Federal Register / Vol. 74, No. 38 / Friday, February 27, 2009 / Notices 8955 

1As explained more fully in this release, AMA is 

the name given to conforming mortgage loans that 

the Banks purchase from their members pursuant to 

part 955 of current regulations. 12 CFR part 955. 

The transactions through which the Banks purchase 

AMA must meet a number of conditions set forth 

in the regulations. These conditions are explained 

more fully below. 

[FR Doc. E9–4293 Filed 2–26–09; 8:45 am] 

BILLING CODE 6690–01–C 

FEDERAL HOUSING FINANCE 

AGENCY 

[No. 2009–N–03] 

FHFA Study of Securitization of 

Acquired Member Assets 

AGENCY: Federal Housing Finance 

Agency. 

ACTION: Notice of Concept Release; 

request for comments. 

SUMMARY: The Federal Housing 

Regulatory Reform Act (Act), Division A 

of the Housing and Economic Recovery 

Act of 2008 (HERA), requires the 

Federal Housing Finance Agency 

(FHFA) to conduct a study on the 

securitization of home mortgage loans 

purchased or to be purchased from 

Federal Home Loan Bank (Bank) System 

member financial institutions under the 

Acquired Member Assets (AMA) 

programs. FHFA is seeking public 

comment and hopes that the responses 

to this request for comments will 

constitute an important source of 

information that will assist it in its 

preparation of the study. FHFA urges 

commenters to analyze, in light of 

current market conditions, the benefits 

and risks associated with securitization, 

the potential impact of securitization 

upon liquidity and competitiveness in 

the mortgage and broader credit 

markets, the ability of the Banks to 

manage the risks associated with a 

securitization program, and the effect of 

a securitization program on the Banks’ 

existing activities, as well as on the joint 

and several liability of the Banks and 

the cooperative structure of the Bank 

System. This release in no way alters 

current requirements, restrictions or 

prohibitions on the Banks with respect 

to the purchase or sale of mortgages or 

to the AMA programs. 

DATES: Comments on the Concept 

Release must be received on or before 

April 28, 2009. For additional 

information, see SUPPLEMENTARY

INFORMATION. 

ADDRESSES: You may submit your 

comments on this Concept Release, 

identified by a subject line of 

‘‘Securitization Study’’ by any of the 

following methods: 

• U.S. Mail, United Parcel Post, 

Federal Express, or Other Mail Service: 

The mailing address for comments is: 

Alfred M. Pollard, General Counsel and 

Christopher T. Curtis, Senior Deputy 

General Counsel and Managing Counsel, 

Attention: Comments/Securitization 

Study, Federal Housing Finance 

Agency, Fourth Floor, 1700 G Street, 

NW., Washington, DC 20552. 

• Hand Delivered/Courier: The hand 

delivery address is: Alfred M. Pollard, 

General Counsel and Christopher T. 

Curtis, Senior Deputy General Counsel 

and Managing Counsel, Attention: 

Comments/Securitization Study, 

Federal Housing Finance Agency, 

Fourth Floor, 1700 G Street, NW., 

Washington, DC 20552. The package 

should be logged at the Guard Desk, 

First Floor, on business days between 9 

a.m. and 5 p.m. 

• E-mail: Comments to Alfred M. 

Pollard, General Counsel and 

Christopher T. Curtis, Senior Deputy 

General Counsel and Managing Counsel, 

may be sent by e-mail at 

RegComments@FHFA.gov. Please 

include ‘‘Securitization Study’’ in the 

subject line of the message. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

FOR FURTHER INFORMATION CONTACT: 

George G. Korenko, Senior Economist, 

(202) 408–2543 or Christina Muradian, 

Senior Financial Analyst, (202) 408– 

2584, Division of Federal Home Loan 

Bank Regulation; or Thomas E. Joseph, 

Senior Attorney-Advisor, Office of 

General Counsel for Federal Home Loan 

Bank Supervision, (202) 408–2512, 

Federal Housing Finance Agency, 1625 

Eye Street, NW., Washington, DC 20006. 

The telephone number for the 

Telecommunications Device for the Deaf 

is (800) 877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Comments 

The Federal Housing Finance Agency 

(FHFA) invites comments on all aspects 

of the Concept Release and will 

consider all comments before issuing a 

report to Congress. FHFA requests that 

comments submitted in hard copy also 

be accompanied by the electronic 

version in Microsoft® Word or in 

portable document format (PDF) on CD– 

ROM. 

Copies of all comments will be posted 

on the internet web site at https:// 

www.fhfa.gov. In addition, copies of all 

comments received will be available for 

examination by the public on business 

days between the hours of 10 a.m. and 

3 p.m., at the Federal Housing Finance 

Agency, Fourth Floor, 1700 G Street, 

NW., Washington, DC 20552. To make 

an appointment to inspect comments, 

please call the Office of General Counsel 

at (202) 414–3751. 

II. Purpose of Release 

Effective July 30, 2008, the Act, Public 

Law 110–289, 122 Stat. 2654 (2008), 

transferred the supervisory and 

oversight responsibilities of the Office of 

Federal Housing Enterprise Oversight 

(OFHEO) over the Federal National 

Mortgage Association (Fannie Mae) and 

the Federal Home Loan Mortgage 

Corporation (Freddie Mac) (collectively, 

Enterprises), and the oversight 

responsibilities of the Federal Housing 

Finance Board (FHFB) over the Banks 

and the Office of Finance (which acts as 

the Banks’ fiscal agent) to FHFA, a new 

independent executive branch agency. 

FHFA is responsible for ensuring that 

the Enterprises and the Banks operate in 

a safe and sound manner, that they 

maintain adequate capital and internal 

controls, that their activities foster 

liquid, efficient, competitive and 

resilient national housing finance 

markets, and that they carry out their 

public policy missions through 

authorized activities. See § 1102, Public 

Law 110–289, 122 Stat. 2663–64. The 

Enterprises and the Banks continue to 

operate under regulations promulgated 

by OFHEO and the FHFB until FHFA 

issues its own regulations. See id. at 

§§ 1302, 1313, 122 Stat. 2795, 2798. 

Section 1215 of the Act requires the 

Director of FHFA to conduct a study on 

securitization of home mortgage loans 

purchased or to be purchased from Bank 

member financial institutions under the 

AMA programs.1 See id. at § 1215, 122 

Stat. 2791. The Act requires FHFA to 

submit a report to Congress by July 30, 

2009, detailing the results of the study. 

The report must include policy 

recommendations based on the 

Director’s analysis of the feasibility of 

the Banks, either individually or 

collectively, issuing mortgage-backed 

securities (MBS), and the benefits and 

risks associated with such a program. 

The Act stipulates that the study 

address the benefits and risks associated 

with securitization of AMA; the 

potential impact of securitization upon 

liquidity in the mortgage and broader 

credit markets; the ability of the Banks 

to manage the risks associated with such 

a program; the impact of such a program 

on the existing activities of the Banks, 

including their mortgage portfolios and 

advances; and the effects of 

securitization on joint and several 

liability of the Banks and the 

cooperative structure of the Bank 

System. The Act further requires that in 

conducting the study, the Director 


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2As defined by regulation, ‘‘state’’ means a state 

of the United States, American Samoa, the 

Commonwealth of the Northern Mariana Islands, 

the District of Columbia, Guam, Puerto Rico, or the 

United States Virgin Islands. See 12 CFR 900.3. 

3 In fact, the Banks purchase whole, single-family 

mortgage loans under the AMA programs. The 

Chicago, Pittsburgh and Des Moines Banks have 

also purchased securities that represented senior 

interests in pools of AMA-qualified single-family 

mortgage loans under the MPF Shared Funding 

Program, but this program is not active. Banks have 

not purchased any manufactured housing loans or 

HFA bonds under the AMA programs. 

consult with the Banks, the Office of 

Finance, representatives of the mortgage 

lending industry, practitioners in the 

field of structured finance, and other 

experts as needed. The Director also 

must establish a process for the formal 

submission of comments on the study. 

The purpose of this release is to solicit 

such comments regarding a potential 

Bank securitization program. 

III. Background 

A. The Bank System 

The twelve Banks are 

instrumentalities of the United States 

organized under the Federal Home Loan 

Bank Act (Bank Act). See 12 U.S.C. 

1423, 1432(a). The Banks are 

cooperatives; only members of a Bank 

may own the capital stock of a Bank and 

only members or certain eligible 

housing associates (such as state 

housing finance agencies) may obtain 

access to the products provided by a 

Bank. See 12 U.S.C. 1426, 1430(a), 

1430b. Each Bank is managed by its own 

board of directors and serves the public 

by enhancing the availability of 

residential mortgage and community 

lending credit through its member 

institutions. See 12 U.S.C. 1427. Any 

eligible institution (typically, thrifts, 

Federally insured depository 

institutions or state-regulated insurance 

companies) may become a member of a 

Bank by satisfying certain criteria and 

by purchasing a specified amount of the 

Bank’s capital stock. See 12 U.S.C. 1424, 

1426; 12 CFR part 931. 

As government sponsored enterprises 

(GSEs), the Banks are able to borrow 

funds in the capital markets on terms 

more favorable than could be obtained 

by most other entities. Typically, the 

Bank System can borrow funds at a 

modest spread over the rates on U.S. 

Treasury securities of comparable 

maturity, although under recent market 

conditions spreads to U.S. Treasuries 

have widened considerably. The Banks 

can pass along their GSE funding 

advantage to their members—and 

ultimately to consumers—by providing 

advances (secured loans) and other 

financial services at rates that would not 

otherwise be available to their members. 

Some of the Banks also have AMA 

programs whereby they acquire fixedrate, single-family mortgage loans from 

participating member institutions. 

Consolidated obligations, consisting 

of bonds and discount notes, are the 

principal source for the Banks to fund 

advances, AMA programs, and 

investments. The Office of Finance 

issues all consolidated obligations on 

behalf of the twelve Banks. Although 

each Bank is primarily liable for the 

portion of consolidated obligations 

corresponding to the proceeds received 

by that Bank, each Bank is also jointly 

and severally liable with the other 

eleven Banks for the payment of 

principal of, and interest on, all 

consolidated obligations. See 12 CFR 

966.9. 

B. AMA Regulation 

In July 2000, the Board of Directors of 

the Finance Board adopted a final 

regulation governing AMA activities. 

See Final Rule: Federal Home Loan 

Bank Acquired Member Assets, Core 

Mission Activities, Investments and 

Advances, 65 FR 43969 (July 17, 2000) 

(hereinafter Final AMA Rule). The rule, 

contained in Part 955 of the Finance 

Board’s regulations, remains in effect 

today. To date, two separate mortgage 

programs are authorized under Part 

955—the Mortgage Partnership Finance 

(MPF) program and the Mortgage 

Purchase Program (MPP). 

The AMA products are structured 

such that the Banks acquire, through 

either a purchase or funding transaction, 

whole, single-family mortgage loans 

from their members. Products exist for 

both conventional and governmentguaranteed/-insured loans. The risks 

associated with the mortgages are such 

that the Bank manages the interest-rate 

risk and the member manages a 

substantial portion of the risks 

associated with originating the 

mortgage, including a substantial 

portion of the credit risk. Part 955 

requires that the member provide a 

credit enhancement sufficient to 

enhance the credit quality of the assets 

to an equivalent of an instrument rated 

at least investment grade (e.g., BBB), 

although all approved AMA programs 

require members to enhance the loans to 

the second highest investment grade 

(e.g., AA). The member may provide 

this credit enhancement through various 

means. 

In order for a Bank to acquire a 

mortgage loan as AMA, the loan must 

meet the requirements set forth under a 

three-part test established by regulation. 

See 12 CFR 955.2. The three-part test 

consists of a loan type requirement; a 

member or housing associate nexus 

requirement; and a credit risk-sharing 

requirement. 

The loan type requirement establishes 

the types of assets that could be 

considered as AMA-eligible. Assets 

acquired by a Bank must fall within 

three certain categories. The assets may 

be whole loans eligible to secure 

advances that do not exceed the 

conforming loan limits that apply to the 

Enterprises. Further, the loans must be 

secured by property located in a state.2

The assets also may be whole loans 

secured by manufactured housing, 

regardless of whether such housing 

qualifies as residential real property. 

Finally, state and local housing finance 

agency (HFA) bonds are AMA-eligible. 

Interests in whole loans backed by 

mortgages that meet the previously 

noted asset type requirements are also 

eligible for purchase under AMA.3

The second part of the three-part test 

is the member or housing associate 

nexus requirement. The nexus 

requirement was established to ensure 

that the assets acquired by the Banks 

have some connection to a System 

member or housing associate. In order 

for an asset to be considered AMAeligible, the asset must be originated (if 

a loan) or issued (if a bond) by, through, 

or on behalf of a Bank System member, 

housing associate, or affiliate thereof; or 

held for a ‘‘valid business purpose’’ by 

a Bank System member or housing 

associate prior to the acquisition by the 

Bank. In addition, the asset must be 

acquired from either a member or 

housing associate of the acquiring Bank; 

a member or housing associate of 

another Bank, but only pursuant to an 

arrangement between the Banks; or 

another Bank. 

The final part of the three-part test is 

the credit risk-sharing requirement. The 

risk-sharing requirement was 

established to emphasize the 

cooperative nature of the Bank System 

by ensuring that the member or housing 

associate shares with the Bank the credit 

risks associated with the asset. See Final 

AMA Rule, 65 FR at 43975–78. While 

the first and second parts of the threepart test focus on asset eligibility, the 

third part focuses on the transactions 

through which the Bank acquires AMA. 

In general, the credit risk-sharing 

requirements prescribe the manner in 

which AMA products must be 

structured in order to ensure that the 

member bears the economic costs 

associated with enhancing AMA pools 

to at least a BBB level. The AMA 

regulation provides detailed credit risksharing structure requirements. See 12 

CFR 955.3. Essentially, these 


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requirements provide that AMA 

products must be structured such that 

the member provides a credit 

enhancement sufficient to bring a pool 

up to the equivalent of an instrument 

rated at least the BBB level or such 

higher level required by the Bank. The 

member must have direct economic 

responsibility for the credit 

enhancement that covers expected 

losses (i.e., the member must be in the 

first loss position). For the portion of the 

credit enhancement beyond expected 

losses, the credit enhancement may be 

provided by a member’s insurance 

affiliate; loan-level insurance (which 

includes U.S. Government insurance or 

guarantee) provided that the insurer is 

rated at least the second highest 

investment grade rating established by a 

Nationally Recognized Statistical Rating 

Organization (NRSRO); pool insurance, 

but only to cover the portion of the 

credit enhancement attributable to pool 

size; or another member. A member’s 

credit enhancement obligation must be 

secured fully in parallel with the 

requirements for securing advances 

under Part 950 of the Finance Board’s 

regulations. 

C. Mortgage Programs 

Two AMA programs have been 

authorized by the Finance Board, MPF 

and MPP, under the AMA regulation. 

Additionally, two programs, MPF Xtra 

and Global Mortgage Alliance Program 

(GMAP), were authorized under the 

Banks’ incidental authority. Prior to 

offering these programs to its members, 

each FHLBank underwent an 

application process with the Finance 

Board or FHFA, as appropriate. This 

application process included a safety 

and soundness examination to verify 

that the Banks had in place adequate 

policies, procedures, and controls to 

manage the risks presented by these 

programs. 

As already noted, the AMA programs 

are designed, pursuant to regulation, 

such that members are responsible for a 

substantial portion of the credit risk 

while the Banks manage the interest 

rate, prepayment, and funding risks. 

The exact method through which the 

member assumes responsibility for the 

credit risk varies depending upon the 

structure of the AMA product. For 

example, the ‘‘MPF–Plus’’ and ‘‘MPP– 

Conventional’’ products both rely on 

supplemental mortgage insurance 

purchased by the member to credit 

enhance the mortgage pools to the 

equivalent of an AA–rating. The ‘‘MPF– 

Government’’ and ‘‘MPP–FHA’’ 

products rely on government insurance 

or guarantee to meet the credit-risk 

sharing requirements of the AMA 

regulation. For other MPF products, 

members provide the amount of credit 

enhancement necessary to enhance the 

mortgage pools to achieve a putative 

rating of the second highest investment 

grade rating. The Banks determine the 

amount of the required credit 

enhancement by using methodologies 

verified by an NRSRO. The AMA 

programs allow members to receive 

compensation for providing the credit 

enhancement to the loans sold. The 

structure of this compensation varies 

both between MPF and MPP and among 

the various products offered under the 

MPF program. 

The Banks that currently offer MPF to 

their members (MPF–Banks) are Boston, 

New York, Pittsburgh, Chicago, Des 

Moines, Dallas, and Topeka. The ‘‘MPP– 

Banks’’ are Atlanta, Cincinnati, and 

Indianapolis. Outstanding mortgages in 

the Bank System totaled $87.9 billion as 

of September 30, 2008. Mortgage loans 

comprised 6 percent of total Bank 

System assets while advances (i.e., loans 

made to member institutions) 

represented 71 percent of total assets. 

In May 2007, the Finance Board 

approved the Atlanta Bank’s request to 

offer GMAP under which it would 

facilitate the sale of certain qualified 

conforming mortgage loans from eligible 

members to another of its members, 

which would then securitize those 

loans. To date, no transactions have 

occurred under GMAP. In September 

2008, FHFA approved the Chicago 

Bank’s request to engage in the MPF 

Xtra program, under which it would buy 

certain qualified, conforming mortgages 

from eligible members for immediate 

onward sale to Fannie Mae. Neither 

MPF Xtra nor GMAP are AMA programs 

authorized under part 955 of the 

Finance Board rules. Since September 

2008, five additional Banks requested 

and received approval to engage in MPF 

Xtra through the Chicago Bank. In both 

the GMAP and MPF Xtra programs, the 

mortgages are not held by the Banks and 

are not assets of the Banks. Instead, the 

participating Banks receive a fee for 

their role in the program. 

D. Securitization 

In its most basic form, securitization 

of mortgages involves the sale of pools 

of mortgages from the holder of those 

instruments to a special purpose vehicle 

(SPV). The SPV would be organized to 

be legally distinct from the entity selling 

the mortgages and would be structured 

so that it would not be affected by 

problems associated with or bankruptcy 

of the original seller of the mortgages. 

The SPV often is structured as a trust. 

The SPV would in turn issue 

securities—generally referred to as 

mortgage-backed securities (MBS)—that 

are backed by the pool of mortgages 

held by the SPV and represent an 

interest in the payments generated from 

that pool of mortgages. These securities 

themselves may be pooled together and 

new securities issued representing 

various claims to the underlying cash 

flows. 

There are alternate formats for 

securitizing loans. For example, a 

simple form of an MBS is a mortgage 

pass-through, whereby all principal and 

interest payments (excluding a servicing 

fee) from the pool of mortgages are 

proportionately passed directly to 

investors each month. Thus, a holder of 

the MBS has an undivided, pro rata 

interest in the underlying pool of loans. 

By contrast, a collateralized mortgage 

obligation (CMO) is another type of 

MBS. Unlike a pass-through, a CMO has 

different classes of securities where net 

cash flows are divided differently 

among each class or tranche. The 

tranches are structured to have different 

risk characteristics and maturity ranges. 

Examples of differing structures are 

sequential pay, interest-only (IO), 

principal only (PO), and z-bonds. CMOs 

can be created directly based on an 

underlying pool of mortgages, but they 

are often created by pooling passthrough MBS and dividing the 

underlying cash flows from those 

securities into the various tranches. For 

tax purposes, transactions creating the 

CMOs generally are structured to qualify 

as Real Estate Mortgage Investment 

Conduits (REMICs) under the Internal 

Revenue Code. See 26 U.S.C. 860A– 

860G. 

In securitizing loans, the Banks could 

also consider adding a guarantee that 

principal and interest on the MBS 

created under a Bank securitization 

program will be paid. The holders of the 

MBS, therefore, would not assume the 

credit risk associated with the pool of 

loans but would retain the market, 

interest rate, and prepayment risk. 

Essentially, the Enterprises currently 

operate in this way. They purchase 

conforming mortgage loans, use those 

loans to back the MBS they issue, and 

add a guarantee that the principal and 

interest on these securities will be paid 

in return for a fee that is paid by the 

seller of the loans. Banks could also 

have the option of securitizing loans 

directly or selling loans on to a third 

party and allowing that party to 

undertake the actual securitization. 


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4Each Bank is required to allocate at least 10 

percent of its prior year’s net income to fund the 

AHP. Under the terms of the AHP, a member may 

submit an application to its Bank for funds to 

finance the purchase, construction or rehabilitation 

of housing for very low-, low-, and moderateincome households. See 12 CFR part 951. 

IV. Policy and Safety and Soundness 

Considerations 

A. Securitization of AMA 

Certain characteristics of the AMA 

program make the securitization of the 

Bank’s existing mortgage holdings more 

difficult than the securitization of new 

mortgages that may be acquired. For 

example, members enter into master 

commitments with the Banks 

participating in the MPF program. These 

master commitments define the terms 

under which loan sales to the Bank will 

take place, including the amount of the 

first-loss account, amount of the creditenhancement fees paid to the 

participating financial institution, and 

the amount of the credit enhancement 

obligation. In addition, Banks have 

engaged in ‘‘participations,’’ whereby 

one Bank has acquired an interest in the 

AMA holdings of another Bank. These 

two features leave the responsibility for 

losses, the credit enhancement 

responsibilities, and the ownership of 

some of the AMA, fragmented 

throughout the Bank System. To 

securitize the existing loans, the Banks 

may have to negotiate termination of 

these provisions. 

To avoid these issues arising with 

newly purchased loans, the AMA 

regulation could be amended to make 

buying loans for securitization less 

complicated. For example, the credit 

risk sharing requirement could be 

waived for loans that would be 

securitized. In this way, their mortgage 

purchases would be similar to those of 

Fannie Mae and Freddie Mac. When 

purchasing mortgages, the Enterprises 

must, for example, purchase 

‘‘conforming’’ loans and abide by any 

limits on the size of their overall 

portfolio that are imposed by FHFA. 

The conforming loan requirements 

include loan-to-value ratio limits, 

documentation requirements, and 

maximum loan size. For a securitization 

program, the Banks could follow 

existing loan-type requirements of the 

AMA program, including the purchase 

of only conforming loans, or they could 

be allowed to purchase mortgages from 

a more or less expansive pool of loans. 

In addition, some Banks have had 

difficulty managing the risks associated 

with their AMA portfolios. Thus, it may 

be prudent to limit the size and the 

growth of the AMA portfolio at the Bank 

level and/or at the System level. 

With respect to securitization, we are 

seeking comment on the following: 

A.1. Should the Banks be authorized 

to securitize loans? If so, should the 

Banks be authorized to continue their 

existing AMA programs in addition to 

being authorized to securitize loans? 

Would a pass-through program such as 

MPF Xtra provide a better alternative to 

a direct securitization program? 

A.2. Should individual Banks be 

authorized to securitize loans or should 

the securitization be conducted by the 

Bank System as a whole? 

A.3. Should any limitations be 

imposed on the Banks with respect to 

the mortgages purchased either under 

the AMA program as it currently exists 

or under a modified AMA program? If 

so, what types of limitations should be 

imposed? 

A.4. What are the ways that the 

master commitment obligations and 

participations between Banks can be 

unwound so that the existing AMA 

mortgages could be securitized and 

sold? 

B. Credit Enhancement on MBS 

One potentially critical feature of any 

MBS that the Banks securitize is the 

level of credit enhancement. For 

example, the Enterprises provide a 

guarantee of interest and principal 

payments on their MBS. If the Banks 

were to securitize mortgages, it may be 

beneficial to the program for them to 

provide a similar guarantee. The 

guarantee could be the joint and several 

obligation of all the Banks in the System 

or by a subset of the Banks if not all 

Banks are participating in the program. 

Alternatively, the Banks could 

securitize the AMA in a CMO structure, 

providing tranches, some with more 

protection against credit losses and 

some with less. The Banks could also 

purchase credit enhancement in the 

form of an insurance ‘‘wrap’’ provided 

by a highly rated private mortgage 

insurer. 

With respect to credit enhancements, 

we are seeking comments on the 

following: 

B.1. If the Banks securitize mortgages, 

should they guarantee the resulting 

MBS? 

B.2. Given the Banks’ joint and 

several liability for consolidated 

obligations, would it be reasonable for 

only a sub-set of the Banks to guarantee 

MBS? 

B.3. If the Banks did not provide a 

guarantee, would other types of credit 

enhancement be economically viable or 

more efficient? 

B.4. Would there be a viable market 

for MBS issued by the Banks or the 

Bank System? 

B.5. How would the market in which 

these securities would trade be affected 

by the level and type of credit 

enhancement? 

B.6. Would these securities be likely 

to trade similarly to Private Label MBS 

or Agency MBS, and if so, how might 

such a program affect these markets? 

Alternatively, would such securities 

constitute a new market? How large 

would this program need to be to 

achieve a liquid market? 

C. Benefits and Risks of Securitization 

An important consideration in the 

establishment of a securitization 

program is an evaluation of the potential 

benefits and risks of such a program. If 

a securitization program were allowed, 

the potential benefits of such a program 

would need to be weighed against 

possible risks. Potentially, benefits 

could include increased liquidity and 

competition in the markets and greater 

access to smaller member financial 

institutions to sell mortgage loans. 

When the AMA programs were 

introduced, a primary goal was to 

provide participating member financial 

institutions with an alternative avenue 

to sell single-family mortgage loans with 

the risks aligned to the competencies of 

the members and the Banks. A 

securitization program could also help 

the Banks manage some of the risks 

such as interest rate risk associated with 

holding mortgages on their balance 

sheet. Difficulty in managing the 

interest rate risks associated with the 

AMA program has caused financial 

problems for some Banks. 

The benefits of securitization would 

need to be weighed against the risks. For 

example, the Banks currently classify 

their AMA portfolios as held-inportfolio. This classification is available 

to the Banks since they can demonstrate 

the intent and ability to hold these 

assets to maturity, and can insulate 

them from some changes in the market 

value of the assets. Mortgages acquired 

for a securitization program would 

likely be classified as held-for-sale, and 

fluctuations in the values of these assets 

would need to be reflected on the 

Banks’ financial statements, potentially 

affecting earnings—and therefore, affect 

contributions to the Affordable Housing 

Program (AHP) 4—and economic and 

regulatory capital. In addition, a 

successful program may require the 

Banks to build portfolios of mortgages 

that are substantially larger than those 

they are currently holding. While these 

mortgages are held in the portfolio and 

not yet securitized, the Banks may 

assume substantial market and credit 


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5The Bank Act defines ‘‘permanent capital’’ as 

the amounts paid for Class B stock by members plus 

the Bank’s retained earnings as determined in 

accordance with generally accepted accounting 

principles (GAAP), and defines ‘‘total capital’’ as 

permanent capital plus the amounts paid by 

members for Class A stock, any general allowances 

for losses held by a Bank under GAAP (but not any 

allowances or reserves held against specific assets) 

and any other amounts from sources available to 

absorb losses that are determined by regulation to 

be appropriate to include in total capital. See 12 

U.S.C. 1426(a)(5). However, because the Banks have 

no general allowances for losses (not held against 

specific classes of assets) and no additional sources 

have been determined to be appropriate to include 

in total capital, a Bank’s total capital currently 

consists of its permanent capital plus the amounts, 

if any, paid by its members for Class A stock. 

6Current regulations would not allow the Banks 

to purchase and accumulate mortgage loans for 

securitization unless they were credit enhanced to 

investment grade by the member. The regulations 

would need to be amended before the Banks could 

purchase loans that were not credit enhanced. See 

12 CFR 956.3(a)(4). 

risk, depending on the terms under 

which the mortgages are acquired. 

With respect to the potential benefits 

and risks of a securitization program to 

the Banks, their members and housing 

markets more generally, we are seeking 

comment on the following: 

C.1. Would the Bank’s securitization 

of mortgages provide added liquidity 

and competition to the housing finance 

market? 

C.2. What are the benefits to Bank 

System members? 

C.3. Would the benefits be different 

for large and small members? 

C.4. How would this activity further 

the public purpose of the Banks and 

promote the cooperative nature of the 

System? How would it affect the 

availability and affordability of 

mortgage credit, especially for low- and 

moderate-income households and firsttime homebuyers? 

C.5. How could the Banks’ joint and 

several liability be affected? 

C.6. What types of risk would the 

Banks face under a securitization 

program? 

C.7. Do the Banks have the ability to 

manage these risks? What activities 

would the Banks need to undertake to 

mitigate and manage any such risks? 

C.8. What prudential principles are 

needed and what prudential rules, 

limitations, and constraints would 

FHFA need impose on the Banks to 

ensure that securitization is conducted 

in a safe and sound manner? 

D. Capital Requirements 

The Bank Act states that each Bank 

must hold total capital equal to at least 

5 percent of its total assets, provided 

that in determining compliance with 

this ratio, a Bank’s total capital shall be 

calculated by multiplying its permanent 

capital by 1.5 and adding to this product 

any other component of total 

capital.5 See 12 U.S.C. 1426(a)(2) and 12 

CFR 932.2(b). The Bank Act also 

requires that when total capital is 

calculated without application of the 

multiplier of 1.5, a Bank’s total capital 

must equal at least 4 percent of its total 

assets. See 12 U.S.C. 1426(a)(2)(B) and 

12 CFR 932.2(a). A Bank also must hold 

sufficient permanent capital to meet its 

market, credit and operations risk, as 

measured under current regulations. See 

12 U.S.C. 1426(a)(3) and 12 CFR 932.3. 

Under current capital requirements, 

loans purchased for securitization 

would be subject to the same capital 

requirements as AMA for the period of 

time a Bank held the loan, assuming the 

loans were purchased with a member 

credit enhancement. If the loans the 

Bank intended to securitize were 

purchased without a member credit 

enhancement, however, credit risk 

charges under the risk-based capital 

rules would likely be higher than for 

AMA because the credit quality of the 

unenhanced loans would be lower.6 See 

12 CFR 932.4. 

If the Banks were to guarantee any 

mortgages that they sold for 

securitization against default, the 

current risk based capital rules would 

likely require the Banks to treat those 

mortgages as ‘‘Asset sales with recourse 

where the credit risk remains with the 

Bank.’’ See id. and Table 2 of 12 CFR 

part 932. Under this provision, a Bank 

would have to treat the pools of loans 

underlying the guaranteed MBS as if it 

owned the loans and apply a credit risk 

charge appropriate for the credit rating 

of those loans. Such capital charges 

could prove prohibitive to a 

securitization program, especially if the 

loans did not retain a credit 

enhancement from the member after 

securitization. Banks may also need to 

modify their market risk models to 

assure that the models would calculate 

an appropriate market risk capital 

charge associated with the guarantees. 

See 12 CFR 932.5. 

With respect to capital requirements, 

we are seeking comments on the 

following: 

D.1. What, if any changes, to the 

current capital requirements may be 

necessary if the Banks were to 

undertake a securitization program? 

D.2. Would the current rules need to 

be changed to account for credit or other 

risks associated with mortgage loan 

guarantees, if the Banks were to provide 

a guarantee, as part of the securitization 

program? 

D.3. What are the risks related to 

mortgage loans and associated hedging 

instruments that would be in a 

securitization pipeline? 

D.4. How should the potential 

increased exposure to operational risk 

associated with a securitization program 

be captured by the risk based capital 

rules? 

E. Financial Viability 

For any securitization program to be 

a viable business line for the Banks, the 

program would need to generate an 

adequate return. The outlook for 

generating such a return can be affected 

by many factors including market 

conditions, economies of scale, and the 

form of the securitization program (e.g., 

whether the Banks provide a guarantee 

on the securitized mortgages). 

With respect to financial viability, we 

are seeking comments on the following: 

E.1. What conditions, resources, and 

capabilities, including technological 

capabilities, would be necessary for the 

Banks to implement a viable 

securitization program? 

E.2. What are the key factors for 

launching and operating a successful 

securitization program in the 

foreseeable future? What scale of 

operations would be necessary to 

operate a successful securitization 

operation? 

E.3. Given the Banks’ capabilities, 

what are the feasible strategic 

alternatives for competing in the 

securitization market? 

E4. How might the Banks achieve a 

comparative advantage over existing 

competitors in the market? 

E.5. What segment of the market for 

MBS would the Banks serve? How 

would the Banks differentiate their MBS 

product from existing competitors in 

that market? Would there be sufficient 

demand for product securitized by the 

Banks? 

E.6. Would the Banks be able to earn 

a sufficient return if the current 

structure of the AMA programs in 

which members provide the credit 

enhancement were carried over to the 

securitized products? Would a Bank 

guarantee of the mortgages be necessary 

to assure an adequate return for the 

Banks and/or the success of the 

program? 

E.7. How would the Banks’ advances 

programs (and returns from the 

advances business) be affected if the 

Banks also bought mortgages from 

members to securitize? Could a 

securitization program affect other Bank 

products, such as MPF Xtra? 

E.8. How would the development of a 

market for covered bonds affect the 

feasibility of launching a securitization 

program? 


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8960 Federal Register / Vol. 74, No. 38 / Friday, February 27, 2009 / Notices 

7The court determined that it was sufficient that 

the Banks had authority to purchase mortgages as 

an activity incidental to their housing finance 

mission, and it did not find it necessary to consider 

the Banks’ investment authority or the Finance 

Board’s construction of the investment authority 

provision of the Bank Act. See Texas Savings, 201 

F.3d at 551 n.5. 

8The Opinion noted that one of the underlying 

purposes of amendments to the incidental power 

provisions of the Bank Act made by Federal 

Financial Institutions Reform, Recovery and 

Enforcement Act of 1989 (FIRREA) was to permit 

the Banks to assist members in controlling their 

costs, and the interest and credit risks arising from 

their activities. See 1999–GC–03 at 4–5. 

F. Accounting Issues 

Currently, the mortgages purchased 

under the mortgage purchase programs 

are designated by the Banks as Held-inportfolio. Therefore, short-term market 

gains and losses on their purchased 

mortgage portfolios are not recognized 

in financial statements. If the Banks 

developed a securitization program, 

mortgage loans that they purchased for 

securitization would have to be 

designated as held-for-sale. Fluctuations 

in current market values of these loans 

would be recognized through current 

income while the loans are held by the 

Bank. Allowing a mortgage 

securitization program, therefore, could 

in theory create greater volatility in 

Banks’ reported income, although such 

possibility must be weighed against the 

longer terms effects on income that 

might arise from not needing to hold 

purchased mortgages on their books for 

the life of the loans. The Banks could 

also be expected to implement hedging 

strategies that could mitigate the effects 

of market value changes in the 

mortgages held for securitization on 

their income. 

Accounting considerations may also 

affect a Bank’s decision as to whether it 

would securitize loans that it previously 

purchased with the intent to hold them 

to maturity. If a Bank determined that it 

wanted to securitize any of these loans, 

the Bank would need to identify which 

loans that it would likely securitize, and 

designate such loans as held-for-sale. It 

would also have to recognize 

immediately current market value gains 

and losses in current income and 

continue to recognize future changes in 

market value through income until the 

loans actually are securitized. Given 

that the mortgages portfolio for most 

Banks currently show market value 

losses, such immediate recognition of 

the losses initially could negatively 

affect a Bank’s reported income. 

If the Banks were to guarantee the 

payment of principal and interest on the 

MBS they issue, they would also have 

to record the guarantee on their balance 

sheets. Guarantees generally would 

appear to meet the definitions of 

derivatives under Statement of 

Financial Accounting Standard 133, but 

may qualify for the exemption provided 

for financial guarantee contracts in that 

statement. In any case, the use of a 

guarantee as part of the securitization 

program would affect the timing and the 

amounts of the Banks’ reported income. 

In September 2008, the Financial 

Accounting Standards Board (FASB) 

issued Exposure Drafts requesting 

public comment on a proposed 

amendment to Interpretation No. 46 

(revised December 2003), Consolidation 

of Variable Interest Entities (FIN 46(R)) 

as well as to FASB Statement No. 140, 

Accounting for Transfers of Financial 

Assets. These amendments could 

significantly affect financial reporting 

for securitizations and associated 

guarantees. Therefore, the amendments 

could present challenges for the Banks 

in implementing a securitization 

program. 

F.1. Would accounting 

considerations, including, but not 

limited to amendments to FIN 46(R) and 

FASB 140, present a major obstacle to 

the Banks’ implementing a 

securitization program? 

G. Legal Issues 

The Banks currently purchase 

mortgages under the incidental 

authority in sections 11(a) and 11(e)(1) 

of the Bank Act. 12 U.S.C. 1431(a) and 

(e)(1). In approving the initial mortgage 

purchase programs, the Finance Board 

noted that the programs were a way for 

the Banks to channel funds into 

residential housing finance in a manner 

that was functionally similar but 

technically more sophisticated than the 

advances programs. For that reason, it 

saw the activity as incidental to the 

dominant statutory purpose of the 

Banks to make advances. See Fin. Brd. 

Res. No. 96–111 (Dec. 23, 1996). See 

also, Office of General Counsel Opinion, 

1996–GC–10 (Fin. Brd. Dec. 18, 1996). 

The Finance Board’s decision to allow 

the Banks to purchase mortgages was 

challenged in court, but it was 

eventually upheld by the Fifth Circuit 

Court of Appeals. See Texas Savings v. 

Fed. Housing Fin. Brd., 201 F.3d 551 

(5th Cir. 2000). In upholding the 

Finance Board’s action, the court 

concluded that the Finance Board’s 

interpretation of the Bank’s incidental 

authority was ‘‘permissible * * * 

because it is consistent with the 

structure and purpose of the * * * Bank 

Act, i.e., to use the FHLBanks’ access to 

low-cost funds in the securities markets 

in an effort to improve the level of 

housing finance.’’ 7 Id. at 556. While 

major amendments were made to the 

Bank Act in 1999 by the Gramm-LeachBliley Act and more recently by HERA, 

the Banks’ central mission remains 

providing funding for housing finance 

so that the underlying reasoning in 

Texas Savings is still applicable. See 12 

U.S.C. 1430. See also, § 1313, Public 

Law 110–289 (amending 12 U.S.C. 

4513(a)(1)(B)(ii)). 

Securitization would go beyond the 

Banks’ current mortgage purchase 

programs. It would provide the Banks 

an additional means to manage the risks 

of these programs by allowing them to 

package and sell the loans that they 

purchase. The underlying purpose of 

the mortgage purchase programs—to 

channel funding into housing finance— 

would not be altered, however, by a 

securitization program. Thus, the 

underlying legal reasoning applicable to 

the mortgage programs might apply to a 

securitization program so that the Banks 

should be able to undertake such a 

program without additional changes to 

their authorizing statutes. This would 

especially appear to be true if the Banks 

do not also guarantee the payment of 

principal and interest for the MBS as 

part of the securitization program. 

In fact, in 1999, the Finance Board 

approved a program for the New York 

Bank that allowed it to buy certain 

conforming mortgages and community 

development loans originated by 

members, pool the loans and create 

credit support and other tranches from 

those pools, and sell those interests back 

to its members. See Fin. Brd. Res. 1999– 

43 (Aug. 18, 1999) (approving 

modifications to Community Mortgage 

Asset Activities Program). See also 

Office of General Counsel Opinion, 

1999–GC–03 (Fin. Brd. Aug. 12, 1999). 

The program required that the member 

that originated the loans buy the credit 

support tranche from the Bank, and that 

the loans sold by the member meet 

certain other requirements. The Bank 

was not authorized to guarantee 

payments on the pooled loans. 

This program was approved under the 

Banks’ incidental powers, as were the 

other mortgage purchase programs. See 

Fin. Brd. Res. 1999–43, and 1999–GC– 

03. In analyzing the program, the 

Finance Board’s Office of General 

Counsel reasoned that the securitization 

of the loans in question both would be 

a means to help members control the 

risks of their housing and community 

development lending 8 and would be a 

means for the Bank itself to manage the 

risk of its investment portfolio so that 

the program would be ‘‘convenient and 

useful’’ in carrying out the Bank’s 

express investment powers. See 1999– 


rwilkins on PROD1PC63 with NOTICES2
Federal Register / Vol. 74, No. 38 / Friday, February 27, 2009 / Notices 8961 

9For example, if the Banks were to issue CMOs 

as part of the program, the Banks would want such 

interests to qualify for the tax treatment provided 

to REMICs. The Banks, however, because they are 

not subject to Federal taxes, would most likely be 

considered a ‘‘disqualified organization’’ under the 

REMIC tax provisions and therefore could not hold 

any residual interests that were created by the 

securitization. See 26 U.S.C. 860E. 

GC–03 at 5. Although the Bank in 

question never implemented this 

program, so no loans were securitized 

under it, the legal reasoning remains 

valid given that the incidental powers 

provisions have not been amended since 

the program was approved. The same 

legal reasoning could be extended to a 

more general securitization program for 

the Banks. 

With respect to legal issues, we are 

specifically seeking comment on the 

following: 

G.1. Do the incidental authorities in 

section 11(a) and 11(e)(1) of the Bank 

Act provide a sufficient basis to 

authorize a securitization program, 

especially if the Banks are allowed to 

guarantee the securitized mortgages? 

G.2. Are there other laws, such as the 

Government Corporation Control Act or 

specific tax provisions, which could 

create obstacles to a Bank securitization 

program? 9

G.3. Given that different formats for 

securitization could be adopted by the 

Banks, would some formats present 

more legal obstacles to a program than 

others? 

V. Summary of Request for Comment 

In anticipation of presenting a report 

to Congress by July 30, 2009, FHFA is 

seeking public comment with respect to 

a possible securitization program in the 

Bank System. Some of the policy and 

safety and soundness issues that FHFA 

would need to address in the study are 

described in this notice. FHFA 

anticipates that responses to the 

questions raised in this notice will 

constitute an important source of 

relevant data and analysis. In addition 

to responses on the specific questions 

raised, commenters should provide 

other information that they believe may 

be useful in our analysis and 

preparation of the FHFA report to 

Congress. 

Dated: February 23, 2009. 

James B. Lockhart III, 

Director, Federal Housing Finance Agency. 

[FR Doc. E9–4262 Filed 2–26–09; 8:45 am] 

BILLING CODE 8070–01–P 

FEDERAL RESERVE SYSTEM 

Change in Bank Control Notices; 

Acquisition of Shares of Bank or Bank 

Holding Companies 

The notificants listed below have 

applied under the Change in Bank 

Control Act (12 U.S.C. 1817(j)) and 

§ 225.41 of the Board’s Regulation Y (12 

CFR 225.41) to acquire a bank or bank 

holding company. The factors that are 

considered in acting on the notices are 

set forth in paragraph 7 of the Act (12 

U.S.C. 1817(j)(7)). 

The notices are available for 

immediate inspection at the Federal 

Reserve Bank indicated. The notices 

also will be available for inspection at 

the office of the Board of Governors. 

Interested persons may express their 

views in writing to the Reserve Bank 

indicated for that notice or to the offices 

of the Board of Governors. Comments 

must be received not later than March 

16, 2009. 

A. Federal Reserve Bank of 

Minneapolis (Jacqueline G. King, 

Community Affairs Officer) 90 

Hennepin Avenue, Minneapolis, 

Minnesota 55480–0291: 

1. Gary Ihry; Mary Ihry; Wade Ihry; 

Marilyn Ihry; Keith Ihry; Brenda Ihry, all 

of Hope, North Dakota, and Reed Ihry, 

of Devils Lake, North Dakota, to acquire 

voting shares of Quality Bankshares, 

Inc., and thereby indirectly acquire 

voting shares of Quality Bank, both of 

Fingal, North Dakota. 

Board of Governors of the Federal Reserve 

System, February 24, 2009. 

Robert deV. Frierson, 

Deputy Secretary of the Board. 

[FR Doc. E9–4206 Filed 2–26–09; 8:45 am] 

BILLING CODE 6210–01–S 

FEDERAL RESERVE SYSTEM 

Notice of Proposals to Engage in 

Permissible Nonbanking Activities or 

To Acquire Companies That Are 

Engaged in Permissible Nonbanking 

Activities 

The companies listed in this notice 

have given notice under section 4 of the 

Bank Holding Company Act (12 U.S.C. 

1843) (BHC Act) and Regulation Y (12 

CFR Part 225) to engage de novo, or to 

acquire or control voting securities or 

assets of a company, including the 

companies listed below, that engages 

either directly or through a subsidiary or 

other company, in a nonbanking activity 

that is listed in § 225.28 of Regulation Y 

(12 CFR 225.28) or that the Board has 

determined by Order to be closely 

related to banking and permissible for 

bank holding companies. Unless 

otherwise noted, these activities will be 

conducted throughout the United States. 

Each notice is available for inspection 

at the Federal Reserve Bank indicated. 

The notice also will be available for 

inspection at the offices of the Board of 

Governors. Interested persons may 

express their views in writing on the 

question whether the proposal complies 

with the standards of section 4 of the 

BHC Act. Additional information on all 

bank holding companies may be 

obtained from the National Information 

Center website at www.ffiec.gov/nic/. 

Unless otherwise noted, comments 

regarding the applications must be 

received at the Reserve Bank indicated 

or the offices of the Board of Governors 

not later than March 16, 2009. 

A. Federal Reserve Bank of Atlanta 

(Steve Foley, Vice President) 1000 

Peachtree Street, N.E., Atlanta, Georgia 

30309: 

1. Educational Services of America, 

Inc. and Educational Funding of the 

South, Inc., both of Knoxville, 

Tennessee, to engage in community 

development activities, pursuant to 

section 225.28(b)(12) of Regulation Y. 

Board of Governors of the Federal Reserve 

System, February 24, 2009. 

Robert deV. Frierson, 

Deputy Secretary of the Board. 

[FR Doc. E9–4205 Filed 2–26–09; 8:45 am] 

BILLING CODE 6210–01–S 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

National Institute for Occupational 

Safety and Health; Final Effect of 

Designation of a Class of Employees 

for Addition to the Special Exposure 

Cohort 

AGENCY: Centers for Disease Control and 

Prevention (CDC), Department of Health 

and Human Services (HHS). 

ACTION: Notice. 

SUMMARY: The Department of Health and 

Human Services (HHS) gives notice 

concerning the final effect of the HHS 

decision to designate a class of 

employees at Vitro Manufacturing in 

Canonsburg, Pennsylvania, as an 

addition to the Special Exposure Cohort 

(SEC) under the Energy Employees 

Occupational Illness Compensation 

Program Act of 2000. On January 16, 

2009, as provided for under 42 U.S.C. 

7384q(b), the Secretary of HHS 

designated the following class of 

employees as an addition to the SEC: 

All AWE employees who worked at Vitro 

Manufacturing in Canonsburg, Pennsylvania, 


rwilkins on PROD1PC63 with NOTICES2