The Des Moines FHLB welcomes the opportunity to comment on the  Administration’s questions regarding

The Des Moines FHLB welcomes the opportunity to comment on the Administration’s questions regarding

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July 21, 2010 Department of the Treasury ent of Housing and Urban Development Re: Public Input on the Reform of the Housing Finance System eDocket Number TREAS-DO-2010-0001; eDocket Number HUD-2010-0029 To Whom It May Concern: The Federal Home Loan Bank of Des Moines (FHLB Des Moines or Bank) appreciates the opportunity to comment on the Administration’s questions regarding housing finance reform. The last time the country engaged in such a wide-ranging debate over housing finance was during the Great Depression. That debate resulted in numerous changes to the U.S. housing finance structure, and created many of the players in today’s housing finance system, including the Federal Home Loan Banks in 1932. As one of the twelve Federal Home Loan Banks that is successfully fulfilling the housing finance mission the federal government assigned to us, we believe we are an important component of housing finance in this country, and welcome the opportunity to be part of any housing finance solution that the federal government fashions for the future. Our cooperative structure and members have been important factors in this success. Our members, which are also our customers and stockholders, include commercial banks, savings institutions, credit unions, and insurance companies in Iowa, Minnesota, Missouri, North Dakota, and South Dakota. Approximately, 88 percent of our members are community financial institutions, ...

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July 21, 2010
Department of the Treasury
Department of Housing and Urban Development
Re:
Public Input on the Reform of the Housing Finance System
eDocket Number TREAS-DO-2010-0001;
eDocket Number HUD-2010-0029
To Whom It May Concern:
The Federal Home Loan Bank of Des Moines (FHLB Des Moines or Bank) appreciates
the opportunity to comment on the Administration’s questions regarding housing finance
reform.
The last time the country engaged in such a wide-ranging debate over housing
finance was during the Great Depression.
That debate resulted in numerous changes to
the U.S. housing finance structure, and created many of the players in today’s housing
finance system, including the Federal Home Loan Banks in 1932.
As one of the twelve
Federal Home Loan Banks that is successfully fulfilling the housing finance mission the
federal government assigned to us, we believe we are an important component of housing
finance in this country,
and welcome the opportunity to be part of any housing finance
solution that the federal government fashions for the future.
Our cooperative structure and members have been important factors in this success.
Our
members, which are also our customers and stockholders, include commercial banks,
savings institutions, credit unions, and insurance companies in Iowa, Minnesota,
Missouri, North Dakota, and South Dakota.
Approximately, 88 percent of our members
are community financial institutions, which are generally defined as FDIC-insured
members that have $1 billion or less in assets. We also do business with state and local
housing associates.
Because of the importance of housing finance to our mission, our members, and the
communities in the five states that we serve, we convened a public policy forum on the
Future of Housing Finance in November 2009 (Forum) to address the same issues being
explored through the Administration’s questions.
Participants in the Forum included
public and private sector, national and regional leaders in housing finance, including
many of our members.
The Forum included presentations and panel discussions on what
went wrong, what worked, where we are now, and what needs to be done in the future to
ensure a stable housing finance system
Our responses to the Administration’s questions reflect the dialogue that occurred at the
Forum, as well as the collective experience of the Bank and our membership in
supporting housing finance for nearly 80 years.
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1. How should federal housing finance objectives be prioritized in the context of the
broader objectives of housing policy? Commentary could address: Policy for
sustainable homeownership; rental policy; balancing rental and ownership; how to
account for regional differences; and affordability goals.
Housing finance should be a means to achieving housing policy objectives.
Historically,
the country’s housing policy objectives have included the following:
Homeownership provides numerous benefits to homeowners and their
communities and should be encouraged, but only to the extent that it is
sustainable.
Affordable rental housing should be available for those who cannot afford
homeownership or who do not wish to own a home.
In the pursuit of these objectives, obtaining housing finance is and has been the biggest
obstacle to homeownership and for affordable housing programs.
Few individuals have
the financial wherewithal to pay the full purchase price on their homes and need
financing to purchase a home.
Adequate financing for affordable housing has also been a
chronic problem that policymakers have addressed through housing goals and
government subsidies.
Before the creation of the Federal Home Loan Bank System, home mortgages with 50
percent down payments, high interest rates (in some cases “pawnshop rates”), and
repayment terms as short as one or two years were common. It was in this environment
that Federal Home Loan Banks were established to provide loans – or what we call
advances -- to their members to enable them to offer longer-term, amortizing, low-cost
mortgages.
The Federal Home Loan Banks have been successful in this mission without
federal taxpayer assistance, without distorting private markets, and without suffering
credit losses on the advances provided to their membership throughout their history.
Since the establishment of the Federal Home Loan Banks their housing finance activities
have evolved to include not only the provision of advances to portfolio lenders, but also
other activities that address new public policy goals, member needs, and market
innovations, such as the development of a secondary mortgage market and mortgage-
backed securities (MBS).
These other activities include:
mortgage purchases from members;
investments in MBS;
affordable housing assistance through the Affordable Housing Program (AHP)
and Community Investment Program (CIP);
standby bond purchase agreements to provide liquidity support for affordable
housing programs offered by state housing finance agencies (HFAs);
investments in taxable bonds issued by HFAs that are collateralized by mortgages
for affordable housing; and
a cash advance program to assist in maximizing the lending capacity of HFAs.
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In order for all regions of the country to have access to affordable housing finance, it is
important to have an institutional arrangement in place that ensures this access.
In that
regard, the Federal Home Loan Bank System provides such an arrangement.
By charter,
the Federal Home Loan Bank System is divided into 12 distinct areas of the country.
Financial institutions join as members of a particular Federal Home Loan Bank based on
their geography. Therefore, each Federal Home Loan Bank is regionally controlled
allowing it to be focused on the specific credit needs of its members and their
communities.
In addition to the funding provided by the Federal Home Loan Banks through advances
to their members for home lending and other financial services, each Federal Home Loan
Bank is responsible for identifying and responding to particular housing needs in its
service area.
Based upon the specific needs of our region, FHLB Des Moines has
identified five priorities for our housing-related efforts.
These include 1) providing
housing for low-income, disabled and homeless people; 2) supporting economic
development; 3) addressing Native American housing needs; 4) reducing homelessness;
and 5) developing long-term affordable housing for seniors and people with special
needs.
The Bank’s Affordable Housing Advisory Council – a 15-member group made up of a
diverse range of individuals from the Bank’s five-state district – supports and builds on
these priorities to respond to changing needs in the Bank’s district.
The input this
regional council provides, along with input from the Bank’s board of directors and
members, ensures federal housing finance support that we provide is aligned with the
housing needs of our communities.
2. What role should the federal government play in supporting a stable, well-
functioning housing finance system and what risks, if any, should the federal
government bear in meeting its housing finance objectives? Commentary could
address: Level of government involvement and type of support provided; role of
government agencies; role of private vs. public capital; role of any explicit
government guarantees; role of direct subsidies and other fiscal support and
mechanisms to convey such support; monitoring and management of risks including
how to balance the retention and distribution of risk; incentives to encourage
appropriate alignment of risk bearing in the private sector; mechanisms for dealing
with episodes of market stress; and how to promote market discipline.
Participants at the Bank’s Forum had a number of thoughts regarding what role the
federal government should play in the housing finance sector.
These thoughts are
summarized below.
The federal government should:
ensure that consumers are protected from unscrupulous or predatory lenders;
promote competition in the housing finance market;
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be transparent about its housing finance objectives and how these objectives are to
be met;
foster public confidence in the housing finance system and lenders;
provide for appropriate and uniform regulation of all housing finance originators;
and
promote accountability at all levels and with all participants -- including the
borrower, lender, securitizer, and real estate service provider.
The federal government should in its housing finance policies avoid:
incentivizing or fostering the consolidation of mortgage lenders;
exacerbating cyclical financing trends, such as increasing capital requirements or
imposing stricter accounting policies when credit is already being restricted or
increasing housing finance incentives when housing credit is plentiful; and
distorting or taking over the housing finance market.
With regard to what the federal government should avoid in its housing finance policies,
we believe it is important that the federal government complement, and not supplant,
private sector housing finance efforts and promote a structure that relies on putting more
private capital at risk before the taxpayers. The Federal Home Loan Bank System,
through its self-capitalizing, cooperative structure, is a good example of how private
sector capital can be channeled through member financial institutions to the housing
finance consumer in a transparent, fair, and cost-effective manner.
As for the need for mechanisms that deal with episodes of market stress, it is well worth
noting that at the height of the nation’s recent financial crisis, the Federal Home Loan
Banks were a crucial source of liquidity as other sources disappeared.
Prior to the
coordinated response of the federal government, the Federal Home Loan Banks increased
their advances by more than 50 percent between yearend 2006 when advances were $640
billion and September 2008 when advances peaked at $1.011 trillion, ensuring that
community lenders had access to much needed liquidity provided in a safe and sound
manner.
The Federal Home Loan Banks also played a role in restarting the secondary mortgage
market during the recent financial crisis.
Utilizing in part the temporary authority granted
by their regulator in March 2008 to purchase additional Agency MBS, the Federal Home
Loan Banks doubled their total holdings of Agency MBS from $55 billion on December
31, 2007 to $110 billion on March 31, 2010.
.
Investing in both Agency and private-label MBS is an important way the Federal Home
Loan Banks fulfill their housing finance mission and one that has benefited the housing
finance market generally.
At March 31, 2010, the Bank and the Federal Home Loan
Bank System held MBS investments totaling $14.3 billion and $156 billion, respectively.
One way for the federal government to ensure a more liquid secondary market for
mortgages and MBS in the future is to allow Federal Home Loan Banks more regulatory
flexibility to make investments in such assets.
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Finally, at the Bank’s Forum, concerns were expressed that the government-insured
(FHA and VA) share of the market is currently at the highest levels in 20 years and that a
handful of mortgage lenders now account for nearly two-thirds of all mortgage
originations.
Greater reliance on private sector capital support for mortgages and
origination of mortgages through a less concentrated, more broadly distributed industry
of private sector participants were considered desirable.
The Federal Home Loan Bank
System with its more than 8,000 members is a good model for promoting competition
and providing private sector funding.
3. Should the government approach differ across different segments of the market,
and if so, how?
Commentary could address: Differentiation of approach based on
mortgage size or other characteristics; rationale for integration or separation of
functions related to the single-family and multifamily market; whether there should
be an emphasis on supporting the production of subsidized multifamily housing;
differentiation in mechanism to convey subsidies, if any.
Yes.
The Federal Home Loan Bank System has been part of the government’s approach
to housing finance for almost 80 years and during this time has demonstrated that
different types of housing assistance can be successfully tailored to different markets and
geographic regions.
a.
Affordable Housing
An important segment in the market that our members and affordable housing group
partners serve is the low- and moderate-income housing finance sector, especially the
affordable rental housing market. Local nonprofit housing groups each year work with
our members in using funds from the Bank’s AHP and CIP to provide housing finance
for this segment.
FHLB Des Moines has also been a leader in assisting state housing
finance agencies in their affordable housing efforts.
i.
AHP
As background, the Federal Home Loan Banks contribute 10 percent of their net income
to affordable housing through the AHP, the largest, single source of private sector grants
for housing and community development in the country. This 10 percent contribution is
mandated by law and provides a good example of how the federal government can be
transparent in its affordable housing initiatives.
The Federal Home Loan Banks have
distributed nearly $4 billion in AHP funds since 1990.
As of March 31, 2010, FHLB Des
Moines has provided $164.2 million in grants for 1,040 AHP projects.
FHLB Des Moines annually allocates a portion of its AHP funds to three distinct
homebuyer assistance programs – Native American Homeownership Initiative, Rural
Homeownership Fund, and Urban First-Time Homebuyer Fund. These programs help
eligible homebuyers purchase single-family, owner-occupied properties. Individuals and
families at or below 80 percent of the area median income can receive down payment,
closing cost, counseling, or rehabilitation assistance.
As of March 31, 2010, FHLB Des
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Moines has allocated $24.7 million to these programs enabling the purchase of more than
8,000 housing units.
ii.
CIP
Each Federal Home Loan Bank also operates a CIP that offers below-market-rate loans to
members for long-term financing for housing and economic development that benefits
low- and moderate-income families and neighborhoods.
Collectively, the Federal Home
Loan Banks have provided more than $56 billion of very low cost funding through CIP
for a variety of affordable housing and community development projects since the
program’s inception two decades ago. These programs are important sources of funds for
local affordable housing initiatives, which combine this funding with many other private
and public resources.
As of March 31, 2010, FHLB Des Moines has provided more than $7 billion in
community investment advances to help our members finance important housing and
economic development initiatives.
These advances have been tailored to the specific
needs of our district.
Such tailored advances include specific ones for rural communities
and advances for members located in federal disaster areas, which can be used to help
finance repair or reconstruction of residences or businesses damaged by disasters.
iii.
State HFAs
FHLB Des Moines also assists state HFAs in their affordable housing efforts by
providing them advances and supporting their bond issuances.
FHLB Des Moines
provides three programs to HFAs: a Standby Bond Purchase Agreement to enhance their
credit rating for marketing bonds; a Taxable Bond Program to purchase taxable bonds
securitized by secondary market loans; and the Cash Advance Program to assist in
maximizing their lending capacity.
b.
Multifamily Housing Finance
One specific example of how assistance can be provided for multifamily housing is
through the USDA’s section 515 program.
Under the Section 515 program, the USDA
Rural Development makes direct loans to finance affordable rental housing. Across the
nation, these properties provide safe and affordable homes to lower-income residents,
including the elderly, single-parent households and the disabled. In nearly every small
community across the state a Section 515 property exists. In many cases, these homes are
the only rental housing available making their preservation an important goal of FHLB
Des Moines and USDA Rural Development.
Properties in Missouri, like many states, are aging and lack the financial reserves
necessary to incur rehabilitation expenses. Although the properties are structurally sound,
many are in need of new roofs, updated heating and cooling systems and other capital
improvements.
To address this need, FHLB Des Moines has partnered with member
financial institutions in Missouri to rehabilitate 38 properties and improve the lives of
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over 1,270 families. Many residents only have an average income of $10,000 and that
average falls to $6,500 for elderly and disabled properties. An AHP grant ensures that
major improvements are made while rents remain around $314 for a one-bedroom
apartment.
c.
Conforming Loans
The Federal Home Loan Banks’ mortgage purchase programs provide a secondary
market for conventional conforming mortgages that target middle-income families.
FHLB Des Moines also offers the MPF Xtra program, which provides a conduit for
smaller members to sell mortgages to Fannie Mae on favorable terms.
d.
Jumbo and Other Non-Conforming Mortgages
Through its advances, the Federal Home Loan Banks provide liquidity for jumbo
mortgages and other safe and sound mortgages that do not fit the conforming loan
definitions.
The importance of such assistance is evidenced today where there is no
secondary market for such loans.
In addition, Federal Home Loan Bank advances
provide liquidity and interest rate management capabilities for the members who hold
these loans on their portfolios.
4. How should the current organization of the housing finance system be improved?
Commentary could address: What aspects should be preserved, changed, eliminated
or added; regulatory considerations; optimal general organizational design and
market structure; capital market functions; sources of funding; mortgage
origination, distribution and servicing; the role of the existing government
sponsored enterprises; and the challenges of transitioning from the current system
to a desired future system.
The housing finance system should allow community bankers to play a more central role
in the mortgage origination process to ensure that the system is not dominated by a
handful of institutions or by institutions that have no incentive to ensure sound
underwriting practices.
An important way the Federal Home Loan Banks have helped
community bankers is by providing them low-cost funding and interest-rate management
tools to hold mortgages in their portfolio.
These low-cost funds are made possible
because the Federal Home Loan Banks borrow money efficiently and cheaply in the
capital markets.
In that regard, the ability of the Federal Home Loan Banks to access the
capital markets should not be impaired.
This access has allowed funds from the capital
markets of Wall Street to be provided efficiently to institutions on Main Street.
In addition, consideration should be given to how community banks and Federal Home
Loan Banks can assist in the rejuvenation of the secondary market.
Many of our
community bank members are very good originators of mortgages, but do not always
have the capacity to retain these mortgages on their books.
To address these lenders’
needs, the Bank has purchased mortgages under the Mortgage Partnership Finance
®
(MPF) Program and more recently under MPF Xtra.
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Since its beginning in 1997, the MPF Program has had remarkable success and market
acceptance. The number of financial institutions in the MPF and the Federal Home Loan
Bank System’s other major mortgage purchase program has continued to grow steadily
with approximately 1,500 institutions having signed up for the programs. These
institutions have funded over $215 billion of mortgage loans, helping more than 1.5
million individuals and families buy a new house or lower the cost of their existing home
through refinancing.
The MPF Program has been especially helpful to smaller community banks, many of
which originate only one or two mortgages at a time and has often been the only way
they can offer long-term, fixed-rate mortgages to consumers within their communities.
The key to the MPF Program's success has been its risk sharing structure. Each party
manages the risks it is best suited to manage. Community banks know their customers
better than any secondary market entity can, and are required to provide credit
enhancement on the pool of loans they sell or fund through the Program. The
Federal Home Loan Banks provide the funding for the loans and, for the most part, have
retained them on their balance sheets, managing the interest rate and prepayment risks.
This structure purposely requires the originators to retain most of the credit risk for
expected credit losses of the mortgages they underwrite. Therefore, they have no
incentive to create loans for which the borrower does not have the ability to repay.
Because these originators are required to have "skin in the game," MPF loans have
exhibited superior credit performance since the program began almost 13 years ago.
Properly matching the duration of long-term, fixed-rate loans with the liabilities that
funded them can be challenging given the propensity for the loans to prepay when
interest rates fall.
The Federal Home Loan Banks have used a variety of risk
management tools to indirectly transfer the interest rate and prepayment risks to third
parties.
An additional way to address this challenge is for the Federal Home Loan Banks
to securitize the mortgages that they purchase.
Such a securitization program would not
only strengthen the safety and soundness of the Federal Home Loan Banks, but also
provide a more robust secondary market for community bank members to sell mortgages
while retaining the primary credit risk and valuable customer relationships of the loans
they originate.
5. How should the housing finance system support sound market practices?
Commentary could address:
Underwriting standards; how best to balance risk and
access; and extent to which housing finance systems that reference certain standards
and mortgage products contribute to this objective.
As noted above, the rules and regulations governing the housing finance system should
cover all housing finance originators, including brokers and other previously unregulated
mortgage financial firms.
To ensure accountability, originators, securitizers, borrowers,
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all need to have “skin in the game” or money at stake with regard to repayment of
mortgage loans.
The success of the Federal Home Loan Banks’ MPF Program is a good example of
supporting sound market practices.
As noted above, the MPF Program has had a default
rate significantly below those of other housing finance programs due in part to the sound
underwriting required of loans and the requirement that the originator retain a portion of
the credit risk.
Our advance program is also structured so that the holder of a mortgage loan pledged as
collateral for an advance, usually the originator of that loan, holds the credit risk of that
loan, thereby providing an incentive to ensure that the home is correctly appraised, the
loan prudently underwritten, and the borrower has the ability to repay the loan.
6. What is the best way for the housing finance system to help ensure consumers are
protected from unfair, abusive or deceptive practices?
Commentary could address:
Level of consumer protections and limitation; supervising agencies; specific
restrictions; and role of consumer education.
The best way to protect consumers is to ensure that loans are originated by reputable
entities that are licensed, regulated, and have capital at risk.
One of the reasons consumer
protection is not a problem with the mortgages purchased by or financed through the
Federal Home Loan Banks is that Federal Home Loan Bank members are subject to
federal or state regulation and have their own funds and reputations at risk with regard to
their mortgage activities.
Another way to protect borrowers is through homebuyer education. The homebuyer
assistance programs offered by the Federal Home Loan Banks require all first-time
homebuyers to receive financial education. These programs have had low default rates
even during the recent economic crisis.
7. Do housing finance systems in other countries offer insights that can help inform
U.S. reform choices?
One of the presentations at the Forum focused on a review of the mortgage finance
systems in other countries.
From that presentation, we learned the following:
The prepayable 30-year fixed-rate mortgage is not the focus of other countries’
housing finance models.
Such a product generally requires some source of capital
market funding and/or specific interest-rate management tools.
It is useful to note
that the Federal Home Loan Banks because of their access to capital markets and the
ability to borrow long have been able to support such a product.
This has been the
case most notably with the development of the mortgage purchase programs, but also
historically the Federal Home Loan Banks were able to fund long-term mortgages
originated by thrift and insurance company members through prepayable advances
funded with callable debt.
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Many countries rely on covered bonds to provide mortgage finance through portfolio
lenders.
Such an approach allows for credit risk to stay on the balance sheet of the
lender and provides a simple, liquid debt instrument to finance mortgages.
It was
noted, however, that Federal Home Loan Banks provide the same benefits as the
covered bond market, but in a more efficient manner and to a broader range of market
participants, including smaller originators.
Before the recent crisis, the U.S. housing finance system was the envy of the world
with robust competition among diverse mortgage originators. The crisis has
diminished the competitive feature of the nation’s system with mortgage originations
now dominated by a few institutions, resulting in elevated concentration risk.
Having
housing finance provided through a widely-dispersed industry of competing, diverse
lenders is an important goal that can be fostered through the Federal Home Loan
Banks.
Finally, at the Bank’s Forum, a number of speakers noted the many ways the U.S.
supports the housing finance market and how such support is much more extensive than
in many other countries.
Given the size of the U.S. housing finance market ($11 trillion
in single family mortgages alone), the importance of this market to the economy, and the
unique housing finance products that Americans have come to expect, some federal
government support is needed.
Successful recovery from the financial crisis and
rebuilding a more resilient housing finance system require a rigorous review of the
various federal programs to determine what has worked well and what has not been
successful or not been justified by its cost.
Because of the conservatorships of Fannie Mae and Freddie Mac, some policymakers
believe that the government-sponsored entity (GSE) model does not work for housing
finance.
We believe that the Federal Home Loan Bank System demonstrates a GSE
model that does work.
As outlined in our responses above, this model has fulfilled the
public mission of providing liquidity, stability, and housing finance to all regions and all
segments at all times without taxpayer assistance, without distorting private markets, and
without suffering credit losses on advances.
The success of the Federal Home Loan Bank System has been made possible and
enhanced through having private-sector capital at risk.
Unlike Fannie Mae and Freddie
Mac, this capital, with redemption periods of up to five years, comes from our customers
who have a long-term interest in our sustainability because they are also our owners.
The
cooperative structure, with its self-capitalizing requirements, has ensured adequate capital
is at risk to avoid the moral hazard of profits being privatized while risk is socialized.
Unlike Fannie Mae and Freddie Mac, the private-sector capital supporting the Federal
Home Loan Banks is counter-cyclical.
As the balance sheets of the Federal Home Loan
Banks grow due to increased borrowing or other member activity, additional stock must
be purchased by members to maintain required capital levels.
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The capital requirements and the structure of our mortgage purchase programs also
ensure appropriate risk-sharing and “skin-in-the game” among housing finance
participants. The AHP, whereby 10% of each Federal Home Loan Bank’s earnings go to
affordable housing grants, is a transparent commitment of resources to achieve federal
affordable housing objectives.
In sum, the Federal Home Loan Banks’ partnerships with their financial institution
members in providing affordable housing finance have served the country well in the past
and should be preserved in order to ensure “a more stable and sound housing finance
system” in the future.
Sincerely,
Richard S. Swanson
President & CEO