At the Federal Home Loan Bank annual Directors’ Conference on May 24, Federal Housing Finance Agency (FHFA) Director Melvin Watt discussed what the agency is doing to create a better Federal Home Loan Bank (FHLBank) System.
“The Federal Housing Finance Agency (FHFA) shares your commitment to ensuring that the FHLBanks remain a reliable source of liquidity, provide access to the secondary mortgage market, and offer other services for their members, especially smaller institutions,” Watt said. “And we remain committed to ensuring that the FHLBanks accomplish these goals in a safe and sound manner while fulfilling their affordable housing obligations.”
Last year was the most profitable year in history for the FHLBank System, with all 11 FHLBanks profitable and a net income at $2.9 billion. In 2015, total FHLBank assets increased to $969.6 billion, driven primarily by increases in advances to members. Watt admitted that some of this profitability was attributed to unique events, such as $688 million in gains from litigation settlements.
The FHFA will continue to monitor whether FHLBanks remain focused on their core mission of providing advances and supporting secondary mortgage market access for member institutions. Watt stated that the FHLBanks overall have done very well in meeting the standards that were set forth within last July’s Core Mission Achievement Advisory Bulletin but that the FHFA remained concerned about the extent to which some FHLBanks continue to rely on non-core mission assets to support their earnings.
“Again, however, we are making progress,” Watt added. “This is demonstrated by the decline in the overall level of FHLBank assets held in investments from 30 percent at the end of 2014 to 28 percent at the end of 2015.”
Watt discussed three other areas that the FHFA will continue to monitor closely, including the due diligence exercised by FHLBanks that have large exposures to insurance company members to establish conservative haircuts and controls over collateral pledged by them in support of their advances. Another area that will receive close monitoring is situations where advances have been concentrated to a few large members.
“Across the system, the top four borrowers accounted for 24 percent of aggregate advances at the end of 2015. Business concentration with a small number of borrowers can threaten profitability if one or more of these borrowers suddenly decrease their demand for advances,” Watt said. “Consequently, FHFA will continue to evaluate contingency planning for possible rapid decreases in advance demand at FHLBanks with heavy advance concentrations.”
The third area that will receive close monitoring, which had not been discussed in Watt’s comments last year, is the FHLBank System’s increased use of short-term funding in the form of discount notes.
At year-end 2015, discount notes constituted 54 percent of outstanding FHLBank debt, compared with 43 percent at year-end 2014 and 39 percent at year-end 2013. Short-term funding requires more frequent debt rollover than longer-term funding, and this could become a safety and soundness issue if liquidity dries up unexpectedly.
Watt said that the FHFA has been communicating with the Office of Finance and market participants to gather more information about recent changes in debt issuances.
“Even with this trend of greater short-term funding, it is important to note that all FHLBanks met their liquidity requirements in 2015 and continue to maintain ready access to the agency debt markets,” he added.
Watt also discussed the finalized membership rule and affordable housing oversight.
For the membership rule, the FHFA received more than 1,300 comment letters and ultimately decided to eliminate the proposed ongoing asset test after concluding that the burdens of implementing the proposed changes would have outweighed the benefits.
“As you know, however, we decided to finalize our proposed definition of an insurance company to exclude captive insurers,” Watt said. “While this decision may adversely impact some FHLBanks, and certainly some of their members, we continue to believe that the decision we made was the right one and that Congress is the appropriate body to make changes to the statutory membership requirements for FHLBanks. To date, Congress has not taken any action in response to our final rule.”
Watt stated that FHFA continues to make progress in modernizing the Affordable Housing Program (AHP) and that he is hopeful the agency can announce more details on its plans for overseeing its housing goals in the future.
Lastly, Watt discussed the FHFA’s oversight on diversity and inclusion efforts.
The Housing and Economic Recovery Act of 2008 required the FHLBanks, Office of Finance, Fannie Mae and Freddie Mac each to establish an Office of Minority and Women Inclusion and, to the maximum extent possible, utilize minorities, women and minority- and women-owned businesses across all lines and activities of the entities.
“I view this as more than a compliance exercise geared toward meeting some kind of minimum standard. I have mentioned diversity and inclusion in each of my speeches to this group because I want to communicate the importance of seeing diversity and inclusion as integral parts of your efforts to meet your mission, not as an isolated endeavor,” Watt said.
Watt said the FHFA developed a survey to ask each regulated entity about its existing practices, including its diversity and inclusion organizational framework, strategic planning efforts, supplier and workforce diversity programs and reporting procedures and then followed up by visiting each FHLBank and the Office of Finance to interview officials. The FHFA is finishing this process with Fannie Mae and Freddie Mac.
“All of that work was designed to capture information about the current state of each regulated entity’s diversity and inclusion program,” Watt said. “This information will be critically important in enabling us to establish benchmarks against which we can measure and evaluate each entity's progress going forward.”
The FHFA expects to examine its regulated entities’ diversity and inclusion programs and activities as well as develop examiner guidance, hire and train examiners and establish consistent examination methods and practices to ensure that diversity and inclusion examination activities will be part of its regular examination work conducted for all regulated entities in 2017.
The FHFA also plans to propose an amended minority and women inclusion regulation that would direct all regulated entities to undertake diversity and inclusion strategic planning, either on a stand-alone basis or as part of their overall business strategic planning process. The FHFA hopes to publish the proposed amendments for public comment this year.
Watt applauded the efforts voluntarily taken by the Chicago, Dallas and Pittsburgh FHLBanks to tie their executive compensation to specific diversity and inclusion goals.
Finally, Watt discussed a proposed clarification that he signed off on regarding the FHFA’s rules governing FHLBank director and personnel involvement in board elections.
“This proposed clarification, which responds to concerns several of you had raised, makes clear that FHLBank directors or personnel can actively seek out and encourage diverse candidates to run for election, even while directors and personnel still face other limitations on their involvement in elections. This proposed clarification should be coming out soon for public comment,” Watt said.
The Board Diversity Working Group, which was formed by the FHLBanks and is headed by Indianapolis FHLBank CEO Cindy Konich, convened its first in-person meeting several weeks ago and, in the coming months, will be examining best practices across the system and considering what new infrastructure or policies are needed to achieve the goal of increasing board diversity.