[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE FEDERAL HOME
LOAN BANK SYSTEM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
OCTOBER 12, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-71
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
Larry C. Lavender, Chief of Staff
Subcommittee on Oversight and Investigations
RANDY NEUGEBAUER, Texas, Chairman
MICHAEL G. FITZPATRICK, MICHAEL E. CAPUANO, Massachusetts,
Pennsylvania, Vice Chairman Ranking Member
PETER T. KING, New York STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota MAXINE WATERS, California
STEVAN PEARCE, New Mexico JOE BACA, California
BILL POSEY, Florida BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee
C O N T E N T S
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Page
Hearing held on:
October 12, 2011............................................. 1
Appendix:
October 12, 2011............................................. 41
WITNESSES
Wednesday, October 12, 2011
Costa, Anthony P., Chairman and Co-Chief Executive Officer,
Empire State Bank, on behalf of the American Bankers
Association (ABA).............................................. 5
Gibson, Lee R., Chairman, Federal Home Loan Bank of Dallas, and
Chairman, Council of Federal Home Loan Banks................... 7
Morrison, Hon. Bruce A., former Member of Congress, former
Director of the Federal Housing Finance Board, and Chairman,
Morrison Public Affairs Group.................................. 10
Zimmerman, Timothy K., President and Chief Executive Officer,
Standard Bank, on behalf of the Independent Community Bankers
of America (ICBA).............................................. 8
APPENDIX
Prepared statements:
Costa, Anthony P............................................. 42
Gibson, Lee R................................................ 50
Morrison, Hon. Bruce A....................................... 68
Zimmerman, Timothy K......................................... 77
OVERSIGHT OF THE FEDERAL HOME
LOAN BANK SYSTEM
----------
Wednesday, October 12, 2011
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 1:02 p.m., in
room 2220, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Fitzpatrick,
Pearce, Posey, Hayworth, Canseco, Fincher; Capuano and Waters.
Also present: Representatives Garrett and Grimm.
Chairman Neugebauer. We are waiting on a couple of Members
and we will get started here shortly. BlackBerrys are down in
the Capital. It has locked the whole city down.
This hearing of the Oversight and Investigations
Subcommittee of the Financial Services Committee will come to
order.
Today's hearing is on oversight of the Federal Home Loan
Bank System. Without objection, I ask unanimous consent to
allow Mr. Garrett, who is not a member of this subcommittee but
is a member of the full Financial Services Committee as well as
the chairman of the Capital Markets Subcommittee, to join us.
Without objection, it is so ordered.
Someone asked why we are having an oversight hearing on the
Federal Home Loan Bank System? Well, for a couple of reasons.
One reason is that we haven't had one in 5\1/2\ years.
Lately, we have been waiting until there is a crisis and then
we have oversight hearings. And a lot of people think maybe
this is not the time to be doing oversight, but maybe you ought
to do oversight in front of issues instead of in a trailing
manner.
And the other reason is that the Federal Home Loan Bank
System is a trillion dollar entity. It has a huge impact on
liquidity in the marketplace, and has served a function in
housing and other areas by providing liquidity for banks.
So it is an important piece of our financial System and
obviously it is an opportune time to have a little bit of an
update. I think one of the things that obviously there has been
a lot of discussion about GSEs. And the Federal Home Loan Banks
are, in fact, GSEs.
So one of the issues that I think we will want to hear more
about today is that really the core mission of the Federal Home
Loan Bank System in the past was to provide advances, as they
are called, to their member banks.
But when we started looking at the balance sheets of some
of these entities, we found out that a lot of them, in fact,
hold more investments and things other than advances, other
than they do in advances.
So the question is, has the Federal Home Loan Bank System
gotten away from their core mission statement? And one of the
things--not to draw an analogy here but to go back and revisit
Freddie Mac and Fannie Mae, a lot of people feel that where
Freddie and Fannie went wrong was that they got away from their
core mission and tried to be some things that maybe they
shouldn't have tried to be.
Obviously, we want to talk today about what is the core
mission of the Home Loan Banks, and are they following that
mission. And I think the other question is, is that System
operating in an optimum way? Because obviously the efficiency
of the System has a huge impact on the cost of capital to the
members, and so, obviously that is an important thing,
particularly in this environment.
I think that this is an excellent opportunity for a couple
of things: one, for our distinguished committee members to
learn a little bit more about the Federal Home Loan Bank
System, and for us to get an update; and to get into some
discussions about what is the direction forward for the banks
as well.
So I appreciate our distinguished witnesses today, and we
look forward to some healthy discussion here.
With that, it is a great segue to turn it over to Ranking
Member Capuano for his opening statement.
Mr. Capuano. Ditto. I am looking forward to hearing from
you guys.
Chairman Neugebauer. And I would now recognize Dr. Hayworth
for 1 minute.
Dr. Hayworth. Thank you, Mr. Chairman.
And it is particularly important, I think, sir, that we
think about the role and the future of the Federal Home Loan
Banks--and it is so appropriate that Chairman Garrett is here--
because as we consider the role of the GSEs and how we can
mitigate the potential negative effects that unfortunately the
expansion of the GSE's mission statement beyond what they were
able to do.
As we consider how we backed the GSEs out of their undue
influence on the economy, what role would the Federal Home Loan
Banks play? And how can we make sure that our community banks,
who are focused on their customers, their clients, and their
communities--how can we make sure that we are helping them and
not hurting them to perform a crucial role? So I look very much
forward to what our panelists have to say.
And I want to thank you again, sir, for holding this
hearing.
Chairman Neugebauer. I thank the gentlelady.
And now, Mr. Fitzpatrick is recognized for 2 minutes.
Mr. Fitzpatrick. I would like to thank the chairman, Mr.
Neugebauer, for holding this oversight hearing today to discuss
and examine a number of issues surrounding the Federal Home
Loan Bank System.
I would also like to welcome a fellow Pennsylvanian, Tim
Zimmerman, appearing here today on behalf of ICBA. Tim not only
serves as chairman of the ICBA Bank Task Force, but also as
chairman of the Legislative Committee of the Pennsylvania
Community Bankers.
So thank you for your service.
The Federal Home Loan Banks could well be called the quiet
GSE. They are typically in the background meeting their primary
statutory mission of providing liquidity to member banks across
the Nation.
Just because they are quiet does not mean that they are not
important. I hear from bankers all the time throughout my
district about the importance of the Federal Home Loan Banks.
As we see from our witnesses' testimony today, community
bankers often use the Home Loan Bank loans to structure their
loans in markets to meet credit needs. Local bankers safely
making loans to their customers certainly is central to
building a strong economy.
I also hear from leaders in the area of affordable housing
in my district about how important the affordable housing
program is. It is not just the downwards, but the bringing
together of the various local governments, community bankers,
the affordable housing program individuals, and the nonprofits
that is important, not just in my district in Pennsylvania, but
in districts throughout the Nation.
So as we move forward on GSE reform and devise a new
mortgage finance System in this country, good actors should not
be lumped in with bad ones. We must be deliberate in our
actions to ensure our constituents that they have access to
capital.
And as we have seen with Dodd-Frank, all too often the
unintended consequences of Washington's actions represent
backwards steps, unfortunately not always forward steps.
Clearly, our community banks have a vital partnership with
the Federal Home Loan Banks. And we all need more investments
in our districts.
So this hearing will help us to gather information to form
an understanding of how we protect taxpayers, while ensuring
that the banks contribute to our economic recovery.
I look forward to the testimony here today, and I thank the
chairman.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Texas, Mr. Canseco, for 1
minute.
Mr. Canseco. Thank you, Chairman Neugebauer, and thank you
for calling this very important meeting.
After learning the hard way about Government-Sponsored
Enterprises 3 years ago, no stone that enjoys an implicit
backing by the Federal Government should be left unturned by
the Congress.
Federal Home Loan Banks play a sizeable role in our
financial economy with assets of over $800 billion as of June.
And many financial institutions, particularly community
banks, have come to rely on funding from the Home Loan Banks,
as was highlighted during the financial crisis of 2008.
With the Home Loan Banks having such a significant role in
our financial sector, Congress must examine closely the
operations of these institutions to ensure that they are
functioning safely and soundly, and not putting the financial
sector, or especially the taxpayer, at risk.
I look forward to hearing from our witnesses today on this
very important matter.
Thank you, Mr. Chairman, and I yield back.
Chairman Neugebauer. I thank the gentleman.
Mr. Garrett is recognized for 1 minute.
Mr. Garrett. I also thank the chairman for holding this
very important meeting, and ditto as well.
I recognize the very important role that the Federal Home
Loan Bank System has played in the past, and currently plays in
the Nation's housing and finance System, basically providing
access to capital markets, especially to many of our local
banks.
And while they perform their core mission, providing
advances as well, I think, during the financial crisis, I still
believe there is always room for review and improvement.
After the collapse of Fannie and Freddie, there was
widespread agreement, I think, on both sides of the aisle that
it is really inappropriate to have American taxpayers
implicitly back the institutions and their debts. The consensus
view, I think, is that government guarantees should either be
on the books, transparent, and budgeted for or they shouldn't
exist at all.
So I think the recent credit downgrade of the U.S.
Government by S&P, followed by the downgrade then right after
of Federal Home Loan Banks, is something of a signal of the
market's perception of whether or not the Federal Home Loan
Bank is either explicitly backed by the taxpayer or not.
So it just raises a number of questions, I think, that we
have to look at. There is not going to be an easy answer to
this, but it is essential that we have that discussion.
And I thank the chairman.
Chairman Neugebauer. I thank the gentleman.
And I believe that is everybody.
I would remind all Members that your opening statements
will be made a part of the record.
I am now going to introduce our witness list, and I am
going to yield back to the gentlewoman from New York to
introduce Mr. Costa.
Dr. Hayworth. Thank you, Mr. Chairman.
Mr. Anthony Costa has over 44 years of distinguished
community banking service in the mid-Hudson Valley. His B.S.
degree is in accounting.
And since July of 2004, he has been chairman and CEO of
Empire State Bank, which was organized and opened in July of
2004. It is now a $160 million company serving the mid-Hudson
and Staten Island areas.
Mr. Costa has also held executive positions at First
Interbank Corp as president and chief operating officer from
1990 to 1994, and at Mid-Hudson Savings Bank, which is a
wholly-owned subsidiary of First Interbank Corp.
He was president and CEO of Intercounty Savings Bank from
1970 until 1990 when Intercounty and Mid-Hudson Savings Bank
merged together under the First Interbank Corp logo.
He has also served--or is currently serving on the boards
of directors and/or committees for a number of community-
related and professional organizations including the Mid-Hudson
Family Health Institute, the People for People Fund, the
Institute for Family Health in New York City, the New York
Banker's Association, the Benedictine Hospital, the American
Bankers' Association, and the Bishop Dunn Memorial School.
Thank you so much, Mr. Costa, for being with us today.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentlewoman.
We also have: Mr. Lee Gibson, chairman of the Federal Home
Loan Bank of Dallas, and chairman of the Council of Federal
Home Loan Banks; Mr. Tim Zimmerman, president and chief
executive officer of Standard Bank of Pennsylvania, on behalf
of the Independent Community Bankers of America; and the
Honorable Bruce Morrison, former Member of Congress, and former
Director of the Federal Housing Finance Board.
I remind each of you that your written statements will be
made a part of the record, and you will be recognized for 5
minutes to summarize your testimony.
And with that, I will recognize Mr. Costa.
STATEMENT OF ANTHONY P. COSTA, CHAIRMAN AND CO-CHIEF EXECUTIVE
OFFICER, EMPIRE STATE BANK, ON BEHALF OF THE AMERICAN BANKERS
ASSOCIATION (ABA)
Mr. Costa. Thank you, Chairman Neugebauer and Ranking
Member Capuano.
My name is Anthony Costa, and I am chairman and CEO of
Empire State Bank, which is a $165 million asset community bank
in New York's Hudson Valley.
I also served as chairman of the Federal Home Loan Bank
Committee at the American Bankers Association. And I thank you
for the opportunity to testify today.
The Federal Home Loan Bank System plays a vital role in
mortgage financing and economic development in communities
throughout the United States. And its importance cannot be
overstated. Many of our loans at Empire State Bank could not
have been made were it not for our Federal Home Loan Bank.
Congress and the regulators will soon consider changes to
the secondary mortgage market and to Fannie Mae and Freddie
Mac. It is critically important that any reform of the
secondary mortgage market protect the traditional business of
the Federal Home Loan Banks and access to liquidity by their
members.
Failure to do so will have a detrimental effect on mortgage
funding and homeownership for many years to come.
During the recent financial crisis, the Federal Home Loan
Banks played a critical role for bank members. As the crisis
took hold and credit markets froze, the Federal Home Loan Banks
were the first available source of funding for banks like mine
at a time when it was most needed. It allowed us to continue to
serve our communities even in the face of extreme difficulties.
As members had more need for liquidity, Federal Home Loan
Banks increased advances from $650 billion at the beginning of
the crisis, to over $1 trillion at its peak. The demand for
liquidity has diminished, and now advances are below pre-crisis
levels.
This proves the flexibility of the System and demonstrates
its ability to withstand crisis. In 8 decades and through
numerous financial crises, the Federal Home Loan Banks have
never incurred a credit loss on an advance.
The Federal Home Loan Bank System does more than just
liquidity management. It also runs two important programs that
provide housing and economic development for low- and moderate-
income communities: the Affordable Housing Program; and the
Community Investment Program.
The Affordable Housing Program is one of the largest
private sources of funds for affordable housing in the United
States. Through this program, banks can fund projects that
otherwise might never be carried out.
These projects serve a wide range of community needs. Many
are designed for seniors, the disabled, homeless families,
first-time homeowners, and others with limited resources. More
than 726,000 housing units have been built using the Affordable
Housing Program funds, including 457,000 units for very low-
income residents.
The Community Investment Program offers below-market-rate
loans to banks like mine for long-term financing to low- and
moderate-income families. The program is a catalyst for
economic development because it supports projects that create
and preserve jobs, and helps build infrastructure to support
growth.
Banks like mine have used the Community Investment Program
to fund owner-occupied and rental housing, construct roads,
bridges and sewer treatment plants, and to provide small
business loans. The program is especially appreciated in rural
areas where resources are limited.
Since 1990, the Community Investment Program has lent over
$61 billion for a variety of projects, resulting in an
estimated 200,000 jobs.
Recently, the Administration and regulators have proposed
ill-advised membership and benefit changes that would make it
more difficult for all financial institutions to access the
funding available through the Federal Home Loan Banks. The
changes would devalue membership for existing Federal Home Loan
Bank members and discourage potential members from joining.
These proposals, if adopted, would have a deeply negative
impact on the ability of Federal Home Loan Banks to carry out
important programs like the Affordable Housing Program and the
Community Investment program. They should be rejected.
In conclusion, the Federal Home Loan Bank System is strong
because of the diversity of its membership. Without the Federal
Home Loan Banks, community banks would not be able to reliably
meet demand and there would be less funding available to
improve low- and moderate-income communities.
As Congress considers reforms of the mortgage markets, it
is crucial that the important role of the Federal Home Loan
Bank System be preserved. I would be happy to answer any
questions.
[The prepared statement of Mr. Costa can be found on page
42 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Costa.
Mr. Gibson?
STATEMENT OF LEE R. GIBSON, CHAIRMAN, FEDERAL HOME LOAN BANK OF
DALLAS, AND CHAIRMAN, COUNCIL OF FEDERAL HOME LOAN BANKS
Mr. Gibson. Good afternoon, Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee.
My name is Lee Gibson, and I am chairman of the Council of
Federal Home Loan Banks, as well as chairman of the Federal
Home Loan Bank of Dallas. I am also the chief financial officer
of Southside Bank, a $3 billion community bank with
headquarters in Tyler, Texas.
Mr. Chairman, I would like in the time I have today to
describe why the Federal Home Loan Banks are essential to the
future of not only my community bank, but to all community
banks across the country.
Federal Home Loan Banks are cooperatives. We are 100
percent owned by our members, comprised of nearly 7,800
financial institutions. By design, our capital structure does
not subject us to the growth and income pressures that
publicly-traded corporations face.
Community financial institutions rely on us as a source of
funding for financing housing, jobs, and economic growth in
their communities. Both large and small lenders are likely
funding lending in your community with the help of their
Federal Home Loan Bank.
We have been around for over 80 years, in good times and
bad. Through the Nation's most recent financial turmoil, the
Federal Home Loan Banks passed this significant stress test and
once again proved to be a model that works. When the crisis
unfolded and other funding sources disappeared, we were the
only source of liquidity available for many of our members.
We owe our stability and long record of successfully
fulfilling our mission to our unique business model and
cooperative structure. Our core business is issuing what we
call advances. We borrow funds from all over the world and
provide those funds to our members in the form of fully-secured
loans.
For the vast majority of our members, these advances are
the only access they have to the global credit markets. Federal
Home Loan Bank advances lower the cost of extending credit to
Americans.
They are the primary way that the Federal Home Loan Banks
serve as a mechanism for economic stability in America. All
advances are secured by eligible collateral and the purchase of
capital stock. Members must meet strict collateral, capital,
and credit standards that are continually monitored.
Our cooperative structure also demands that we focus
intently on capital. In fact, we recently voluntarily entered
into a joint capital enhancement agreement to further
strengthen the System. Each Home Loan Bank will now, on a
quarterly basis, allocate 20 percent of its net income to a
separate, restricted retained earnings account.
Our commitment to affordable housing and community
development is both proven and strong. Working with our
members, we have helped more than 2 million American families
in the last 20 years, through more than $61 billion in long-
term financing, and nearly $4.5 billion in direct grants.
Each Home Loan Bank is regionally focused and controlled,
allowing it to be responsive to the specific credit needs of
the communities that its members serve.
It is a System that functions well. That is why the
Administration's February report to Congress, which included
several proposed changes to our unique structure, concerns me
greatly. I believe these proposals would disassemble the model
that American communities and their local lenders have relied
upon for years.
Mr. Chairman, I want to speak to the committee for a moment
as a community banker. In a time when so many of our
institutions are in need of repair, we have a community banking
System in America that works.
It works because as local lenders, we know our communities
expect us to do business in a responsible way, and to remain
focused on the needs of our own communities. Our community
banking System also works because it can rely on a critical
partner, the Federal Home Loan Banks.
America's Federal Home Loan Banks may be invisible to the
community banker's customers, but the Federal Home Loan Banks
are there for our customers every day.
I urge you in considering the Federal Home Loan Banks to
preserve and protect their proven value to the Nation's
community banking System and the Americans we serve.
Mr. Chairman and members of the committee, the Federal Home
Loan Banks are a model that works. It is a structure that must
not be changed.
Thank you, Mr. Chairman, for the opportunity to speak to
you today, and I look forward to taking any questions the
subcommittee may have.
[The prepared statement of Mr. Gibson can be found on page
50 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Gibson.
Mr. Zimmerman?
STATEMENT OF TIMOTHY K. ZIMMERMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, STANDARD BANK, ON BEHALF OF THE INDEPENDENT
COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Zimmerman. Good afternoon, Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee.
My name is Tim Zimmerman, and I am president and CEO of
Standard Bank, a $435 million sized community bank
headquartered in Monroeville, Pennsylvania. Standard Bank is a
member of the Federal Home Loan Bank of Pittsburgh.
I also serve as chairman of ICBA's Federal Home Loan Bank
Task Force. I am pleased to represent ICBA's nearly 5,000
members today at today's hearing about the Federal Home Loan
Bank System.
I welcome this opportunity to share Standard Bank's
experience with the Federal Home Loan Bank of Pittsburgh, which
is broadly typical of community banks nationwide.
The 12 regional Federal Home Loan Banks are a critical
resource to community banks, the vast majority of which are
members of the Federal Home Loan Bank System. Federal Home Loan
Banks help community banks like mine better serve our
communities and compete with too-big-to-fail institutions in
our markets.
They demonstrated their value during the recent financial
crisis when they continued to provide liquidity through
advances after other parts of the credit markets shut down. As
Congress debates the future of the housing finance System, I
urge you to preserve the role of the Federal Home Loan Banks.
Community banks value Federal Home Loan Bank membership
primarily for the access to advances they offer. Standard Bank,
for example, currently holds $33 million in advances, an amount
that has recently fluctuated widely with economic conditions.
Federal Home Loan Banks offer advances in a variety of
maturities and customized terms for their members. These
advances are made possible by the Federal Home Loan Banks'
strong credit rating and access to the world credit markets,
access that is not practical for a community bank.
Community banks use advances to fund mortgages and other
types of loans to manage the substantial interest rate risk
associated with holding longer-term fixed-rate loans in
portfolio. Some community banks use advances to adjust the
duration of their liabilities to better match their assets and
manage risks.
Additionally, short-term, on-demand advances can be used to
provide liquidity and manage cash flow. Most community banks
qualify as community financial institutions, and are therefore
able to collateralize advances with small business and
agricultural loans in addition to residential mortgages.
The broader mission of the Federal Home Loan Bank
distinguishes them from Fannie Mae and Freddie Mac, which are
focused exclusively on residential mortgage lending.
Many rural bank members of the ICBA report that the Federal
Home Loan Bank advances are absolutely essential for their
ability to remain competitive in agricultural lending, in
particular, long-term fixed-rate loans of 10 years or more
would be nearly impossible for a community bank to make without
the use of Federal Home Loan Bank advances. These loans cannot
be funded with short-term deposits because of interest rate
risk.
Federal Home Loan Bank advances help bankers meet the
cyclical challenges inherent in agricultural lending and play a
critical role in helping the rural economy to prosper and
remain vibrant. Agricultural lenders use advances to fund their
short-term agricultural production loans. During peak season
demands, as much as 50 percent of such lending is supported by
advances.
ICBA strongly opposes the current Federal Housing Finance
Agency proposal that would re-impose a mortgage lending test on
Federal Home Loan Bank members. The Gramm-Leach-Bliley Act
lifted the mortgage asset test for community financial
institutions, which is significant for rural lenders that have
few residential lending opportunities that greatly benefit from
Federal Home Loan Bank membership.
In addition to advances, Federal Home Loan Banks offer a
range of other valued services including community investment
programs and correspondent programs. The mortgage partnership
finance program of secondary market options for members is
especially important to Standard Bank.
We sell all of our fixed-rate loans with a term of more
than 15 years to the Federal Home Loan Bank of Pittsburgh to
avoid interest rate risk exposure. Without this option, we
would not be able to make the long-term fixed-rate loans our
customers expect, and we would not be able to compete with
large banks.
While many community banks continue to sell primarily to
Fannie Mae and Freddie Mac, the MPF programs of the various
Federal Home Loan Banks are an important alternative source of
secondary market access.
As Congress and the Administration consider changes to the
housing finance System, we urge you to preserve the significant
role of the Federal Home Loan Banks, which help community banks
serve the mortgage, small business, and agricultural lending
needs of their communities, and remain competitive with the
large banks and tax advantage farm credit System.
There is no reason to tamper with the model that has worked
well since inception, and proved its critical value during the
recent crisis. The Federal Home Loan Banks must be kept
distinct from Fannie Mae and Freddie Mac.
ICBA opposes proposals to merge them.
While community banks have benefited from existing Federal
Home Loan Bank secondary market programs, the primary business
of Federal home banks must remain advances.
Thank you again for convening this important hearing.
We appreciate the opportunity to discuss the Federal Home
Loan Banks, and how important they are to community banks. And
I am also very happy to answer any questions.
[The prepared statement of Mr. Zimmerman can be found on
page 77 of the appendix.]
Chairman Neugebauer. Thank you.
Mr. Morrison?
STATEMENT OF THE HONORABLE BRUCE A. MORRISON, FORMER MEMBER OF
CONGRESS, FORMER DIRECTOR OF THE FEDERAL HOUSING FINANCE BOARD,
AND CHAIRMAN, MORRISON PUBLIC AFFAIRS GROUP
Mr. Morrison. Thank you, Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee. It is an honor
and a pleasure to be here, and I thank you for inviting me.
I am here to express personal views based on experiences
that I have had with the Federal Home Loan Bank System. And I
am very happy to answer any questions that Members may have.
In my written testimony, I covered a number of different
topics related to the System. I will focus on a few of these in
my oral testimony.
``Liquidity'' is one of those words we use all the time. We
don't really notice its value until it is gone. Lehman Brothers
is a wonderful example of what happens when liquidity fails and
you get markets that don't work.
The banks have provided liquidity to members in all kinds
of markets. They were set up to be a liquidity source for S&Ls
in 1932. This is a Herbert Hoover program.
You don't hear many of those being discussed. But it has
been a success ever since.
It was the first intervention by the government in
facilitating housing lending, and it has been a success in that
regard for all of its 80 years.
It certainly was tested on that score during the recent
financial crisis, and it responded admirably.
There were some questions raised on the Hill about its
work, about all the money that flowed out. But the fact is that
it flowed out, and it also flowed back, because of the very
favorable security position that the banks have.
So from that perspective, the banks can be very proud of
their performance.
It has a co-op structure. That is extremely important. One
of the things that happened in Fannie and Freddie was the
conflict between investors, who cared only about profits, and a
public mission that the taxpayers were standing behind.
That conflict is absent in the bank System; its members are
competitors. So whatever benefit they get from Federal backing,
in terms of cost of funds, tends to pass through to customers
because of competition.
That is a good thing. And that is a useful structure to
understand.
The bank System has more than just just community bank
members. Everyone who talks about the bank System talks about
the value to community banks. And I think that value is
indisputable.
I think the liquidity that is provided for longer-term
assets for community banks, going back to the S&Ls of the
1930s, is one of its proudest achievements.
The fact is, however, when you look at its balance sheet,
and ask who got the advances, you will find a very high
percentage of them went to very large financial institutions.
And the question is--where does that fit? Is it something
that should exist? Should it be in any way restricted? Should
it be in any way targeted?
I have some thoughts about that. But let me first say that
one of the things that reflects the success of the banks is
their performance in the affordable housing program. But it is
also a very small program.
It is $150 million to $200 million a year. This is an $800
billion to $1 trillion System. That is a small amount of money
compared to the size of the System.
But the money has been used very well, and has been
targeted in two areas: investment in low-income, multi-family
housing developments; and in downpayment matching programs for
single family purchases by low- and moderate-income people.
Both of those have been great successes.
I regret the fact that the completion of the Refcorp
payments did not lead to an increase in investment in the
affordable housing program because, frankly, it is one of the
jewels of the System.
I would also comment that I was a member of this committee
when this program was created in 1989, and the banks were all
against it.
The fact is that it was forced on them. But I don't think
there is a single bank that would give it up today, so
sometimes Congress is ahead of the crowd--maybe not usually.
As I mentioned, the banks' performance in response to the
crisis was admirable.
But there are fiscal pressures on the banks. These are
fiscal pressures from the amount of capital that they hold, the
dividends they seek to pay, and the low yield that is
represented by advances.
That fiscal pressure does get them into other kinds of
assets. And their private mortgage-backed security holdings
have gotten them into trouble, and have cost them.
It wasn't their fault that the triple-A ratings didn't mean
triple-A. They aren't the ones that mis-rated these assets. But
the temptation to bulk up on profitable assets is not
independent of the structure that exists. And it deserves
discussion.
Finally, with respect to the future, there is the implied
guarantee--Congressman Garrett referred to it. But the implied
guarantee, in my opinion, is something we shouldn't have.
If we are going to have a government guarantee, it should
be paid for up front, and it should be regulated up front.
Implied guarantees mean if things go bad, taxpayers write a
check. And there is nothing against which to draw.
I think that is a mistake. And I think that you asked the
question, going forward, how will this work?
Will there be explicit guarantees for Federal Home Loan
Bank debt?
You can get rid of debt for Fannie and Freddie. You don't
really need to have portfolios.
But advances are assets. And you have to have liabilities
to fund them. So the debt question and implied guarantee is
right in front of you in the Federal Home Loan Banks.
Finally, big and small, how much should the System be
available to very large holding companies?
My view is that there is a value to their participation, a
financial value. But if they are going to participate, their
advances should be limited to backing those kinds of assets
that could not otherwise be supported, like whole loans for
housing, and perhaps certain kinds of economic development
loans, rather than general liquidity. And we are at the general
liquidity end of the spectrum right now.
Thanks for the opportunity to comment on these matters, and
I look forward to your questions.
[The prepared statement of Mr. Morrison can be found on
page 68 of the appendix.]
Chairman Neugebauer. I thank the panel, and will now
recognize members for 5 minutes for questions, starting with
myself.
Mr. Gibson, I think in your written testimony, you
mentioned advances represent the core of the Federal Home Loan
Bank business.
I want to quote you something that FHFA Acting Director
DeMarco recently said.
He says advances at 52.4 percent of assets barely exceed
half of the System's combined assets. At six Federal Home Loan
Banks, investments exceed 40 percent of assets. At four of
these Federal Home Loan Banks, investments exceed advances.
He says this is not a sustainable operating condition at
the Federal Home Loan Banks. It appears we look through that,
that these entities have changed their business model from
being an advance business to also being an investment business.
Someone used the term--are we turning our Federal Home Loan
Bank into hedge funds?
So what is the correct--have the banks strayed from their
core mission? And as I think was pointed out by Mr. Morrison in
his public record, a number of the banks in the System got into
the mortgage-backed security business. And it was painful.
Had they not been in that business, would they be healthier
banks today?
Can you give me your impression on what is the appropriate
amount of investment activity for a bank? And why do they need
to be in the investment business?
Mr. Gibson. Yes, sir. I would be glad to answer that.
Basically, it goes to the scalability of the System. As I
think it was mentioned, advances grew from roughly $640 billion
second quarter, end of second quarter 2007, to a little over $1
trillion, the third quarter ended 2008.
With that, additional capital came into the System.
Advances were extremely high at that point in time, and there
were some additional investments that were bought because we
have certain investment limits.
We are limited on tax and investments we can buy. We are
also limited on percentages of investments that we can buy.
Now, we are down to $428 million in advances at the end of
second quarter 2011. And due to the scalability, a lot of those
investments have not rolled off at this point in time.
If we stay at that $428 million, the level of investments
is going to shrink. And we are going to see a more sustainable
percentage of investments to advances.
But the investments also act to help us in a number of
ways. It helps us with that scalability issue from the
standpoint that it provides us additional earnings.
For instance, right now, we only have $428 billion in
advances. It provides us additional earnings so that we can
keep in place a structure that we need at the banks, risk
managers, auditors, things of that nature, so that if we needed
to scale back up in the next 5 quarters to over $1 trillion, we
need to make sure we have those things in place.
So it acts and it is a buffer. But it also goes to the
scalability. And right now, yes, we have shrunk and we do have
additional investments. It is something that will roll off over
time.
Chairman Neugebauer. Along with that scalability, and I
have heard, I think, several of the panel use that term, the
question is, and there has been some discussion about this, do
we need 12 Federal Home Loan Banks to do the function? And
would there be some scale achieved by some consolidation to
fewer banks rather than keeping that infrastructure in place
for 12 regional banks?
Mr. Zimmerman, you look like you want to jump in on that
one.
Mr. Zimmerman. I can jump in on that one.
I think my answer to your direct question would be that I
believe there is a strong argument that there should be 12, or
at least more than one Federal Home Loan Bank.
Clearly, if you are only talking about whether it is less
expensive to have one super structure, the answer is yes.
But it is the same reason I have more than one office.
Whether I have 10 offices in my bank, and we can serve the
communities that we are in better by having people closer to
the community, understanding those communities, and familiar
with the customers and things like that.
And I think the same thing goes for the Federal Home Loan
Banks for a couple of reasons. First, for the same idea that
the Federal Home Loan Bank of Des Moines has a different
customer base, and they have different needs than the Federal
Home Loan Bank in Atlanta does, for example.
And so there is a better understanding in those banks. And
they can serve their constituency better.
Also, because of having the regional structure, as the
economy changes and there is a particular problem in one part
of the economy like we have seen, not in this latest crisis,
but in the oil patch days, which I am sure you are familiar
with, it works to help sustain the System.
And as you know, the Federal Home Loan Banks are all
jointly and separately liable, so it kind of works together to
help balance all that out. So I really strongly believe that we
are much better with a structure that has a regional base. And
12 may not be the absolutely perfect number, but I am very sure
that one isn't the right answer.
Chairman Neugebauer. Thank you, and now the ranking member,
Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
Gentlemen, thank you.
I think the Home Loan Banks do an excellent job overall.
And I just want to say thank you on behalf of my constituents
and myself for what you have done.
I do have a couple of questions. I want to start with the
last one, the advances that are made.
I understand why you went up. I have to be honest. I am not
sure why you have cut it 30 percent below what you were before
the problem.
I say that because the truth is for me, I am trying to find
any way I can to encourage anybody and everybody to get off the
bench and get our economy moving again.
And the Federal Home Loan Bank, in my opinion is a key
player there. You are not the only one, but you are a key
player.
And you are talking $212 billion less than you had out in
the market before the problem. Now, I understand the problem.
But from what I have seen, you have survived the problem
probably better than anybody. And therefore, how do I get you
to get it moving again?
I need you to get that money back out to your local banks
so they can get it out to homeowners, and small businesses, and
everybody else to help get this economy moving.
What do we have to do to beg?
Mr. Gibson. I would be glad to take that question.
Right now, I know as a community banker in Tyler, we are
overrun with deposits. And it is not a situation that we were
having back in 2007.
Right now, American citizens are looking for asset classes
to put their money in, and they are not finding asset classes
they are satisfied with. So they are sticking the money in the
banks. And the banks are growing in deposits by leaps and
bounds.
I happen to be very fortunate to be in a part of the
country that hasn't suffered quite as much as many of the other
parts of the country. But I can tell you that people are a
little leery of going out and expanding business at this point
in time with all of the uncertainty that is out there.
And so we are--
Mr. Capuano. At the same time, I won't speak for my
colleagues but I have heard it from numerous Members of
Congress, including myself, I hear it all the time,
particularly from small businesses, that they can't get access
to the capital that they need.
And there is some disconnect here. If you have the money to
lend, and I have people who want to borrow it, how do I make a
marriage?
Mr. Gibson. I know at our bank, we would love to make
loans. That is what we want to do.
Mr. Capuano. Come to Boston.
Mr. Gibson. Come to Boston, okay.
Mr. Capuano. We will open up a branch. We will get you
going--
Mr. Gibson. The issue is we don't know how to do banking in
Boston. And we are not familiar with the area. And that is
why--
Mr. Capuano. We will teach you--
Mr. Gibson. --the community banks in Boston, I think, are
probably better suited to make those loans than a bank in
Tyler, Texas, because we stick to our knitting in East Texas,
and know that market.
We don't know the Boston market.
But, to your point, we are flush with cash right now. We
are not trying to run depositors away, but gosh we are paying
nearly zero on the money, and they are still bringing it in.
We can't loan it out fast enough. And the demand is just
not there. We can't force our customers to borrow money.
And so the Home Loan Bank by default is ending up in a
situation where the banks need less money than they did,
significantly less money--
Mr. Capuano. You are telling me that it is not a result of
the FHLB policy; it is a result of the market?
Mr. Gibson. It is a result of the market, yes, sir.
Mr. Capuano. Mr. Zimmerman?
Mr. Zimmerman. That is exactly right.
If you take my bank as an example, my bank is the most
profitable. We have the happiest customers when we are making a
lot of loans. And most of the money that we have at the bank is
out in loans because that is the highest yielding asset that we
have.
Right now, I have a $435 million bank. I have over $100
million in liquid assets. I don't want it to be that way. There
is a lack of loan demand.
The Federal Home Loan Bank is a member-driven organization,
so my Federal Home Loan Bank account rep wants me to borrow
from him. And I have $100 million in cash waiting to make loans
right now.
I am not going to borrow. Our history is in 2007, we had
$25 million worth of advances that we had outstanding. As the
crisis worsened, and our cash went down--because we were pretty
highly lent out at that point in time--when we finally got to
September of 2008, we had $51 million worth of borrowings from
the Home Loan Bank.
So that is this idea of scalability.
When it was going from $650 billion to $1 trillion, that
was partly because of my bank. And if you take the same thing
and apply it to other banks around the country--so we are not
in normal times. And there isn't loan demand out there.
And I hear this too. But I can tell you in Pittsburgh, we
are trying to make loans every day. We are advertising for
loans.
We are going to meet small businesses. We are trying to
convince them. But even my best customers are so unsure about
the economy that they aren't willing to take that commitment
and buy the next new machine, or add on to their business. It
is the overall economic environment.
And so what you are seeing as too much liquidity at the
Federal Home Loan Bank, is what I see as too much liquidity at
my bank. And it directly affects them because I am not
borrowing.
Mr. Capuano. It is not that I see too much liquidity. I see
too many people sitting by the sidelines. And I am trying to
get as many people as I can to get into the game. And the way
you just described it, you are not the problem. You want to get
in the game too.
So I am just trying to help you guys loan money.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman, Mr. Fitzpatrick, is recognized for 5
minutes.
Mr. Fitzpatrick. Thank you, Mr. Chairman.
I want to follow up on the chairman's comment earlier, and
his questions about what is the right number of banks in the
System.
Mr. Costa, as you know, the Federal Home Loan Banks are
jointly and separately liable for the debts of the other banks
in the System.
Are you concerned at all that the Home Loan Banks in other
districts may be taking unnecessary risks, thereby placing the
bank in your district in some jeopardy?
Mr. Costa. As a banker, my profession is being concerned.
So we spend a lot of time being concerned.
But I would say from my involvement with the Federal Home
Loan Bank System, it is a very well-run System. All the banks
are aware, and have become more aware since 2008, with what
``jointly and severally'' actually means. And there is, I would
say, a heightened awareness across-the-board.
I don't believe that any of the banks feel that we should
not have those banks around. I think there has been some talk
about some banks possibly merging together. But as far as I
know, that has never gone beyond informal discussions.
I believe that the System works, and it has worked for 80
years. And we are all well aware of the responsibilities that
each bank has jointly as well as severally.
I don't see any--certainly in the New York district, which
is a very strong district, I have never heard any talk of
overriding concern. Concern, yes, but not an overriding concern
that we should consolidate out some of the banks.
Mr. Fitzpatrick. So, not enough of a concern that you would
actually make a suggestion that something should be done to
make certain that risks staked by other banks might have an
impact or recommendation.
Mr. Costa. I would say yes.
Mr. Fitzpatrick. Do any other panelists have any
recommendations?
Mr. Morrison. Let me just make a comment about
consolidation.
Lots of people have talked about consolidation over the
years in theoretical terms. This is a cooperative.
Consolidation would save some money, but the members have
never thought it was worth saving that money to give up certain
other advantages. I don't think it is something to be imposed
from the top. I think it is something that if the members
believe that they want consolidation, it should be facilitated.
And I think the statute is not as good as it could be if
that were to come about. But the idea that Congress, or the
regulators, would dictate that it would be better if there were
8 rather than 12 would be a mistake. We can all have those
opinions, but ultimately the opinions that count are the
members.
Now as far as risk, I think there is risk, and it should be
discussed. And it has mostly to do with investments.
But advances are about the safest assets there are in the
financial System. So in terms of risk between banks, I think it
is pretty well regulated in that regard.
Mr. Costa. I am sorry.
I would also point out that the Home Loan Banks are really
cooperatives. And as such, we are looking over each other's
shoulders all the time.
Everybody is looking at everybody else. So there is very
little investing going on out there that is not under the
purview of other banks and other members of those banks.
Mr. Gibson. Whether 12 is the right number or what the
right number is, Congress has given us the ability to
voluntarily merge.
I know in the case of Dallas, we did have merger talks with
another bank. They did not come to fruition, but I know that
our board would certainly entertain a merger if that made
sense.
The thing I will tell you, though, is that having a number
of banks mitigates the risk. Because one of the things I look
as a community banker, and as a board member on the Home Loan
Bank is concentration of risk.
If you put all of this together in one organization, then
it is going to look like some of the other agencies that had
problems. This way, we are able to mitigate the risk among 12
different management teams that approach things just a little
bit differently.
So I think that is an important thing to take into
consideration also.
Mr. Fitzpatrick. Congressman Morrison, can you talk a
little bit more about the affordable housing component of the
Home Loan Banks? How do you believe the programs have performed
and do we need to make any adjustments?
Mr. Morrison. I think they performed very well. I think
that the only criticism I would have of them is that they are
not big enough.
They are uniquely member-driven and community-driven among
all of the housing programs that are supported by government or
by government-assisted entities. And in that flexibility, they
have worked very well with community housing organizations.
There are two things they have done that have not been done
nearly as well by anybody else. First, to provide quasi-equity
in the area of very low-income multi-family housing, and they
have done that as no one else has given flexibility to
developers that they can't get anywhere else.
And second, they created a single family program where
matching grants with savings became the driving force. And that
is one of the most constructive things you can do for low-
income people who want to acquire a home is to get them in a
savings program to build up their own equity, and to build up a
pattern of savings so they will be able to sustain the home.
Those are two things that they have done very well. I would
like to see the program bigger, and I think it could be bigger.
But it is up to Congress and the banks.
Mr. Fitzpatrick. Thank you, Mr. Chairman.
Chairman Neugebauer. Thank you.
Now, the gentlewoman from New York, Ms. Hayworth?
Dr. Hayworth. Thank you, Mr. Chairman.
Mr. Costa and Mr. Zimmerman, if I could ask you, just about
the magnitude, if you will, of the FHLB's importance in your
plans and your dealings with your client universe.
If FHLB's role were to become more limited, what would you
do? And Mr. Costa maybe you can take this first, and then Mr.
Zimmerman? What would you do as an alternative? What would you
seek as an alternative in terms of access to funds?
Mr. Costa. When you say a more limited, I presume talking
about advances?
Certainly, it is an important part of our operation and our
thinking that the Home Loan Bank is there to provide a smooth-
out for us of--you can't always predict when deposits will come
in, how fast they will come in.
As Mr. Zimmerman said earlier, deposits are flowing in now,
but sometimes they aren't flowing in. And investments, when
they are there, need to be acted on.
Things change constantly and if you are unable to act, so
the ability to go to the Home Loan Bank, get an advance, carry
out your project, and then as deposits come back in fund away
the Home Loan Bank advances, helps to smooth that out.
There are other ways of doing it, but they are limited.
Some of them are capital dependent. Some of them restrict
particularly smaller institutions such as myself.
We were talking earlier about the importance or lack
thereof of the larger banks being involved. The larger banks
provide the ability for the whole System to borrow at the most
favorable rate.
If they were limited or out of the System, I don't know if
the Home Loan Banks could perform at the same level and do the
kinds of things they are doing.
So I think they are vitally important.
Would we find other ways to do it? Yes.
Would they be as effective? I doubt it.
Dr. Hayworth. Thank you, sir.
Mr. Zimmerman?
Mr. Zimmerman. That is my thought too. Basically, I can
tell you in the case of my bank, without the Federal Home Loan
Bank, there is no way that I could access the money markets.
We are $435 million. That is not even a dot on the spectrum
in terms of--if I went to the rating agencies and said I want
you to rate my bank, they would laugh at me.
Basically, they can't take the time. And so, I can't get a
rating.
So I can't issue a debt instrument or anything like that at
my bank and get money at nearly the cost that the Federal Home
Loan Bank can raise it.
What happens is the consumers are the ones who benefit
because when I get an advance at a very, very good rate, and I
then lend that money out to whether it is a small business, or
residential housing, or whatever it is, the consumer benefits
from that low rate.
So I am able to be more effective and pass that savings on.
And the rest of your question is, where would I go?
I would probably have to go to one of the larger banks.
Like in my market, PNC Bank is the dominate player.
I could go and offer up collateral and borrow money from
PNC Bank, but there is no way that I would be able to get money
at the same rate that I get it from the Federal Home Loan Bank.
And again, I am here representing ICBA. There are over
7,000 community banks in the United States, and most of them
don't have the ability to go get money in the money markets.
You take the Federal Home Loan Bank away, all those people
won't have access to low-cost money. It would make us very,
very uncompetitive. We would have a very difficult time
competing with these larger banks that basically dominate most
of the markets.
So I can't really emphasize how important it is to have
those advances available. And for the reasons that the other
gentleman said, to smooth out when deposits are great, that is
fine. You don't need advances.
But when you don't have the deposits, the consumers are
making these decisions. We are not making decisions for them.
The consumers decide on their own when they feel safe, and when
they don't feel safe. That has a lot to do with when they give
us deposits and when they don't.
Dr. Hayworth. Thank you.
And Mr. Chairman, I yield back.
Chairman Neugebauer. Thank you. I appreciate that.
Mr. Capuano?
Mr. Capuano. Thanks, Mr. Chairman.
Mr. Morrison, I want to follow up a little bit more on the
affordable housing aspect. It is my understanding that the FHFA
has suggested that the Federal Home Loan Bank punch up the
amount of money put into the affordable housing program.
Is that correct?
Mr. Morrison. I actually don't know if they have done that.
At the time that the affordable housing program was
created, two obligations were imposed on the banks.
Essentially, 10 percent of their earnings for the affordable
housing program, and what became 20 percent of their earnings
for paying down a portion of the Refcorp bonds that paid for
the S&L bailout. Because of an accelerated schedule that was in
Gramm-Leach-Bliley, they have now paid off that Refcorp
obligation.
A choice was made to invest those funds in a retained
earnings account. It could have been invested in the affordable
housing program or in an economic development fund similarly.
I don't know that anybody has asked for that to happen. I
regret that it wasn't done, because I think those funds were
being used for public purposes. And they have now been diverted
to essentially private purposes by building up the capital of
the banks.
I don't think there is anything wrong with building up the
capital of the banks, although I have questions about the
capital structure. But I think that the banks were able to
discharge the public function with 30 percent of their
earnings, and I think it is disappointing that we have lost
some of that.
Mr. Capuano. Mr. Gibson, am I correct in my understanding
that there has been a suggestion or proposal to strengthen the
affordable housing component?
Mr. Gibson. In terms of the percentage, I am not aware of
anything that is forthcoming out of the agency. But I could be
mistaken on that. I am just not aware of it.
What I will say is that when we made the decision to go
into the capital enhancement initiative, we had just come
through the greatest crisis since the Depression. I think we
all learned a number of lessons, and one is you can't have too
much capital.
And--
Mr. Capuano. I have nothing against capital--
Mr. Gibson. Right. No, I understand.
And so we--
Mr. Capuano. But I do think that there are limits to it
too, in a thoughtful business sense.
Mr. Gibson. Agreed. The other thing--and our capital--what
we have agreed to do is take 20 percent of the profits until we
reach 1 percent of assets. So it is not like we are going to
continue to grow that to some huge percentage number.
The other thing I will tell you is that the 10 percent is a
required amount, and that is the minimum.
I know at the Dallas bank--I can only speak for what we do
there--we exceed the 10 percent. We put in new programs all the
time. They go beyond the 10 percent.
We just had a program approved whereby we are going to have
a program to assist Purple Heart recipients since 9/11 who have
come home with injuries, in order to help them rehab any
housing that they are going into, expand doors, pull bars,
things of that nature.
So we have done things like that outside of our 10 percent
commitment.
And I can give you many other examples.
When Hurricane Katrina hit--Louisiana is in our district.
We allocated, I think it was, $5 million additional monies for
that.
So we go beyond the 10 percent. The 10 percent is just a
minimum. And we do a lot of good things in affordable housing.
Mr. Capuano. Thank you.
Thank you, Mr. Chairman.
Chairman Neugebauer. The gentleman from Florida, Mr. Posey,
is recognized for 5 minutes.
Mr. Posey. Thank you, Mr. Chairman.
Each of you used the term ``liquidity'' extensively. And
unlike the gentleman from New Jersey, where the answer you gave
the gentleman from New Jersey, in my area, there is a lack of
liquidity on the streets, because of a lack of a desire of
lenders to loan the money.
There is plenty of demand.
We have attempted to look at shoring up liquidity. And one
of the ways we attempted to do that is by restraining
overzealous efforts by regulators.
I won't ask their view about that, because the bankers who
talk to me, every single one of them without exception have
told me how they have been beat up by regulators. But they are
scared to death of retribution, so I can't use their names.
And that is understandable. There are no laws on the books
now to stop the retribution. There are no laws on the books to
stop the abuse.
We have a bipartisan attempt under way to invoke a little
common sense. And that is what I am going to ask for your
comments on.
We would like to have a loan which has never been
delinquent in the past 6 months, even 1 day or 1 minute late,
defined by the historical definition of a performing loan.
And for at least 2 years to recover from this crisis,
forbid the regulators from putting performing loans on an
actual basis.
They could still investigate him for fraud. They can still
do whatever they wanted to do.
They just couldn't suck the liquidity out of the bank--like
any negative thoughts about that you may have.
If any of you know a downside to doing that--I am not
asking you to support it. I would just like you to tell me if
you know of a downside to that, while we happen to have you all
here.
Mr. Zimmerman. I will start.
I think that unfortunately, some of these problems are just
going to take time.
And I think the best thing, rather than getting very
specific about what is a performing loan, and what isn't a
performing loan, I think there just needs to be common sense at
the regulatory level that basically says, look, these people
know what they are doing.
It is not like you wake up one morning and take a stupid
pill--
Mr. Posey. I want to cut you off. We have had 2 years of
hearings of regulators, and they say, yes, we are going to use
common sense. But there is absolutely no forbearance.
So if you modify a loan, it is going on that accrual. If
the parents make a loan for their children, it is going on an
accrual.
If corporation A makes a payment for corporation B, it is
going on an accrual.
And if we think, in our infinite wisdom, that this hotel
where you have $800,000, 30 percent loan to value ratio, that
has never been 1 day late in the 6 years, if in our infinite
wisdom, we feel they should not be able to actually make that
payment, we are going to put it on that accrual.
That is what I would like you to address.
Mr. Zimmerman. To your point, there is an interesting
difference though. In the residential lending area, the
regulators are encouraging banks to forgive debt, to take
funds, take a loan where they own $100,000 and say, if you can
only afford $80,000, we will forgive $20,000 worth of the debt.
And now, you owe $80,000 and we will reset your payment.
That is all okay. It is not a classified loan. You don't
get written up for it or anything like that.
Over on the small business and commercial side, it is
exactly what you stated, Congressman. If you do anything that
is in anywhere near that, it is a problem.
It is a classified loan. It is an impaired loan. There is
all kinds of extensive reporting you have to do.
And again in those cases, they are making us classify loans
that aren't even delinquent. Because like you said, they feel
that the borrower may not be able to make the payments.
So there is a strange dichotomy where what is okay to work
with customers, give them forbearance, get them on a repayment
plan where they can catch up is okay on the residential side.
It is not okay on the commercial and small business side.
And so back to your point, Congressman, if you want to get
things moving, I think that is an area where there could be
some attention given. And let us make it okay to work with all
the borrowers, not just some of them.
Mr. Posey. Thank you.
Chairman Neugebauer. I thank the gentleman.
Mr. Fincher?
Mr. Posey. I think Mr. Costa wanted to respond.
Mr. Costa. I just wanted to say that following up on Mr.
Zimmerman, there is now coming out new TDR, troubled debt
restructure, guidance. Best practices, as the regulators call
it, that requires you to treat any loan with any change
whatsoever in it as a TDR, unless you can prove otherwise.
So that puts a pretty big damper on how everybody looks at
things. It is an ongoing and very real problem.
Mr. Posey. Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Tennessee, Mr. Fincher?
Mr. Fincher. Thank you, Mr. Chairman.
Mr. Gibson, do Federal Home Loan Banks consider risks when
making advances? And if so, are interest rates on advances
adjusted to make advances relatively more expensive for member
banks?
Mr. Gibson. We are--the first thing I would say is we are a
co-op. And so we treat everybody equally.
We do evaluate the risk. And where we are evaluating the
risk is in the collateral.
So if someone brings collateral that is not quite the
quality that someone else brings, then we are going to loan
them less dollars on that collateral, as opposed to the better
collateral over here where we will loan more dollars.
So that is where we equalize it. The pricing is the same
for everybody, because we are a co-op.
Mr. Fincher. Less quality? What do you mean by less
quality?
Mr. Gibson. Let us say that it is maybe not as liquid a
loan. Maybe it is raw land.
We may haircut that significantly more than we would a
single family loan that is much more fungible in the
marketplace, and we can apply a better value to.
Mr. Fincher. Okay. If interest rates on advances are not
adjusted, are other terms altered in some way to take risk into
account?
Mr. Gibson. Yes. If a member becomes a troubled member, we
will continue to advance to them, as long as they have
acceptable collateral. But the maturities begin to shorten.
And so we do shorten those maturities. We are not going to
allow them to take out a long-term advance. We are going to
make it a short-term advance.
If they become more--and when I say troubled, it could be
somebody that has become a three-rated bank. They are not on
the verge of being closed, but they certainly aren't a one or
two-rated bank any more.
So there are different levels that we go to in the
collateral requirements. And, yes, we do make adjustments
there.
Mr. Fincher. Mr. Morrison? Do you have any comments?
Mr. Morrison. Yes. I don't think that the way in which the
banks manage advances is a problem. I think their credit
policies and their monitoring of collateral are generally very
good.
And I think that kind of credit problem has never been
central, and that is why they have never lost anything on an
advance.
There was a time when there was a conflict of interest when
the Federal Home Loan Bank board was both the regulator of
institutions, also the insurer, and also the supervisor of
Federal Home Loan Banks. And in that world, there were
conflicts and lending was done to support regulatory
objectives. And that conflict was removed from the System in
1989.
Since then, the banks, I think, have been very
straightforward in there. So there are differences in pricing,
but they reflect volumes of lending more than they reflect
credit quality. And they cut people off except with consent of
FDIC or another regulator when they go below a certain credit
standard.
Mr. Fincher. Thank you.
I yield back, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
Now the gentleman from New Mexico, Mr. Pearce, is
recognized for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
I will just address this to any one of you. When we start
having difficulties in the regional co-op, what are the
corrective measures that you see taking place as we get deeper
into the problem area?
Mr. Gibson. Are you speaking at a specific regional bank?
Mr. Pearce. No. If we have a specific regional bank that
begins to get--
Mr. Gibson. Okay--
Mr. Pearce. --underwater, and they begin to accumulate more
of the loans they have given, taken, whatever that are not
performing.
So what do you see happening then to the operating unit?
What corrective measures--
Mr. Gibson. There is--
Mr. Pearce. --has been dividends, what do they do?
Mr. Gibson. Yes. There are a number of things they do.
First, they look to the primary collateral that they loaned
against. Then, they look to the super lien status that they
have for additional collateral.
Then, they look to that member's capital stock, because we
are kind of the original skin-in-the-game group. And usually
they are going to have capital stock for their activities
somewhere in the range of 4.25 percent.
We are going to look to that capital stock. Then we are
going to look to the earnings in that specific bank--one of the
12. The earnings and the retained earnings to cover any issues
that comes up. And then we look to the capital stock in that
area.
Prior to getting to that point, you would see suspension of
dividends. You would see suspension of stock buybacks in that
region. And then--
Mr. Pearce. Have we seen any of those things taking place?
Mr. Gibson. We have seen in some of the banks, yes,
suspension of dividends and suspension of stock buybacks, that
is correct.
We have not ever reached the point where we get to the
actual capital stock of that specific bank's capital stock for
their members.
If it happened to go beyond that, then we jump to the joint
and several, and we have all of those issues that we go back to
among the 11 banks.
Basically, the System is structured so that we should never
suffer a loss at the System level, by one bank that would ever
cause us to have to take any taxpayer funds. And we have never
had to.
Mr. Pearce. There is the possibility, though, that causes
us to ask questions up here.
Mr. Gibson. No, I understand.
Mr. Pearce. Mr. Zimmerman, you said that there is no other
access to capital. If you took at a look at the entire System,
all 12 regional banks, how much dollars and margin, how much
profit, if you want to call it that, did they have at their
peak period?
Forget right now because we are kind of in a strange
period, but just roughly.
Mr. Zimmerman. Congressman, I don't have that information
readily available to me.
Mr. Pearce. Is it $1 billion, $10 billion, $100 million--
Mr. Zimmerman. It is just that the System ran--I can tell
you that the System ran very profitably and allowed reasonably
large sums of money to go into affordable housing and things
like that.
Mr. Pearce. But it ran very profitably.
Mr. Zimmerman. Yes--
Mr. Pearce. --which is the key in--
Mr. Zimmerman. Right.
Mr. Pearce. So with all due respect, if--and you are saying
that you couldn't find this liquidity, you are saying, let us
say it is $1 billion.
You don't think there are enough players out there that
would go after $1 billion net profit if the regional banks were
not there. That is--
Mr. Zimmerman. I think I had better understand--
Mr. Pearce. Okay, sorry.
Mr. Zimmerman. In my case, I could borrow money from
somebody besides the Federal Home Loan Bank. I think the key
point is I can't borrow it at that low of a rate. So let us
just say the Home Loan Bank will lend me money and we will
forget about today's rates, because they really don't really
make a lot of sense.
But let us just say that they would lend me money at 4.5
percent. It is very likely that if I went to PNC Bank, with
essentially the same collateral that I used with the Federal
Home Loan Bank, I could pay 100 or 200 basis points more for
the same money.
And then again, what happens is when I lend that money to
my borrower, I have to charge them a higher rate. So it is--
Mr. Pearce. Okay, I understand where you are going. Let us
back it up.
But you are dealing in a System that has a market player in
that slot?
Mr. Zimmerman. Right.
Mr. Pearce. You are telling me that if the FHLB was not
there, that you don't think that you would want to find that $1
billion worth of profit and go organize a group to slide in
there and loan at the same things, make the advances at the
same rate.
I just don't--
Mr. Zimmerman. I don't think I could form a group that
could go into the money markets and be a AAA borrower, and get
money at the rate that the Federal Home Loan Bank can get it. I
think that is the rub here.
You can go in and get funds, depending on the size and
scale and things like that. But the key issue here is this AAA
or really AAA rating.
Mr. Pearce. Yes--
Mr. Zimmerman. And you can't replicate that. Forming a
group or another co-op probably wouldn't have the same high
credit quality. And my guess is that it wouldn't be able to
raise money at those extremely low rates.
Mr. Pearce. Yes, okay.
I see my time has expired, Mr. Chairman.
At the end of the day, you have to ask if it won't happen
in the market, why are we guaranteeing it from taxpayer funds?
I think that the model sounds like it makes money. I think
that somebody would open up. But we really do--I am one who
hates that we are sitting here bailing out Fannie Mae and
Freddie Mac.
Mr. Zimmerman. But remember, the group we are talking about
was not bailed out. They have never taken a dime--
Mr. Pearce. No, I understand--
Mr. Zimmerman. --from the government. And remember, the
money the customers, the American citizens, actually benefit
from this because all of our customers, all the community banks
that are making loans out there every day using Federal Home
Loan Banks as the source of funds, those loans we make are at
lower rates. And so there is all every day citizens, every day
benefiting from the fact that this System exists, that this co-
op--
Mr. Pearce. I don't take issue with that. We have had to
look at that implicit guarantee. I think that is--thank you,
Mr. Chairman, I have extended too long.
I am sorry.
Chairman Neugebauer. I thank the gentleman.
The gentleman from New Jersey, Mr. Garrett?
Mr. Garrett. Thanks, Mr. Chairman, and I thank the panel.
I have heard everyone say what a good job the Home Loan
Banks have done. And I agree that they have done well and
weathered the storm well.
And to the point, Mr. Gibson, both here and in your written
testimony, you said the same thing, that things are going well.
But we do note some notable exceptions out there and we
read about in Chicago and Seattle and Des Moines and elsewhere
where they are having problems.
So maybe there is some room for improvement. I know in your
testimony you talked about how you have a little bit of a push
back to what the Administration has said, and the FHFA has said
as far as their recommendations.
So if you push those aside, do you have any recommendations
for improvements to the Federal Home Loan Banks?
Mr. Gibson. I think you have to--the one thing I would say
is, yes, I acknowledge that a few of the banks do have some
issues.
Those issues are primarily related to the private label
mortgage-backed securities which were AAA rated at the time
they were issued. They are working though those issues.
The System has remained profitable throughout this.
In terms of recommendations to improve the System, there
are always opportunities. Nobody is perfect.
So, yes, there are opportunities.
But what we would encourage is that the model and the
structure be looked at carefully because it is very
interdependent. And if you change one thing it could have
unintended consequences somewhere else, and maybe not prove to
be quite as successful as we move through all these different
economic cycles.
Mr. Garrett. Okay, I get that. And if you have any specific
ones, we would love to have--myself, and I am sure the
committee as well.
Does anyone else have any specific recommendations that you
would like to set forward today?
Yes. So one of the reasons might be because I think in your
testimony you say that well over the history, there haven't
been any losses with regard to the advances, right?
Mr. Gibson. That is correct.
Mr. Garrett. Now my understanding, and that might be in
part because vis-a-vis the FDIC--what you all have, is what, a
super lien position, right?
Mr. Gibson. That is correct.
Mr. Garrett. But for that super lien position, when you
have some of these larger loses where the FDIC had to step in
such as IndyMac, in which case what, the taxpayer effectively
is on the hook there.
For example, let us use that one. Had you not had--not
you--but not had the super lien position, would there have been
losses absorbed by the member banks as opposed to the FDIC and
the taxpayer?
Mr. Gibson. I think the key there is that we only loan
against quality of collateral. If the quality of collateral is
not there, we don't loan against it.
Mr. Garrett. At IndyMac, there was significant
overcollateralization, right? That was the problem, 220
percent. And so with the in that case, I guess it was the
problem.
Mr. Gibson. Had we--
Mr. Garrett. I know--
Mr. Gibson. Yes, they are--
Mr. Garrett. I get you.
Mr. Gibson. --they are not in my footprint, so I don't know
all the particulars about IndyMac. But my guess is that if we
did not have the super lien position, and we simply had the
specific collateral that the number of advances would have
dropped precipitously.
The reason IndyMac closed in the end was not credit, it
ended up being a liquidity run. We are required by statute to
work with their primary regulator when they run into those
liquidity issues.
The Federal Reserve, by law, cannot loan to a five rated
bank. So, the Home Loan Banks are the only option.
And, one of the things the FDIC does well is arrange
orderly liquidations. We are the only source to be able to help
the FDIC arrange orderly liquidations.
Mr. Garrett. So the FDIC position of the super lien is
beneficial to the FDIC?
Mr. Gibson. I do not know what the FDIC's position is.
Mr. Garrett. I wouldn't--
Mr. Gibson. But I would say--
Mr. Garrett. --I wouldn't think so. We are talking about
another area where they accuse us of trying to set up a super
lien position. And they don't usually like that.
Mr. Gibson. But I would say that we only loan against
quality assets. We do not encourage bad lending. Because if
you--
Mr. Garrett. I understand.
Mr. Gibson. --have bad lending, we are not going to loan
you any money against it.
Mr. Garrett. I will throw it to Mr. Morrison on that point,
and also--I see my time is just about wrapping up--as far as
how do you put the subsidy onto the balance sheet which it
seems would be something that you would be favorable doing,
right?
Mr. Morrison. Yes. I would say first, I think you are
absolutely right in your analysis that the super lien does
shift the burden of the loss to somewhere else. And that is why
it was passed in 1987 because the S&Ls had losses.
And there was a decision to benefit the banks over the
insurance fund.
Mr. Garrett. I get that.
Mr. Morrison. And so that conflict does exist.
I think the banks are not profitable lenders. I think that
it is a rare case where this problem arises, but it does arise.
And they have had some very big failures like WAMU.
So this is a real issue in terms of the FDIC. If you ask
anybody who has been in a credit competition with the FDIC, you
will find out that the FDIC has very powerful statutes. And you
may have perfected loans and you may find out that you are not
perfected.
So there is a reason for it. It is a practical matter.
I wouldn't suggest that you change it. But I would just
suggest that the rhetoric about never having a loss is
sometimes stated with a little bit too much force.
And in terms of the guarantee, I don't think we should
have, as a country, pledges on behalf of the taxpayers that are
not funded up front. And I think there is an argument for
having explicit guarantees.
People can disagree about that, but if you are going to
have them, I think you ought to have to pay for them up front
like we pay for FDIC up front.
And so I think that either you make it explicit, you score
it, and you collect money for it, or you shouldn't have a
guarantee.
And that takes you back to what Mr. Zimmerman was talking
about. Could you have a private System that would work? Or is
the margin that is the benefit of the implied guarantee--or the
25 or 50 basis points gained in the marketplace--what it takes
to make the System run.
I don't know the answer to that. I think it would be a
scary experiment because you might lose the community bank
focus.
But I think that if you are thinking about explicit
guarantees, you ought to think about community banks. And you
ought to worry a little bit about Wells Fargo, and Bank of
America, and all these other large institutions which are
perfectly good institutions, but also represent a big piece of
the balance sheet of the Federal Home Loan Banks, and should
they get the subsidy.
Mr. Garrett. Thanks. I appreciate that.
Chairman Neugebauer. I thank the gentleman.
Now, the gentlelady from California, Ms. Waters?
Ms. Waters. Thank you very much, Mr. Chairman.
I want to ask a question that you may not feel is directly
related to what you do. But I am concerned about all of these
REOs out there.
Right now the banks have on their books thousands upon
thousands of Real Estate Owned properties, or REOs, similarly
between FHA, Fannie Mae, and Freddie Mac.
The government owns about 300,000 REOs.
Do you have any thoughts about the best way to dispose of
these assets?
Do we need to create something like the Resolution
Corporation?
And is there a role for the Federal Home Loan banks to play
if such an asset disposition structure was created?
Anybody? Somebody?
Mr. Zimmerman. Again, you asked, so I think that it would
be very difficult to set up an organization and to fund it and
staff it and so forth. The amount of expense and the delay in
time of trying to do that, until you actually got a result,
would be very, very difficult.
I, unfortunately, think--and I touched on this a little bit
ago--that it is going to take more time because the market
needs to work. And these properties need to work their way
through.
Unfortunately, there were a lot of people who got houses,
bought homes not for the right reasons necessarily, and so
those are out there. They couldn't afford them. Now, they are
an REO, as you are pointing out.
And it is going to take a while for the market to absorb
that, but the market will absorb it. It will work its way
through.
And it is just like trying to accelerate that by creating
some kind of other structure like the Resolution Trust
Corporation, I think would have problematic results, because--
Ms. Waters. But let me ask you this. Over the past several
months, I keep hearing about groups that want to purchase all
of these nonperforming assets.
And they say, ``We want to rehab them. We want to keep
people in them. We will rent and maintain them as rental units.
And then we will have rent-to-buy.''
We think that it made good sense to take these
nonperforming assets and turn them into performing assets.
And they keep talking about how they have the money, that
they have individuals who have come together who have put
together a pot of money to do this. And I hear nothing from
anybody about a response to this.
Have you been hearing this?
It is something like what PennyMac did after the guys left
from over at the bank that was purchased--Countrywide. Remember
when Countrywide--?
Some of the guys who were high up in Countrywide, they
first left and they created something called PennyMac. And they
were supposed to do this kind of thing.
And then I heard nothing. It just kind of fell apart.
Mr. Zimmerman. I think it is a viable solution.
If there are groups and they want to buy assets--and I can
tell you, again, from personal experience, if a group came to
my bank and said they wanted to buy my real estate-owned
properties from me in a group, I would tell them I would meet
with them anytime, anywhere, to talk about--seriously--because
if they have money and they want to do it--because I am a
banker.
I don't manage properties. I don't rehab properties. I am
not an expert at that. I don't know exactly the best way to do
that.
So if I could give it to somebody who can--
Ms. Waters. It has to be discounted though.
Mr. Zimmerman. They do. And of course, then it becomes the
price.
And so my suspicion is that some of the groups that you may
be hearing from want to buy some of these properties at such
deep discounts that you just can't let the properties go for
that price.
Ms. Waters. But it is negotiable isn't it--
Mr. Zimmerman. Giving them away.
Ms. Waters. Can't you negotiate that?
Mr. Zimmerman. Yes.
Ms. Waters. Given that you have all these properties that
are underwater anyway, they are not what they were when the
mortgages were written on them.
There seems to be some room here--
Mr. Zimmerman. There is--
Ms. Waters. --in order to write this down, that people
could come to some agreement. But I see no movement in this
direction anywhere.
Mr. Zimmerman. And all I can tell you from the bankers'
perspective is that we are not experiencing people coming to us
with real money wanting to do this. I can personally say no one
has approached us--
Ms. Waters. Can I send you some people who keep coming to
me, telling me about these?
Mr. Zimmerman. I can't--
Ms. Waters. So you can hear their stories.
Mr. Zimmerman. I have some real estate owned, and I would
love to talk with them, so send them my way.
Ms. Waters. All right. I need to get rid of them, bugging
me, because I don't know what to do about it.
Mr. Morrison. Congresswoman?
Ms. Waters. I am sending them to you.
Mr. Morrison. Congresswoman?
Ms. Waters. Thank you. I yield back the balance of my time.
Mr. Morrison. Congresswomen, let me just make a comment.
I was around here when we did RTC and RTC worked. It was
under a Republican President, so it is not some left-wing idea.
It is something that requires a mandate. And it is not
going to work voluntarily. Quite frankly, all of the emergency
mortgage relief programs that we have had have operated on a
voluntary basis, and they frankly haven't worked.
And it is unfortunate because we have a lot of Americans
suffering. So the question is, is there enough consensus up
here to create a mandatory solution?
If there isn't that consensus, then you are going to rely
on the market to come up with a solution. And I frankly think
that is where the problem is.
Ms. Waters. Thank you.
Chairman Neugebauer. We are going to do another round as
Members would like to do that.
So I am going to start.
One of the recommendations recently from Treasury, as it
relates to the Federal Home Loan Bank System, was that some of
the larger banks are taking advantage. We have had a lot of
emphasis on community banks. And I come from an area where we
have more community banks than we have large banks.
But I think, Mr. Morrison, you alluded to this--is why
should these guys that would be your alternative if there
wasn't a Federal Home Loan Bank, why should they be eligible to
come in and leverage off of the borrowing rates or the home
loan System.
Because I understand, and I don't have those numbers in
front of me, but I think when I was getting briefed that 70
percent of the advances or maybe 80 percent of the advances or
to about 20 percent of the members and that there is--of those
numbers, a lot of large banks.
So what is the benefit of letting the large financial
institutions, is the Treasury Secretary made sincere, maybe not
value add?
Mr. Gibson. I will be glad to start on that one.
First, it is mission-consistent. One of the missions of the
Home Loan Bank is to provide funding for housing.
Our top 10 borrowers, which I think would encompass the
large banks that we are talking about, represent 38 percent of
the borrowing at the end of June 30th, I believe.
These institutions represented 68 percent of the mortgage
originations in 2010. So it is definitely mission-consistent.
They are heavily involved in housing in this country.
Second, they act in the scalability issue to reduce the
cost for community banks. And they do that in a number of ways:
one, by having the spread on the advances that are out there;
and two, they allow us the access to the global markets.
The global markets wouldn't be as deep and as liquid for
the Federal Home Loan Banks without the size of the issues that
we have outstanding. The earnings that they help provide build
the retainer and help build the capital structure.
And then the last, and I think one of the really key things
is that we have, in the mechanism, built-in corporate
governance structure that does not allow them to have a
disproportionate voting. We take the total number of members in
a State, the total number of shares, and we divide that, and
that is the maximum number of shares any institution can vote.
So in my case, Southside typically would have about 200,000
votes. I am limited to 30,000. And that is the maximum that
anybody has of any of the large institutions.
So I think it is critical that we keep the large members
because it acts to help the small community banks and provide
the affordable lending all through the entire country.
Chairman Neugebauer. Mr. Costa, and I think, Mr. Zimmerman,
you both said that when you are able to borrow at a cheaper
rate from your advances, that you had that opportunity to pass
that along to your customers.
The question is, is the advance rate at all of the 12
Federal Home Loan Banks or is it the same rate, in other words
if I was going to borrow from, say, Chicago, and I was going to
borrow from Dallas. Would I be paying the same rate if I am a
bank?
Mr. Costa. I do not believe that the rates are exactly the
same. The rates are probably fairly close, but each of the
banks price their own advances. We don't get involved in price-
setting or anything of that nature.
So each of the banks do have a little bit different
pricing, but all the banks provide funding at a competitive
level, because if they go too far outside the bounds, then
there might be another source for one specific type of
borrowing that they could borrow.
But no, I don't believe they are all exactly the same.
Chairman Neugebauer. And don't we have banks that are
multiple members of a number of regional banks, that they are
not just a member of one?
Mr. Gibson. We do. And in the case--some of these top 10
borrowers may belong to 2 or 3 different member banks. And that
actually acts, once again it goes back to the concentration
risk. The risk is spread among several banks, and there are
several bank management teams looking at those.
Another key benefit is that if the large bank happen to be
represented in one area, then all the profits from that and the
affordable housing dollars would only flow to that one area,
when most of those banks have tentacles that reach all across
the country.
So it helps to spread the costs and it also helps to spread
the benefits to the members all across the country.
Chairman Neugebauer. Would anybody else like to comment on
that?
Mr. Morrison. Yes, Mr. Chairman. I would say everything
that Mr. Gibson said is correct.
But there also is a substantial subsidy that is flowing to
the largest banking institutions in the country. And that is a
policy judgment for the Congress.
In my written testimony, I suggested a way to square that
circle to allow those institutions access when there is a very
specific kind of illiquid asset being supported, as opposed to
just supporting the liquidity of those very large institutions.
There are benefits in terms of pricing, and there are
benefits in terms of disciplining the System. Probably it would
be better if all of the big institutions were spread around the
12 banks and there wasn't any competition for getting the big
members in.
But it is a value judgment at the end. And I think that
many Members here in other contexts, if they saw the subsidy to
the particular institutions, would be disquieted by it. And I
think people should at least understand it and decide whether
or not they want to target it better.
Chairman Neugebauer. Thank you.
You are recognized, Ms. Hayworth.
Dr. Hayworth. Gentlemen, as you know, the Financial
Services Committee spends quite a bit of its time, rightly so,
on Dodd-Frank. And I am wondering what, if any, anticipated
burdens you see on yourselves, on community banks, on the
relationship or the functioning of the relationship you have
with FHLB or the functioning of FHLB related to Dodd-Frank?
I will throw that out to all the members of the panel.
Mr. Gibson. I will start.
Dodd-Frank--it is hard when you go through a crisis like we
went through, it is hard to say, ``Gosh, we don't need any
additional regulation.''
I think there needs to be a cost-benefit analysis, though.
In the case of the Home Loan Banks, our regulatory costs have
tripled in the last 10 years.
I guess what I would say is we need to make sure we have
smart regulation, not just additional regulation. So I would
just leave it at that.
The costs are just going through the roof. And they are
going through the roof at my community bank also, and I will
let the other gentlemen speak to their instances.
Mr. Zimmerman. Yes, I can pretty much ditto that.
If you wonder about a concern to get the economy moving,
one of the big concerns is can we afford all the regulation
that we are supposed to be able to handle and buck up to?
Because more and more and more doesn't mean we are going to
prevent a problem or whatever. And I totally support the idea
that there should be smart--you have to have regulation.
But we are regulating community banks particularly down to
the point where there is barely room to breathe. That is not
how you get the economy going. And that is not how you lend
money out.
Mr. Morrison. I just have to take a moment of personal
privilege to say that the tripling of the regulatory cost of
the bank System came precisely after I left my job as chairman
of the Finance Board.
Perhaps because when I was chairman, and I got to set how
much we were going to charge, I had experience up here, and I
couldn't imagine just willy-nilly increasing the cost without
having a sense of accountability.
I, frankly, think that the regulatory costs that have been
imposed on the bank System have been unnecessary at the scale
at which they have been increased because the regulatory focus
should, I think, be more targeted. And it probably shouldn't
cost quite so much as it does.
It is easy when you are in the business of both setting the
spending and the taxing to do what is easy and comfortable, and
increase both. But I think Members up here would have a
different view if they were sitting in the Chair.
Mr. Costa. I would just like to say, as the smallest guy up
here, our bank is probably the average size ABA member out of
all the banks. And the regulation doesn't take into account at
all the size of an institution.
So the need for me to comply is really burdensome because
of my size. It costs me just as much money to comply as it does
a $3 billion bank, relatively speaking. And we just don't have
the room for that.
So it has become a real burden for the average size
community bank across the country, not just me.
Every time I go to a meeting, whether it is here or in some
other part of the country with the ABA, everybody is saying the
same thing, ``This is killing us. Where does this end? How do
we do this?''
They don't know how to do it.
So it is a real problem.
Dr. Hayworth. Thank you, Mr. Chairman.
I yield back.
Chairman Neugebauer. Mr. Posey?
Mr. Posey. Thank you, Mr. Chairman.
I believe Mr. Morrison hit the nail on the head when he
said the solution is more about accountability than it is new
regulation.
Ken Lay, for plundering Enron, went to prison. Bernie
Madoff, although he had to basically turn himself in because
the SEC wouldn't track him down, ended up in prison.
I am sure there were some people in financial institutions
who were, at the very least, culpably negligent in causing a
great harm to this economy, to this country.
To my knowledge, although I hear whispers and rumors of
investigations, nothing has surfaced yet that has been
significant. There has been no accountability for the
wrongdoing that they did to harm their stockholders, their
employees.
One would think--I think the common prudent person on the
street would think that certainly that would be considered
racketeering, certainly they had to use telephone, mail, other
ways of communicate more than one thing. And somewhere, we have
some people going after the people who perpetrated these great
damages and inflicted this great financial injury on our
country and our citizens, tracking them down and trying to
bring them to justice.
I think that is the final accountability. I don't think
when we have talked about it before, were to be ever smart
enough to have a law to stop somebody from profiteering in
every conceivable manner.
It is just the law of probability that says it's moot. But
history has shown--and if we had time we could walk through the
instances that when there was prompt and severe punishment for
what these people have done, that stops the practice from
repeating itself more than anything else.
So I am sorry for the regulations that you all have to
suffer as we try and overcompensate for having not done the
right things in the beginning. But I don't think all the
regulations in the world are going to stop the bad guys from
scheming and trying to take advantage of honest people and
honest companies.
I think the only way we are going to do that is when we
hold them accountable for that.
So any comments you have on that would be appreciated.
Mr. Zimmerman. I couldn't agree more. It is this idea of
when you look at where the problems were and then what the
solution is, when you have all this regulation--and we are here
speaking as community banks, and I think it is reasonably well-
established now.
There is a pretty bright line between the big banks and the
community banks. And the ones that caused the problem, go ahead
and go after them.
But what is happening is one-size-fits-all regulation is
happening. And we are expected to bear the cost, even though we
didn't cause the problems.
And so there needs to be some kind of System where the
people--let us go after the people who caused the problem. But
don't keep adding more and more regulations onto the people who
didn't have anything to do with it and expect us to pay for it.
Because when the bank down the street closes in a small
town, and they have to merge with a larger company because they
can't afford the cost of regulation, the people in that area
are hurt. The American citizens are hurt. And it is just not
right.
Mr. Posey. We have tried to make that point to the people
who are trying to eliminate the 3 percent FHA downpayment loan,
saying it would take the government off the hook.
But for 60 years that has worked. There has been a 0.5
percent MIP that has covered that. And by changing the game
now, you only hurt the next generations of homebuyers.
You hurt the innocent people. You don't do anything to make
the guilty pay.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
Now, the gentlewoman from California?
Ms. Waters. Thank you very much, Mr. Chairman.
I was just looking at some of the information that was
provided to us. We have a paragraph here that says, ``During
the financial crisis, as other sources of funding dried up,
financial institutions turned to the Federal Home Loan Banks
for advances for much needed liquidity. These advances may have
kept some financial institutions from collapsing and may have
delayed the failure of others long enough to allow merger or
acquisition of another financial institution.''
My first question is--we witnessed the closure of many
community banks. The FDIC was closing them so fast they
couldn't keep up with them.
And of course, we know that one of the problems of these
small banks is access to capital. This is what we hear all the
time.
I want to know, in all of these financial institutions that
you saved, what percentage or portion of those Federal Home
Loan Banks were small or community banks or minority banks?
That is number one.
Number two, let me just say that there is a great deal of
sympathy and support for community banks on the Financial
Services Committee, on both sides of the aisle, and I think in
this Congress.
As you know, during the Dodd-Frank Conference Committee, we
looked at getting rid of an overabundance of auditors being in
one bank at the same time. You hear a lot of us talk about the
capital requirements. We would like to make sure that community
banks are not overburdened with capital requirements that banks
basically hamper them.
So on the latter part of this commentary, what are the
specific regulations, would you advise us, that need to be
eliminated or modified in some way?
So that is two questions. Who got saved?
How many community banks got saved?
Why are they still screaming about access to capital?
And what regulations could you identify specifically to
tell this working group of members on both sides of the aisle,
that I am speaking for, even though they didn't tell me I could
speak for them--to help with the regulations problem?
Mr. Gibson. I will start. I don't know the exact
percentages, but I will tell you that the large institutions
have always been considered too-big-to-fail. So I don't think
that we were saving large institutions.
My guess is that the vast majority, if not all, were small
community institutions that did not have that access. When the
Treasury Secretary and Chairman Bernanke were in Washington
meeting with bankers during the crisis, I don't think they were
meeting with small community bankers. They were meeting with
the big guys trying to figure out how to save them.
There is nobody out there when a community bank--any of the
three of our community banks gets in trouble, there is nobody
going to come help us. And so the liquidity provided that saved
the banks would--my guess is, and I can get you the
information, would have been the smaller banks.
In terms of regulations, the--
Ms. Waters. Are you saying the Federal Home Loan Banks did
the advances to the small and community banks?
Mr. Gibson. I am saying that when liquidity dried up, and
two things happened, especially in the third quarter of 2008.
Liquidity went away for everybody.
Ms. Waters. Yes.
Mr. Gibson. And the ability to raise capital went away for
everybody. Fortunately, the way the System works in the Home
Loan Bank, we have a self-capitalizing model, and we were able
to provide that liquidity.
So as long as a bank who may have needed liquidity could
give us the capital and had the assets on balance sheet, we
were able to give them the liquidity. And they would not have
been able to get that anywhere else.
Ms. Waters. Do you feel that your collateralization
requirements are so awesome that some of the community banks
could not apply for or be considered for advances?
Because I understand they have to offer--
Mr. Gibson. Sure.
Ms. Waters. --an abundance of collateral for you guys.
Mr. Gibson. They have to offer quality collateral. And in
some cases, some banks reached a point where they had made so
many--and it was a small segment fortunately. But some of them
had made so many bad loans that yes, there probably were
instances where we just couldn't advance additional advances.
We never took the advances away from those institutions.
But for those who were teetering because of a liquidity
crisis, we were able to advance funds to those folks because
for the most part, they had quality assets. They just didn't
have any place else to go to get liquidity.
Chairman Neugebauer. I thank the gentlewoman.
Ms. Waters. Thank you.
Chairman Neugebauer. Mr. Capuano?
Mr. Capuano. Thank you, Mr. Chairman.
Gentlemen, let me ask you if you agree. I see the economic
crisis having been--no one person or one group is to blame.
It is all of us, if you want the truth. But if I had to
point to one person or one group, it would be the unregulated
financial institutions that really went the craziest.
And it wasn't the--the regulated did some too. But the
truth is if they had just held all the problems that we did
have just within the regulated institutions, big and small,
that we could have handled that without much of a problem.
It would have been a minor problem to some people, but not
to the economy as a whole. The economy as a whole was shaken,
in my opinion, because the unregulated institutions.
I guess the only thing I want to say is I wanted to follow
up on what Maxine said. I want to be really clear.
I am a liberal, progressive, whatever you want to call me.
I believe the government has a role to play in drawing lines,
saying, ``You can't cross this line,'' for a lot of people.
The classic one is that you can't murder anybody. We don't
say you can't murder anybody because we think everybody is
going to murder somebody.
It is just if you do, there is a consequence to pay.
And I look at regulations for the most part, not just with
banks but all regulations, as the same thing.
At the same time, I was going to say I am the most liberal
person in the room, but I don't want to offend Maxine, so--
[laughter]
I am not for overregulation. And I represented all the
banks in Massachusetts for about 7 years.
So I understand what you are saying, but honestly the
problem I have when my banking friends come in and say--and
again, not just banking, but bankers in this committee--when
they say, ``Oh, there is too much regulation. Help us.''
Now some of my friends here and I may have a difference of
where the line should be drawn. That is fine.
But I have no interest whatsoever in driving up your costs
on unnecessary, duplicative regulation. That is stupid. I am
not interested in that.
At the same time, I need to know exactly what you mean.
Today is not the day to do it.
So especially the groups, the ABA, the ICBA, and others,
come in and talk to us. And not about, ``Oh, there is too much
regulation.'' That is great, but that doesn't help me answer
the problem.
And I do hear on occasion--I have been here for 13 years. I
do hear on occasion someone will come in about one specific
regulation. It is usually about a proposed regulation that they
don't like.
But I have never had a group come in to me and say, ``Hey,
Mike. Here are the 25 regulations that are killing community
banks. And look, we don't need them. Here is why we don't need
them.'' Not just, ``We don't like them.''
The truth is nobody likes--I would like to go do anything I
want to do any time I want to do it. But I think everybody
agrees that there is a need for some thoughtful, reasonable
regulations. And not because we think you are going to break
the law, but because we hope you don't and we want to make sure
you know where it is--
It is also for competitive reasons, which is I think what
got us in trouble, is that without regulation the human nature
of competitiveness is once you start doing something, I had
better start doing it if I want to compete with you.
And it just becomes unsustainable. So for me, regulations
are about saying, ``Here is the line. Nobody can cross it. And
therefore everybody is on an equal playing field.''
So I guess what I am saying is please, from the
organization's standpoint, not here, not today, come in with a
thoughtful, comprehensive proposal on how we can go about--with
the reasons.
Okay, we don't like this regulation. This is why, or, you
don't have to have this because we have to do the same thing
here, or, we have to do this form for this agency and this one.
It is the same form. Make them the same.
Those kinds of things help me try to help you.
Now again, we will probably have disagreement of where the
line should be, but at least we will know what we are arguing
about.
And I will simply say that when people come in and say
there is too much regulation, it is a good political sound bite
but it doesn't help the System.
And in the end what ends up happening is you end up having
lots of regulations that are not enforced--which I also think
is probably one of the biggest problems we have. And you have
regulators who are afraid to regulate.
And you end up with nothing. And we end up with an economic
crisis like we have now, and then you get an overreaction.
So for me, before we get too far down that road, I am
begging you again, the associations, come in and talk to us
about details and specifics and how we can move forward.
Because even those of us who don't mind regulation, most of
us--I am not interested in overregulation.
That is not good for business. That is not good for
government. It is necessary in any way I can see it. And so
therefore I am not against regulation, but I need help in
trying to determine exactly where we should draw it.
Thank you.
Chairman Neugebauer. I thank the gentleman.
This has been a very good hearing. I appreciate the
witnesses.
I think we have had some good interchange. We had good
participation from our membership today.
As you know, as we begin to try to reinstall and restart
the private mortgage finance business in this country, the
whole chain is going to be an important part of that.
And as we also try to figure out a way in the future of
trying to decouple the taxpayers from picking up the tab when
people make bad investment decisions, obviously that is going
to be an important part of the discussion. But I thank the
witnesses for your time today.
The Chair notes that some members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
So what that really means is some of our folks may want to
follow up. We would appreciate your response. And then we will
make your responses, again, part of the record.
And I thank the panel.
And with that, this hearing is adjourned.
[Whereupon, at 2:58 p.m., the hearing was adjourned.]
A P P E N D I X
October 12, 2011