FHFA Sees Securitization Inappropriate for FHLBs
The practice of securitizing mortgages, while freeing up capital for more loans, is not the financing answer for Federal Home Loan Banks (FHLBs) financing, according to reports out of the Federal Housing Finance Administration (FHFA). The securitization market is too volatile in the wake of massive loan defaults and competition from Fannie Mae (FNM) and Freddie Mac (FRE) is too strong for securitization to prove a profitable business segment for FHLBs, FHFA director James Lockhart noted. The banks offer secure loans -- or advances -- to members. Lockhart said the FHLB system remains sound and the joint and several guarantee is strong. His comments arrived on the first anniversary of the Housing and Economic Recovery Act of 2008, which set up FHFA. His comments on Thursday addressed concerns facing the FHFA, Fannie Mae, Freddie Mac and the 12 FHLBs. Questions facing the securitization market range from payment methodology to the future of securitization in the US. Lockhart noted challenges ahead for the FHLBs, including managing capital prudently given some exposure to private-label mortgage-backed securities (MBS), finding the best way of providing system support for individual FHLBs and ensuring more consistency in financial disclosures and accounting. As "high levels of delinquencies triggered downgrades in the private label securities, it has presented significant challenges for investors, including Fannie Mae, Freddie Mac and the Federal Home Loan Banks," Lockhart said. "Currently 65% of the carrying value of private label securities in the FHLB system are below investment grade, downgraded or on negative watch. This compares to only 20% in those categories at the end of 2008." The FHLBs’ exposure to private-label securities varies considerably among the FHLBs and has impacted their retained earnings, accumulated other comprehensive income and GAAP capital, according to Lockhart. As of March 31, 2009, the FHLBs held $64bn of private-label MBS. These securities had a fair value of $49bn, or $0.76 on the dollar. "We have been working with the 12 FHLBs regarding valuing their private-label MBS," Lockhart added, "an issue that has significant consequences for them. As they adopted early the new other- than-temporary impairment rules, we worked with them on the adoption of a common platform for accounting." He indicated an FHFA report on FHLB securitization recommends FHLBs not be allowed to securitize mortgages at this time. Instead, the report reccomends participation in a program called MPF Xtra, through which the FHLBs serve as a mortgage purchase conduit, selling the mortgage loans immediately to government-sponsored enterprises (GSEs), rather than acquiring the loans on their portfolios. Under this mortgage program, members do not credit enhance loans or receive any credit enhancement fee for these loans, the FHFA noted. Instead, a FHLB facilitates loan sales between members and a third party, and performs other services and functions in return for a fee. The FHFA's report concluded that while FHLB securitization could enable the FHLBs to purchase a larger volume of conforming mortgages from members and increase the availability of mortgage credit, FHLB securitization of mortgages would best be considered after government agencies have developed their recommendations concerning the future of the mortgage-related government sponsored enterprises based on market conditions that exist when that effort is completed. The push for securitization among GSEs but not FHLBs seems to enforce a consensus that emerging policies have begun to "waffle"on when securitization practices are acceptable. HousingWire's own Linda Lowell recently explored the phenomenon of "full-tilt policy schizophrenia" in comprehensive coverage last week. "You’ll find elected representatives coming out of one hearing where they excoriate bank execs for not lending, and going into another where they tenderly commiserate with the bank exec apparently threatened by another branch of government for trying to ensure taxpayers got value and not systemic mayhem for their investment," Lowell wrote. She noted banks this environment may soon want room to waffle, too. The push may be for some form of housing GSE that underpins primary and secondary mortgage markets similar to Fannie and Freddie. Under the new accounting rules, Lowell said, the best mortgage banking play may be to make conforming loans and sell them into GSE MBS, taking gains on sale and booking servicing assets and pushing the cost of capital onto the GSEs’ plate. Write to Diana Golobay. Disclaimer: The author held no relevant investments when this story was published.