[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

                              ----------                              
                                                                   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




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