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Home loan banks will continue to be key housing player

[interview: John Korsmo]

Q: How would you like to see the Home Loan Banks evolve over the next five years?

The Federal Home Loan Banks will continue to have a very valuable role to play in the housing finance area and they will certainly continue to support community banks. That role will inevitably change given some of the changes we are seeing in the industry, such as consolidation. The top 50 home mortgage originators now make up 80-some percent of the home loan originations. One institution is doing about a third of the home loan originations in the country. Nevertheless, the system will continue as it has in the past to play an important role. By virtue of change, however, the system is going to have to change as well. The whole issue of debt cost is an example. There is going to have to be increased effort on behalf of the 12 Home Loan Banks to cooperate and coordinate. There is no reason to use the other 'c' word - consolidation scares everybody. There are real geographical differences that make the 12 banks important in and of themselves.

There is a lot of diversity among the 12 banks. Is that a good thing?

Good thing or bad thing, it exists. As the regulator, I have to take reality as it comes to me. My position is that member asset programs will play an increasingly important part in the future of the banks and in their planning. Again, as a regulator, I am not in a position to prompt them but I think the future of MPF, for example, raises the whole question of how important it is that the banks develop some level of cooperation among themselves. Business varies around the country. Business in California is different than business in New York. Business in Atlanta is different than the business in Topeka. There will always be a diversity of product line and just the nature of the industry in different parts of the country. But there are ways that the bank system as a cooperative venture can work together to lower the cost of funds, to lower the cost of their operations, to avoid duplication of effort, to coordinate activities and products, and share best practices.

What about credit unions having access to Federal Home Loan Bank membership?

I have to take the world as I find it. A number of the Home Loan Banks are looking for new members. Here is a large market that is not very well penetrated by the Home Loan Bank system. I came from a health care background, so I can see where it's kind of like preaching chiropractors to the doctors, to talk about credit unions to bankers. But the reality is federally insured credit unions are now members of the system, and several of the banks are in a situation where it makes sense for them to have state-insured, or privately-insured credit union members.

In the late 1980s when the S&Ls were having trouble, there was an issue with the Home Loan Banks having priority to assets that had been pledged as collateral against Home Loan Bank advances. Is there any discussion going on about changing that as deposit insurance is debated now?

I haven't been involved in any of that discussion. I have met with FDIC Chairman Donald Powell and that wasn't one of the issues we discussed. I've certainly heard the commentary. There has been some ongoing discussion of the super lien at the FDIC. I don't anticipate any change on that. The super lien at the Federal Home Loan Banks has served the larger industry well and while there is conversa tion about changing that I don't think it is conversation that really is any different than what has gone on before.

What do you tell regulators and bankers who are worried banks are growing overly dependent upon Home Loan Bank advances?

I'm a safety and soundness regulator. As long as these advances are well collateralized, I'm comfortable. There has never in the history of the system been a loss on an advance. I am comfortable with the business the banks are doing. And I see no reason to not be at this point. This is what we do everyday, we make sure that we can say with confidence that each of the 12 banks is operating in a safe and sound manner. I have no reason to be concerned given our collateral practices and the history of the system, but it is something we watch everyday.

John Korsmo is chairman of the Federal Housing Finance Board.