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

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

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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

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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

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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