Va home mortgage loan rate

The Federal Home Loan Banks are part of a system created by the federal government to promote home ownership. This Commentary looks at new initiatives undertaken by these government-sponsored enterprises to expand their role in financial markets and the attendant implications for their balance sheets.

The 1929-33 contraction had far reaching effects in many directions, no least on monetary institutions and academic and popular thinking about the role of monetary factors in the economy A number of special monetary institutions were established in the course of the contraction, notably the Reconstruction Finance Corporation and the Federal Home Loan Banks,...

-- Friedman and Schwartz (1963)

Created by 1932 legislation, the Federal Home Loan Bank System is part of the federal infrastructure for promoting home ownership in the United States. For much of its history, the System's 12 Federal Home Loan Banks (FHLBs) have fulfilled their mission by providing liquidity to the housing finance industry, primarily the nation's savings and loans and savings banks. More recently, they have assisted commercial banks as well. The FHLBs increase the liquidity of mortgage markets by making advances (loans) to member institutions, which use the advances to make new mortgage loans. Advances are secured against the members' mortgage-related assets.

The 1980s thrift debacle resulted in legislation that completely overhauled the federal regulatory system for savings and loans and the Federal Home Loan Bank System. The System underwent major restructuring, but the fundamental mission of the FHLBs remained housing finance.

While the mission of the FHLBs has not changed, their activities have expanded in a number of important ways. Over the past decade, the FHLBs substantially increased the size of their investment portfolios, including their holdings of mortgage-backed securities. In 1999, the FHLBs' lending authority was extended by the Gramm-Leach-Bliley Act to include the loans secured by small business and agricultural credits of community depository institutions (currently defined as depository institutions with S538 million or less in total assets). To date, lending activity under this new authority has been trivial-only $8.4 billion of advances (1.72 percent of total advances) secured by small business and agricultural loans were outstanding on December 31, 2002.

From the perspective of its traditional housing finance mandate, the FHLB System undertook a major new initiative in 1997: the direct holding of mortgage loans. Through purchases of mortgage loans from FHLB System member institutions, the FHLBs join the ranks of the two other government-sponsored enterprises that have a mission to promote home ownership--the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation--in promoting the secondary market for mortgages. The evolution of FHLB mortgage activities took another important turn recently as the FHLB of Chicago recently received permission to operate a new program in which mortgage assets purchased from FHLB members are securitized.

The public commitment to support home ownership remains strong, and expanding the FHLBs' housing-related asset powers is consistent with that objective. But as with other government-sponsored enterprises, the FHLBs' public charters convey upon them special treatment not afforded privately chartered firms, providing them with competitive advantages in the marketplace--not the least of which is the perceived implicit government backing of their liabilities. Therefore, the continuing evolution of FHLB activities merits periodic review.

* Providing Liquidity to Mortgage Lenders

The FHLBs were established as a liquidity facility for the housing finance industry. Initially, they operated as deposit-replacement facilities, making advances to thrifts and other FHLB member institutions. Thrifts would use FHLB advances to insulate their mortgage lending activities from shifts in loan demand and deposit flows. Through time, these housing lenders began to use FHLB advances as a routine source of funding for their mortgage assets.

For the better part of six decades, membership in the FHLBs was limited to institutions specializing in housing finance--largely savings associations. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 opened up membership in the FHLBs to commercial banks. Starting from zero at the beginning of 1990, commercial bank membership has grown to 5,886 institutions (73 percent of all FHLB members) as of December 31, 2002.

Providing liquidity through secured lending remains the FHLBs' most important activity. More than 64 percent of the FHLBs' total assets ($764 billion) consisted of outstanding advances ($490 billion) as of December 31, 2002. While the current ratio of advances to assets is substantially below the high mark set in 1980 (90 percent), it is considerably above the historical low of less than 49 percent recorded in 1995. Moreover, on average, advances accounted for nearly two-thirds of FHLB assets over the past five years. And despite the widening of the pool of eligible collateral for community financial institutions under the 1999 Gramm-Leach-Bliley Act, over 98 percent of advances are still secured by housing-related assets.

The shift away from advances is reflected largely in the FHLBs' investment portfolio. From 1990 through the end of of 2002, FHLB investments increased from $72 billion to $206 billion (over 27 percent of total assets). These investments--which consist largely of holdings of mortgage-backed securities, securities of the U.S. Treasury and official agencies, federal funds sold, and interest-bearing deposits in banks--increase the flexibility with which the FHLBs can manage their balance sheets. For instance, the FHLBs can use their investment accounts to accommodate unforeseen changes in demand for advances by making offsetting changes in their investments--increasing investments when demand for advances is falling and decreasing investments when demand for advances is rising. Investments appear to be attractive assets to hold in portfolio for their own sake as well, for their magnitude has grown enormously since 1990. Certainly, the $96 billion of mortgage-backed securities (nearly 47 percent of total investmen ts) held by the FHLBs on December 31, 2002, provide a means of supplying credit to the housing industry other than the more traditional advances.

* Direct Holdings of Mortgages

On January 9, 1997, the FI{LB of Chicago received approval from the Federal Housing Finance Board to operate a pilot program for a new initiative, the Mortgage Partnership Finance Program, which allowed the Chicago bank to engage in a new activity, directly purchasing mortgages from FHLB members. Two years later, all 12 FHLBs were granted the right to establish mortgage-asset programs similar to Chicago's. In June 2000, the Finance Board removed a $9 billion cap on the Chicago pilot and made mortgage-asset programs permanent for those FHLBs that decided to offer them. By the end of 2000, 11 of the 12 FHLBs held mortgages purchased under one of two such programs: the program pioneered by the FHLB of Chicago or a program established in 2000 by the FHLBs of Seattle, Indianapolis, and Cincinnati called the Mortgage Purchase Program. Seattle, Indianapolis, and Cincinnati offer their program to their members, and all other FHLBs offer Chicago's program to theirs. The FHLB of Atlanta plans to offer the Mortgage Purc hase Program to its members in 2003. Currently, all 12 FHLBs are holding mortgage assets on their balance sheets.