[Federal Register Volume 62, Number 26 (Friday, February 7, 1997)]
[Notices]
[Pages 5828-5831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3191]


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FEDERAL HOUSING FINANCE BOARD


Hearings on Pilot Programs Recently Authorized To Be Established 
at the Federal Home Loan Banks (FHL Banks) of New York, Atlanta, and 
Chicago, and the Provisions in the Financial Management Policy (FMP) 
Governing Investments Supporting Housing and Community Development

AGENCY: Federal Housing Finance Board.

ACTION: Notice of public hearings.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is hereby 
announcing a public hearing on pilot programs recently authorized to be 
established at the Federal Home Loan Banks of New York, Atlanta, and 
Chicago and the provisions of the FMP governing such activities.

DATES: The public hearing will be held on Monday, March 10, 1997, 
beginning at 9:00 a.m. Written requests to participate in the hearing 
must be received no later than Wednesday, February 19, 1997.

ADDRESSES: The hearing will be held at the Office of Thrift Supervision 
Amphitheater, 1700 G Street, N.W., Washington, D.C. 20552. Send 
requests to participate in the hearing, written statements of hearing 
participants, or other written comments to Elaine L. Baker, Executive 
Secretariat, Federal Housing Finance Board, 1777 F Street, N.W., 
Washington, D.C. 20006. The submission may be mailed, hand delivered, 
or sent by facsimile transmission to (202) 408-2895. Submissions must 
be received by 5:00 p.m. on the day they are due in order to be 
considered by the Finance Board. Late filed, misaddressed, or 
misidentified submissions may affect eligibility to participate in the 
hearing.

FOR FURTHER INFORMATION CONTACT:
Kerrie Ann Sullivan, External Affairs Specialist at (202) 408-2515 or 
John K. Hardage, Deputy Director of Congressional Affairs at (202) 408-
2980, Federal Housing Finance Board, 1777 F Street, N.W., Washington, 
D.C. 20006.

SUPPLEMENTARY INFORMATION: The Finance Board is interested in the views 
of System members, community groups, trade associations, federal or 
state agencies and departments, elected officials and others on the 
pilot programs recently authorized to be established at the Federal 
Home Loan Banks of New York, Atlanta, and Chicago, and the provisions 
of the FMP governing such activities. A summary follows:.

In General

    As provided by the Financial Management Policy (FMP) of the Finance 
Board, the FHLBanks may invest in housing and community development 
assets, provided that prior to entering into such investments, the 
FHLBank:
    (a) Ensures the appropriate levels of expertise, establishes 
policies, procedures, and controls, and provides for any reserves 
required to effectively limit and manage risk exposure and preserve the 
FHLBank's and the System's triple-A rating;
    (b) Ensures that its involvement in such investment activity 
assists in providing housing and community development financing that 
is not generally available, or that is available

[[Page 5829]]

at lower levels or under less attractive terms;
    (c) Ensures that such investment activity promotes (or at the very 
least, does not detract from) the cooperative nature of the System;
    (d) Provides a complete description of the contemplated investment 
activity (including a comprehensive analysis of how the above three 
requirements are fulfilled) to the Finance Board; and
    (e) Receives written confirmation from the Finance Board, prior to 
entering into such investments, that the above investment eligibility 
standards and requirements have been satisfied.

New York

    The Federal Home Loan Bank (FHLBank) of New York has been 
authorized to establish a $250 million Community Mortgage Asset 
Activities pilot program. Under the program, the FHLBank will purchase 
from members participation interests in one-to-four family residential, 
multifamily, construction, and community development mortgage loans 
that would benefit families and neighborhoods meeting the income 
targets established for the Community Investment Program (CIP)--that 
is, housing for families whose incomes do not exceed 115 percent of 
median income for the area, and loans to finance community and economic 
development projects in neighborhoods where 50 percent of the residents 
earn at or below 80 percent of the area median income.
    The FHLBank's objective is to enhance the capacity of its members 
to meet underserved community financing needs, and to strengthen the 
commitment of the FHLBank to its housing finance mission. The FHLBank 
has indicated that the loans-to-one-borrower regulatory limit often 
caps the ability of highly capitalized members, who are skilled in such 
lending, to bid 0n affordable housing and community and economic 
development projects. By committing to participate in the funding of 
such projects with members, the FHLBank would reduce a member's loans-
to-one-borrower level by the amount of its participation, thereby 
facilitating the flow of funds to housing and community development 
projects that might not otherwise be funded. The FHLBank also 
contemplates offering shares of its participation interests in such 
loans to other FHLBank of New York members who would not otherwise be 
able, due to their size and the size of the project, to engage in such 
lending.
    The Finance Board's Office of General Counsel (OGC) has reviewed 
the FHLBank of New York proposal and has determined that the FHLBank 
may purchase such loans and participation interests pursuant to its 
authority, under subsections 11(h) and 16(a) of the Federal Home Loan 
Bank Act (FHL Bank Act), to invest ``in such securities as fiduciary 
and trust funds may be invested in under the laws of the state in which 
the (FHLBank) is located.'' The FHLBank of New York has provided a 
legal opinion from outside counsel stating that fiduciary and trust 
funds may invest prudently in such loans and participation interests 
under the laws of the State of New York.
    The Finance Board has determined that the pilot program satisfies 
the three criteria established by the Finance Board for considering and 
approving new mission-related investment activities: (1) the program's 
targeting, and the positive impact the program would have on the loans-
to-one-borrower limits of members specializing in such targeted 
lending, would facilitate the provision of credit in areas of the 
community where funding might not, without FHLBank involvement, 
otherwise be available; (2) in facilitating such targeted originations 
by certain members, and in facilitating the participation of other 
members who might not otherwise be able to engage in such lending, the 
program acts to promote the cooperative nature of the Federal Home Loan 
Bank System (FHLBank System); and (3) the FHLBank's in-house expertise, 
the involvement of its board and senior management in the development 
of the program's business plan, policies, underwriting guidelines, and 
monitoring and reporting requirements, the intended establishment of 
reserves appropriate to risk, and the level of program oversight 
contemplated, should ensure preservation of the triple-A rating of the 
FHLBank and the System. Program implementation will be contingent upon 
conformation by the Finance Board's Office of Supervision that 
appropriate program policies, procedures, controls and reserves have 
been established.
    The following conditions apply to the New York pilot program:
    (a) The subject loans shall meet the income targets established for 
CIP advances.
    (b) The purchase of such loans shall not count toward satisfaction 
of the FHLBank's CIP requirements.
    (c) The FHLBank shall ensure that the originator of the loan 
maintains at least a 20 percent interest in the loan participated, with 
higher minimum retention levels required where appropriate.
    (d) The FHLBank shall limit participations in construction loans to 
an amount no greater than 10 percent of the pilot program 
authorization.
    (e) The FHLBank shall make an effort to share its participation 
interests in such loans with FHLBank members, ensuring that such 
members understand their responsibility to undertake due diligence 
separate and apart from that performed by the FHLBank.
    (f) The board of the FHLBank shall ensure, and certify to, the 
existence of appropriate expertise, policies, procedures, and controls 
prior to program implementation.
    (g) The board of the FHLBank shall establish adequate reserves 
prior to program implementation and on an on-going basis.
    (h) The board of the FHLBank shall take appropriate precautions, in 
structuring program oversight, to avoid the appearance of a conflict of 
interest for board directors with direct responsibility for approving 
transactions under the program.
    (i) The board of the FHLBank shall require monthly program progress 
reports from management during the first year of the program (and at 
least quarterly reports thereafter), shall file written evaluations of 
such reports, and shall provide copies of its evaluations and the 
management reports to the Finance Board.

Atlanta

    The FHLBank of Atlanta (FHLBank) has been authorized to establish a 
$50 million Affordable Multi-family Participation Program (AMPP) on a 
pilot basis. The pilot would involve the acquisition by the FHLBank of 
financial interests in low- and moderate-income multi-family loans 
originated by the Community Investment Corporation of North Carolina 
(CICNC). The FHLBank proposes to purchase existing participation 
interests from FHLBank members, as well as participation interests in 
newly-originated multi-family loans. The idea for the program emanated 
from CICNC's membership who indicated that their ability to continue 
participating in new CICNC projects can only occur if they are able to 
participate out some of their current holdings.
    The CICNC, created by the Community Bankers Association of North 
Carolina in 1990, is an affordable housing loan consortium whose sole 
purpose is to facilitate the availability of long-term permanent 
financing for the development of low- and moderate-income housing 
across the state. CICNC membership consists of 90 financial 
institutions (thrifts and commercial

[[Page 5830]]

banks) with $310 billion in assets, 78 of which are currently members 
of the FHLBank of Atlanta. Membership consists primarily of smaller 
financial institutions; a majority (77 percent) of consortium members 
have assets of under $250 million. Most of the banks and thrifts 
located in North Carolina are members of CICNC.
    The consortium provides construction/rehabilitation bridge 
financing and long-term funding for low- and moderate-income multi-
family projects. Over the past six years CICNC has funded or committed 
to fund approximately $45 million for 53 housing developments, 
producing 2,645 units of affordable housing. To be considered for a 
CICNC loan, at least 51 percent of the units in a project must provide 
housing for individuals earning no more than 60 percent of the median 
income in urban areas and 80 percent of median income in rural areas. 
(In practice, all of CICNC's developments have a majority of occupants 
earning no more than 60 percent of area median income, regardless of 
whether the project is located in an urban or rural area.) CICNC has 
reported no delinquent loans and only two late payments in its six-year 
history.
    The FHLBank has opined that it has the legal authority to invest in 
financial interests through the AMPP pilot. The Finance Board's Office 
of General Counsel has reviewed the AMPP pilot proposal and has 
concluded that the Finance Board has authority under the Federal Home 
Loan Bank Act to approve the FHLBank's proposal.
    The Finance Board has determined that Atlanta's proposed AMPP pilot 
program satisfies the three criteria established by the Finance Board 
for considering and approving of new mission-related activities: (1) 
the FHLBank will ensure the appropriate levels of expertise, establish 
policies, procedures, and controls, and provide for any reserves 
required to effectively limit and manage risk exposure and preserve the 
FHLBank's and the FHLBank System's triple-A rating; (2) the FHLBank's 
participation will provide long-term affordable multi-family housing 
finance that might not otherwise be available, particularly in rural 
areas, due to limitations on members' financial capacity to participate 
in CICNC projects; and (3) the program will promote the cooperative 
nature of the System by enhancing the liquidity and marketabilty of 
member CICNC participation interests, which will enable these 
institutions to participate in additional multi-family lending 
projects. Program implementation is contingent upon confirmation by the 
Finance Board's Office of Supervision that appropriate program 
policies, procedures, controls and reserves have been established by 
the FHLBank.
    The following conditions apply to the Atlanta pilot program:
    (a) The FHLBank shall ensure that CICNC members retain at least a 
20 percent interest in the loan participated, with higher minimum 
retention levels required where appropriate.
    (b) The majority of interest purchased shall be from FHLBank 
members.
    (c) To the extent FHLBank members are interested in purchasing 
interests in CICNC participations, the FHLBank shall make an effort to 
share its participation interest with such members, ensuring that such 
members understand their responsibility to undertake due diligence 
separate and apart from that performed by the FHLBank.
    (d) The FHLBank shall attempt to ensure that members selling 
participation interests to the FHLBank use the proceeds to finance new 
instruments in CICNC projects.
    (e) The board of the FHLBank shall ensure, and certify to, the 
existence of appropriate expertise, policies, procedures, and controls 
prior to program implementation.
    (f) The board of the FHLBank shall establish, prior to program 
implementation and on an on-going basis, adequate reserves.
    (g) The board of the FHLBank shall take appropriate precautions, in 
structuring its program oversight, to avoid the appearance of a 
conflict of interest for board directors with direct responsibility for 
approving transactions under the program.
    (h) The board of the FHLBank shall require monthly program progress 
reports from management during the first year of the program (and at 
least quarterly reports thereafter), shall file written evaluations of 
such reports, and shall provide copies of its evaluations and the 
management reports to the Board.

Chicago

    The FHLBank of Chicago (FHLBank) has been authorized to establish a 
$750 million Mortgage Partnership Finance (MPF) pilot program. The 
objective of the pilot program is to unbundle the risks associated with 
home mortgage lending and allocate the individual risk components 
between the FHLBank of Chicago and its members in a manner that uses 
the cooperative structure of the FHLBank System to maximize their 
respective core competencies.
    When financial depositories currently engaged in home mortgage 
lending pool loans they originate for sale into the secondary market, 
pay a guarantee fee, and portfolio the MBS created, the risk components 
associated with home mortgage lending are misaligned. The depository 
institution retains responsibility for marketing and servicing, but 
relinquishes control over what it does best--underwriting and managing 
credit risk--to the securitizer while it retains risks it is less well-
equipped to manage--liquidity, interest rate, and options risk 
associated with funding the MBS. To the extent that the loans are sold 
outright, the member divests itself of the interest rate and options 
risk, but also of any compensation for managing the credit risk.
    MPF envisions providing members with a strategic alternative to 
holding loans in portfolio or selling/securitizing them in the 
secondary market. The member would continue to be responsible for 
functions involving the customer relationship, including all aspects of 
mortgage marketing and origination. The novel feature of the MPF is 
that the FHLBank would fund and retain in portfolio home mortgage loans 
originated, serviced and credit-enhanced by its members. The member 
would receive compensation for managing the customer relationship and 
the credit risk while the FHLBank would retain the risks it has the 
most expertise in managing--liquidity, interest rate and portions risk. 
The FHLBank would hold mission-related mortgage assets on its books.
    The FHLBank is proposing to fund the home mortgages originated 
through its members rather than purchase the loans from member 
institutions so that participating institutions may receive a more 
favorable risk-based capital treatment than if the member funded and 
sold the loans to the FHLBank with recourse.
    The FHLBank of Chicago will not fund home mortgages with principal 
balances above the conforming loan limits applicable to the secondary 
market housing GSEs. Loan originations would result from member credit 
decisions within the context of MPF underwriting guidelines and credit 
enhancement requirements. It is anticipated that a substantial 
proportion of MPF originations will meet the CIP single-family 
eligibility standards (115 percent of area median income or below).
    The Finance Board's Office of General Counsel (OGC) has reviewed 
the Chicago proposal. OGC has determined that MPF is a method of 
channeling

[[Page 5831]]

funds into residential housing finance--the statutory mission of the 
FHLBank System--in a manner that is similar to, but functionally more 
sophisticated than, that which occurs when a FHLBank makes an advance 
to a member. OGC has concluded, therefore, that it is reasonable for 
the Finance Board to authorize the undertaking of the MPF program by 
the FHLBank of Chicago as an activity incidental to a FHLBank's express 
statutory authority.
    The MPF is designed to insulate the FHLBank from virtually all the 
credit risk associated with investing in home mortgages. First loss 
credit protection for the MPF loan program would be provided by a 
reserve fund established by the FHLBank, to be funded by a share of the 
mortgage loan cash flows. The excess spread account would be 
established in an amount at least equal to the historical loss 
experience on the types of MPF loans originated by the members (based 
on historical data over the past five years, this first loss coverage 
is likely to range from two to five basis points of mortgage loan 
principal).
    In return for a fee, MPF participating members would provide second 
loss credit enhancement at least equal to the level of subordination 
afforded double-A rated mortgage-backed securities. The FHLBank will 
determine the amount of the required credit enhancement based on the 
characteristics of the mortgages and rating agency modeling 
methodology. A recent analysis has shown that over an eight-year 
period, investments in mortgage pools rated double-A had zero losses.
    Participating members will benefit from their ability to provide 
home mortgage loans to more customers on more flexible terms while 
realizing fees for mortgage origination, credit enhancement, and 
servicing. The FHLBank and its shareholders will be compensated for 
managing the interest rate and options risk associated with funding MPF 
loans. This cooperative venture could result in increased competition 
in the home mortgage loan market.
    The Finance Board has determined that the proposed pilot program 
satisfies the three criteria established by the Finance Board for 
considering and approving new mission-related activities: (1) the 
FHLBank's in-house expertise, the involvement of its board and senior 
management in the development of the program's business plan, policies, 
underwriting guidelines, and monitoring and reporting requirements, the 
intended establishment of reserves and member secondary credit 
enhancements appropriate to risk, the FHLBank's experience in managing 
the interest rate and options risk associated with home mortgages, and 
the level of program oversight contemplated, should ensure preservation 
of the triple-A rating of the FHLBanks and the FHLBank System; (2) the 
financial advantages of the program relative to other funding 
alternatives available to members, the capital treatment which will 
allow the members to more effectively leverage their equity, and the 
program's underwriting standards, which are expected to be more 
flexible than those used to originate home mortgage loans on more 
flexible and attractive terms; and (3) in providing members with a 
strategic alternative that will allow them to compete more effectively 
in the housing finance market, the program acts to promote the 
cooperative nature of the FHLBank System. Program implementation is 
contingent upon confirmation by the Finance Board's Office of 
Supervision that appropriate program policies, procedures, controls and 
reserves have been established by the FHLBank.
    The following conditions apply to the Chicago Pilot Program:
    (a) The original principal balances of the subject loans shall fall 
within the conforming loan limits applicable to the secondary market 
housing GSEs.
    (b) The FHLBank shall employ pricing methodology in an attempt to 
direct a portion of the program's funding to low- and moderate-income 
households.
    (c) The board of the FHLBank shall ensure, and certify to, the 
existence of appropriate expertise, policies, procedures, and controls 
prior to program implementation.
    (d) The board of the FHLBank shall evaluate the need for and 
establish, prior to program implementation, and on an on-going basis, 
any appropriate reserves.
    (e) The board of the FHLBank shall take appropriate precautions, in 
structuring its program, to avoid conflicts of interest, or any 
appearance thereof, for board directors.
    (f) The board of the FHLBank shall require at each regular board 
meeting program progress reports from management during the first year 
of the program (and at least quarterly reports thereafter), and shall 
provide quarterly evaluations of the progress of the pilot program to 
the Finance Board.
    Persons wishing to participate in the hearings should send a 
written request to the address listed in the ADDRESSES portion of this 
notice, to be received no later than Wednesday, February 19, 1997. A 
request to participate in the hearing must include the following 
information:
    (A) The name, title, address, business telephone and fax number of 
the participant; and
    (B) The entity or entities that the participant will be 
representing.
    Depending on the number of requests received, participants may be 
limited in the length of their oral presentations. All submissions will 
be included as part of the record, including written testimony not 
presented orally, although extraneous material may be deleted from the 
printed record to reduce printing costs. The Finance Board will notify 
those selected to make oral presentations and provide an approximate 
time. The Finance Board reserves the right to limit the number of 
participants and to select, at its discretion, those persons who may 
make oral presentations if more requests are received for participation 
than may be accommodated in the time available.
    Participants will be required to submit written statements in 
advance of the hearing date. These written statements should 
incorporate the major points to be presented at the hearings and should 
be accompanied by an executive summary of no more than two pages. 
Written statements must be received no later than March 3, 1997, and 
should be sent to the address listed in the ADDRESSES portion of this 
notice. Anyone selected for an oral presentation whose testimony has 
not been received by March 3, 1997, may not testify except by special 
permission of the Finance Board.

    By the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 97-3191 Filed 2-6-97; 8:45 am]
BILLING CODE 6725-01-M