Comment Detail

Comment

The FHLB serves as an important component of our institution's overall liquidity. We have had an FHLB borrowing position fairly steadily for a number of years as it provides us with a level of certainty not always present with deposits, our primary source of funding. The availability of our line of credit and access to a full complement of borrowing options is invaluable to us. However, FHLB pricing has trended higher than alternative sources available to us, which seems to me to be contrary to their primary mission, supporting residential lending, the key component of community investment. In a 10+ year market where 30-year mortgages were yielding 3% or less, FHLB borrowings were often not supportive of residential lending. Instead, we had to modify our business to limit our one- to four-family lending and instead expand into higher risk commercial and consumer lending. Now, with rates increasing at a pace not seen since just prior to the 2008 crash, FHLB pricing is still not advantageous. In our experience, FHLB pricing is at least 50 bps more than brokered/reciprocal deposit pricing - exactly the opposite of what one would expect for an organization dedicated to providing liquidity to support housing and community investment.
Further, the FHLB's practice of discounting collateral offered to access FHLB borrowings is not necessary given the highly regulated nature of the banking environment. It seems to me that loans that qualify for the secondary market or that carry a government guarantee should be sufficient to collateralize FHLB borrowings. Afterall, the FHLB has a full lien on a member’s assets as part of the borrowing program. We have USDA guaranteed loans which have LTVs over 80% but which conform to the USDA program. These loans do not qualify for collateral under the FHLB guidelines. For institutions serving rural communities, such a stance makes it very difficult to continue supporting the very market the FHLB espouses to support (i.e., housing). In our case, we have limited our USDA rural residential mortgage product offering as they do not count as FHLB collateral and instead shifted to conventional mortgages which do not carry any guarantees – a riskier loan for us and less effective product for our rural markets. Further, we have programs developed specifically for our communities - supporting low- to moderate-income families providing up to 100% financing with no PMI - strongly supporting our housing markets. These loans do not qualify for FHLB collateral even after they pay down below 80% of the home financed. We suggest that the FHLB consider a given Bank's regulatory rating and capital position into its determination of collateral acceptance. The FHLB could also consider third-party quality control program reports as most community banks have them in place as a control to ensure quality, performing reviews on 10% of their annual production. The FHLB could have a policy in place to require more than the 10% review if deemed appropriate. Well run banks, as demonstrated in their regulatory ratings and their regulatory capital ratios, do not pose significant risk to the FHLB. It would seem to me that any residential product provided safely and prudently to low- to moderate-income families should be considered for FHLB collateral - undiscounted. By maximizing the availability of borrowings to institutions, the FHLB more closely adheres to its mission to support housing with presumably effectively priced liquidity.
Absent a well-priced borrowing option, the next best thing the FHLB can do is provide an effective secondary market option for its members. Holding 30-year residential mortgages is a difficult proposition, especially without the support of organizations like the FHLB whose mission is to provide reliable liquidity - and I would argue affordable - liquidity to member institutions. To that end, the FHLBNY just recently introduced a mortgage purchasing program which replaces the MPF program (a mortgage purchasing program) offered through the FHLB Chicago. The MPF program was initially well priced and easy to implement; however, the MPF pricing was effectively out of the market within a few years of introduction. As a result, after successfully gearing up to produce and sell residential mortgages to the FHLB, we had to reduce our capabilities when the pricing was no longer viable. The current MAP offered through FHLBNY has promise of being useful to member institutions; however, we are reticent to implement the program given the FHLB's pricing track record for both borrowings and mortgage purchase programs. Our hope is that the FHLB will regain its mission focus and reconsider how it can provide the much-needed liquidity need to finance housing which should include access to the secondary market.
As we see a return to pre-2008 markets (i.e., higher rates), deposits are beginning to decrease as families are now beginning to spend pandemic savings to make ends meet. With anticipated net core deposit outflow, small community institutions will be faced with increased funding costs from higher-priced time deposits in market and higher-priced brokered deposits. These institutions will need a reliable source of long-term funding to support housing financing or access to the secondary mortgage market. The important role that the FHLB can have in this environment cannot be over-stated.
Despite the issues raised, the FHLB is a valued partner. Often, we were faced with liquidity needs that were met by the FHLB through our pre-established line of credit. While the cost was higher and the line availability was reduced due to unnecessary collateral valuation, the immediate need was met. Other providers are not as reliable. For example, we recently had a need for additional liquidity as we were about to close on several residential mortgages in our pipeline. We went to the more reasonably priced CD market and were only able to obtain half of the liquidity desired. We then obtained the additional liquidity from the FHLB. The FHLB borrowing was a full 90 bps more, which it seems to me should not be the case given the FHLB’s stated mission. However, the line was immediately available, and provided us the liquidity we needed for a few weeks while we obtained less expensive funding from other sources.
We are hopeful that the FHLB will continue and improve its focus on the primary mission of supporting housing – the key component of community investment.