution 

is, when you have all this regulation—and we are here speaking 

as community banks, and I think it is reasonably well-established 

now. 

There is a pretty bright line between the big banks and the community banks. And the ones that caused the problem, go ahead and 

go after them. 

But what is happening is one-size-fits-all regulation is happening. And we are expected to bear the cost, even though we 

didn’t cause the problems. 

And so there needs to be some kind of System where the people—let us go after the people who caused the problem. But don’t 

35 

keep adding more and more regulations onto the people who didn’t 

have anything to do with it and expect us to pay for it. 

Because when the bank down the street closes in a small town, 

and they have to merge with a larger company because they can’t 

afford the cost of regulation, the people in that area are hurt. The 

American citizens are hurt. And it is just not right. 

Mr. POSEY. We have tried to make that point to the people who 

are trying to eliminate the 3 percent FHA downpayment loan, saying it would take the government off the hook. 

But for 60 years that has worked. There has been a 0.5 percent 

MIP that has covered that. And by changing the game now, you 

only hurt the next generations of homebuyers. 

You hurt the innocent people. You don’t do anything to make the 

guilty pay. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now, the gentlewoman from California? 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I was just looking at some of the information that was provided 

to us. We have a paragraph here that says, ‘‘During the financial 

crisis, as other sources of funding dried up, financial institutions 

turned to the Federal Home Loan Banks for advances for much 

needed liquidity. These advances may have kept some financial institutions from collapsing and may have delayed the failure of others long enough to allow merger or acquisition of another financial 

institution.’’ 

My first question is—we witnessed the closure of many community banks. The FDIC was closing them so fast they couldn’t keep 

up with them. 

And of course, we know that one of the problems of these small 

banks is access to capital. This is what we hear all the time. 

I want to know, in all of these financial institutions that you 

saved, what percentage or portion of those Federal Home Loan 

Banks were small or community banks or minority banks? That is 

number one. 

Number two, let me just say that there is a great deal of sympathy and support for community banks on the Financial Services 

Committee, on both sides of the aisle, and I think in this Congress. 

As you know, during the Dodd-Frank Conference Committee, we 

looked at getting rid of an overabundance of auditors being in one 

bank at the same time. You hear a lot of us talk about the capital 

requirements. We would like to make sure that community banks 

are not overburdened with capital requirements that banks basically hamper them. 

So on the latter part of this commentary, what are the specific 

regulations, would you advise us, that need to be eliminated or 

modified in some way? 

So that is two questions. Who got saved? 

How many community banks got saved? 

Why are they still screaming about access to capital? 

And what regulations could you identify specifically to tell this 

working group of members on both sides of the aisle, that I am 

speaking for, even though they didn’t tell me I could speak for 

them—to help with the regulations problem? 

36 

Mr. GIBSON. I will start. I don’t know the exact percentages, but 

I will tell you that the large institutions have always been considered too-big-to-fail. So I don’t think that we were saving large institutions. 

My guess is that the vast majority, if not all, were small community institutions that did not have that access. When the Treasury 

Secretary and Chairman Bernanke were in Washington meeting 

with bankers during the crisis, I don’t think they were meeting 

with small community bankers. They were meeting with the big 

guys trying to figure out how to save them. 

There is nobody out there when a community bank—any of the 

three of our community banks gets in trouble, there is nobody 

going to come help us. And so the liquidity provided that saved the 

banks would—my guess is, and I can get you the information, 

would have been the smaller banks. 

In terms of regulations, the— 

Ms. WATERS. Are you saying the Federal Home Loan Banks did 

the advances to the small and community banks? 

Mr. GIBSON. I am saying that when liquidity dried up, and two 

things happened, especially in the third quarter of 2008. Liquidity 

went away for everybody. 

Ms. WATERS. Yes. 

Mr. GIBSON. And the ability to raise capital went away for everybody. Fortunately, the way the System works in the Home Loan 

Bank, we have a self-capitalizing model, and we were able to provide that liquidity. 

So as long as a bank who may have needed liquidity could give 

us the capital and had the assets on balance sheet, we were able 

to give them the liquidity. And they would not have been able to 

get that anywhere else. 

Ms. WATERS. Do you feel that your collateralization requirements 

are so awesome that some of the community banks could not apply 

for or be considered for advances? 

Because I understand they have to offer— 

Mr. GIBSON. Sure. 

Ms. WATERS. —an abundance of collateral for you guys. 

Mr. GIBSON. They have to offer quality collateral. And in some 

cases, some banks reached a point where they had made so many— 

and it was a small segment fortunately. But some of them had 

made so many bad loans that yes, there probably were instances 

where we just couldn’t advance additional advances. We never took 

the advances away from those institutions. 

But for those who were teetering because of a liquidity crisis, we 

were able to advance funds to those folks because for the most 

part, they had quality assets. They just didn’t have any place else 

to go to get liquidity. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

Ms. WATERS. Thank you. 

Chairman NEUGEBAUER. Mr. Capuano? 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Gentlemen, let me ask you if you agree. I see the economic crisis 

having been—no one person or one group is to blame. 

37 

It is all of us, if you want the truth. But if I had to point to one 

person or one group, it would be the unregulated financial institutions that really went the craziest. 

And it wasn’t the—the regulated did some too. But the truth is 

if they had just held all the problems that we did have just within 

the regulated institutions, big and small, that we could have handled that without much of a problem. 

It would have been a minor problem to some people, but not to 

the economy as a whole. The economy as a whole was shaken, in 

my opinion, because the unregulated institutions. 

I guess the only thing I want to say is I wanted to follow up on 

what Maxine said. I want to be really clear. 

I am a liberal, progressive, whatever you want to call me. I believe the government has a role to play in drawing lines, saying, 

‘‘You can’t cross this line,’’ for a lot of people. 

The classic one is that you can’t murder anybody. We don’t say 

you can’t murder anybody because we think everybody is going to 

murder somebody. 

It is just if you do, there is a consequence to pay. 

And I look at regulations for the most part, not just with banks 

but all regulations, as the same thing. 

At the same time, I was going to say I am the most liberal person in the room, but I don’t want to offend Maxine, so— 

[laughter] 

I am not for overregulation. And I represented all the banks in 

Massachusetts for about 7 years. 

So I understand what you are saying, but honestly the problem 

I have when my banking friends come in and say—and again, not 

just banking, but bankers in this committee—when they say, ‘‘Oh, 

there is too much regulation. Help us.’’ 

Now some of my friends here and I may have a difference of 

where the line should be drawn. That is fine. 

But I have no interest whatsoever in driving up your costs on unnecessary, duplicative regulation. That is stupid. I am not interested in that. 

At the same time, I need to know exactly what you mean. Today 

is not the day to do it. 

So especially the groups, the ABA, the ICBA, and others, come 

in and talk to us. And not about, ‘‘Oh, there is too much regulation.’’ That is great, but that doesn’t help me answer the problem. 

And I do hear on occasion—I have been here for 13 years. I do 

hear on occasion someone will come in about one specific regulation. It is usually about a proposed regulation that they don’t like. 

But I have never had a group come in to me and say, ‘‘Hey, Mike. 

Here are the 25 regulations that are killing community banks. And 

look, we don’t need them. Here is why we don’t need them.’’ Not 

just, ‘‘We don’t like them.’’ 

The truth is nobody likes—I would like to go do anything I want 

to do any time I want to do it. But I think everybody agrees that 

there is a need for some thoughtful, reasonable regulations. And 

not because we think you are going to break the law, but because 

we hope you don’t and we want to make sure you know where it 

is— 

38 

It is also for competitive reasons, which is I think what got us 

in trouble, is that without regulation the human nature of competitiveness is once you start doing something, I had better start doing 

it if I want to compete with you. 

And it just becomes unsustainable. So for me, regulations are 

about saying, ‘‘Here is the line. Nobody can cross it. And therefore 

everybody is on an equal playing field.’’ 

So I guess what I am saying is please, from the organization’s 

standpoint, not here, not today, come in with a thoughtful, comprehensive proposal on how we can go about—with the reasons. 

Okay, we don’t like this regulation. This is why, or, you don’t 

have to have this because we have to do the same thing here, or, 

we have to do this form for this agency and this one. It is the same 

form. Make them the same. 

Those kinds of things help me try to help you. 

Now again, we will probably have disagreement of where the line 

should be, but at least we will know what we are arguing about. 

And I will simply say that when people come in and say there 

is too much regulation, it is a good political sound bite but it 

doesn’t help the System. 

And in the end what ends up happening is you end up having 

lots of regulations that are not enforced—which I also think is 

probably one of the biggest problems we have. And you have regulators who are afraid to regulate. 

And you end up with nothing. And we end up with an economic 

crisis like we have now, and then you get an overreaction. 

So for me, before we get too far down that road, I am begging 

you again, the associations, come in and talk to us about details 

and specifics and how we can move forward. Because even those of 

us who don’t mind regulation, most of us—I am not interested in 

overregulation. 

That is not good for business. That is not good for government. 

It is necessary in any way I can see it. And so therefore I am not 

against regulation, but I need help in trying to determine exactly 

where we should draw it. 

Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

This has been a very good hearing. I appreciate the witnesses. 

I think we have had some good interchange. We had good participation from our membership today. 

As you know, as we begin to try to reinstall and restart the private mortgage finance business in this country, the whole chain is 

going to be an important part of that. 

And as we also try to figure out a way in the future of trying 

to decouple the taxpayers from picking up the tab when people 

make bad investment decisions, obviously that is going to be an important part of the discussion. But I thank the witnesses for your 

time today. 

The Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

39 

So what that really means is some of our folks may want to follow up. We would appreciate your response. And then we will make 

your responses, again, part of the record. 

And I thank the panel. 

And with that, this hearing is adjourned. 

[Whereupon, at 2:58 p.m., the hearing was adjourned.] 

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A P P E N D I X 

October 12, 2011 

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