[Federal Register Volume 67, Number 45 (Thursday, March 7, 2002)]
[Proposed Rules]
[Pages 10337-10339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5459]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 67, No. 45 / Thursday, March 7, 2002 / 
Proposed Rules  

[[Page 10337]]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 966

[No. 2002-04]
RIN 3069-AB10


Federal Home Loan Bank Consolidated Obligations--Definition of 
the Term ``Non-Mortgage Assets''

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its regulation on Federal Home Loan Bank (Bank) consolidated 
obligations in order to redefine the term ``non-mortgage assets,'' as 
used in the provision on Bank leverage limits. The effect of this 
amendment would be to allow a Bank to qualify more easily to maintain a 
25-to-1 assets-to-capital leverage ratio instead of the general 21-to-1 
ratio. In addition, the rule makes several technical changes to the 
definition of ``non-mortgage assets.''

DATES: The Finance Board will accept written comments on the proposed 
rule on or before April 8, 2002.

ADDRESSES: Mail comments to Elaine L. Baker, Secretary to the Board, by 
electronic mail at [email protected], or by regular mail at Federal 
Housing Finance Board, 1777 F Street, NW., Washington, DC 20006. 
Comments will be available for inspection at this address.

FOR FURTHER INFORMATION CONTACT: Scott L. Smith, Acting Director, 
Office of Policy, Research and Analysis (202) 408-2991; Eric M. 
Raudenbush, Senior Attorney-Advisor, Office of General Counsel (202) 
408-2932; Federal Housing Finance Board, 1777 F Street, NW., 
Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Summary of the Rule

A. Background

    Section 966.3(a) of the Finance Board's regulations sets forth the 
assets-to-capital leverage limit that will apply to each Bank until: 
(1) That Bank's capital structure plan required under part 933 of the 
regulations becomes effective; and (2) the Bank is in compliance with 
the new leverage limit set forth in Sec. 932.2 of the regulations. See 
12 CFR 931.9(b)(1) (governing transition from old to new leverage 
limit); see also 66 FR 8262, 8280 (Jan. 30, 2001) (transition discussed 
in preamble to rule adopting new capital regulations). Under 
Sec. 966.3(a)(1), each Bank generally is required to maintain a 
leverage ratio not in excess of 21-to-1. However, Sec. 966.3(a)(2) 
provides that a Bank may maintain a leverage ratio of up to 25-to-1 if 
the amount of its ``non-mortgage assets'' (after deducting deposits and 
capital held by the Bank) does not exceed 11 percent of the Bank's 
total assets.
    Under Sec. 966.3(a)(2), ``non-mortgage assets'' are defined to 
include a Bank's total assets after deduction of core mission activity 
(CMA) assets described in Sec. 940.3 of the regulations and assets 
described in sections II.B.8 through II.B.11 of the Federal Home Loan 
Bank System Financial Management Policy (FMP),\1\ which include: 
Mortgage-backed securities (MBS) or collateralized mortgage obligations 
(CMOs) issued by U.S. government-sponsored enterprises; AAA-rated MBS 
or CMOs issued by private entities; AAA-rated asset-backed securities 
backed by manufactured housing loans or home equity loans; and certain 
obligations of state and local housing finance agencies rated AA or 
higher. This proposed rule would amend Sec. 966.3(a)(2) to: (1) Exclude 
from the scope of the definition of ``non-mortgage assets'' United 
States government-insured mortgages acquired by Banks as part of their 
acquired member asset (AMA) programs established under part 955 of the 
regulations; and (2) clarify the definition by eliminating the CMA and 
FMP cross-references and replacing them with direct descriptions of the 
assets in question. The Finance Board welcomes comments regarding these 
regulatory changes.
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    \1\ The FMP is a Finance Board policy that governs Banks' 
investments and other issues of financial management. The policy 
currently is being phased out as the Banks transition to their new 
capital structures in compliance with the Finance Board's new 
regulations on Bank capital. See 12 CFR Parts 930-933.
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B. Government-insured or -guaranteed mortgages

    Section 940.3 of the regulations enumerates the Bank activities 
that qualify as CMA--i.e., activities that the Finance Board has 
determined are most central to the fulfillment of the Banks' statutory 
mission and upon which the Banks must focus when preparing their 
strategic business plans as required by Sec. 917.5 of the regulations. 
Under Sec. 940.3(b), most AMA qualify as CMA. However, in order to 
provide incentive for Banks to focus upon the acquisition of 
conventional mortgages, in which market the Finance Board believes that 
the involvement of the Banks provides greater benefit, see 65 FR 43969, 
43972 (July 17, 2000), Sec. 940.3(b) provides that U.S. government-
insured or -guaranteed mortgages acquired under commitments entered 
into after April 12, 2000 qualify as CMA only in an amount up to 33 
percent of total AMA acquired after that date, less U.S. government-
insured or -guaranteed mortgages acquired after April 12, 2000 under 
commitments entered into on or before April 12, 2000. Any government-
insured or -guaranteed mortgages held by a Bank in excess of this 
benchmark do not qualify as CMA and therefore are ``non-mortgage 
assets'' for purposes of the calculation to be made under 
Sec. 966.3(a)(2).
    Notwithstanding its efforts to focus the Banks upon conventional--
as opposed to government-insured or -guaranteed--AMA, the Finance Board 
has consistently favored Bank investment in markets (including those 
for all types of AMA) in which Bank participation is likely to have a 
measurable positive impact over investment in MBS. See 65 FR 43969, 
43971-72 (July 17, 2000) (explaining Finance Board preference for AMA 
over MBS). Thus, most AMA qualify as CMA, while no MBS qualify as CMA 
(except to the extent that a particular MBS investment qualifies under 
the ``targeted investment'' language of Sec. 940.3(e)) and each Bank's 
investment in MBS is limited to 300 percent of that Bank's capital. See 
FMP at II.C.2.
    In light of the emphasis that the Finance Board has asked the Banks 
to place upon AMA, as opposed to MBS, it is counterintuitive to 
designate all MBS for favorable treatment in making the leverage limit 
calculation, while denying such favorable treatment to a category of 
AMA. Accordingly, the

[[Page 10338]]

Finance Board is proposing to amend Sec. 966.3(a)(2) to add ``acquired 
member assets, including all United States government-insured or 
guaranteed whole single-family residential mortgage loans'' to the list 
of assets to be subtracted from a Bank's total assets to obtain the 
amount of ``non-mortgage assets'' on a Bank's balance sheet for 
purposes of the leverage limit calculation.

C. Elimination of Cross-References

    In addition to the above-described revision, this proposed rule 
also would eliminate the reference in Sec. 966.3(a)(2) to ``core 
mission activity assets'' and ``assets described in sections II.B.8 
through II.B.11 of the FMP'' and replace them with an explicit 
enumeration of the assets in question. The FMP is being gradually 
phased-out and will no longer govern Bank operations once all Banks are 
in compliance with the Finance Board's new capital regulations. As 
such, the Finance Board finds it prudent to begin eliminating 
regulatory references to this policy (except in the case of transition 
provisions) so that all relevant information can be found in the 
published regulatory text. Although the Finance Board has revised some 
of the language used in the FMP to describe these assets so as to 
conform to the conventions used in its regulations, no substantive 
change is intended.
    In the same vein, the Finance Board also is proposing to eliminate 
the cross-reference to CMA assets and, instead, substitute an explicit 
enumeration of all of the other assets that are to be subtracted from a 
Bank's total assets in calculating the percentage of non-mortgage 
assets. With the inclusion of government-insured or -guaranteed 
mortgages--which do not qualify as CMA--in the list of items to be 
subtracted from total assets to derive the amount of a Bank's non-
mortgage assets, the Finance Board believes that it is not appropriate 
to tie Sec. 966.3(a)(2) to the CMA definition. In addition, this change 
would make the definition of non-mortgage assets clearer and more 
transparent.

II. Regulatory Flexibility Act

    The proposed rule applies only to the Banks, which do not come 
within the meaning of ``small entities,'' as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance 
with section 605(b) of the RFA, see id. at 605(b), the Finance Board 
hereby certifies that this proposed rule will not have a significant 
economic impact on a substantial number of small entities.

III. Paperwork Reduction Act

    The proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501 et 
seq. Consequently, the Finance Board has not submitted any information 
to the Office of Management and Budget for review.

List of Subjects in 12 CFR Part 966

    Federal home loan banks, Securities.

    Accordingly, the Finance Board hereby proposes to amend title 12, 
chapter IX, Code of Federal Regulations as follows:

PART 966--CONSOLIDATED OBLIGATIONS

    1. The authority citation for part 966 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a, 1422b, and 1431.

    2. Amend Sec. 966.3 by revising paragraph (a)(2) to read as 
follows:


Sec. 966.3  Leverage limit and credit rating requirements.

    (a) * * *
    (2) The aggregate amount of assets of any Bank may be up to 25 
times the total paid-in capital stock, retained earnings, and reserves 
of that Bank, provided that non-mortgage assets, after deducting the 
amount of deposits and capital, do not exceed 11 percent of such total 
assets. For the purposes of this section, the amount of non-mortgage 
assets equals total assets after deduction of:
    (i) Advances;
    (ii) Acquired member assets, including all United States 
government-insured or guaranteed whole single-family residential 
mortgage loans;
    (iii) Standby letters of credit;
    (iv) Intermediary derivative contracts;
    (v) Debt or equity investments:
    (A) That primarily benefit households having a targeted income 
level, a significant proportion of which must benefit households with 
incomes at or below 80 percent of area median income, or areas targeted 
for redevelopment by local, state, tribal or Federal government 
(including Federal Empowerment Zones and Enterprise and Champion 
Communities), by providing or supporting one or more of the following 
activities:
    (1) Housing;
    (2) Economic development;
    (3) Community services;
    (4) Permanent jobs; or
    (5) Area revitalization or stabilization;
    (B) In the case of mortgage- or asset-backed securities, the 
acquisition of which would expand liquidity for loans that are not 
otherwise adequately provided by the private sector and do not have a 
readily available or well established secondary market; and
    (C) That involve one or more members or housing associates in a 
manner, financial or otherwise, and to a degree to be determined by the 
Bank;
    (vi) Investments in SBICs, where one or more members or housing 
associates of the Bank also make a material investment in the same 
activity;
    (vii) SBIC debentures, the short term tranche of SBIC securities, 
or other debentures that are guaranteed by the Small Business 
Administration under title III of the Small Business Investment Act of 
1958, as amended (15 U.S.C. 681 et seq.);
    (viii) Section 108 Interim Notes and Participation Certificates 
guaranteed by the Department of Housing and Urban Development under 
section 108 of the Housing and Community Development Act of 1974, as 
amended (42 U.S.C. 5308);
    (ix) Investments and obligations issued or guaranteed under the 
Native American Housing Assistance and Self-Determination Act of 1996 
(25 U.S.C. 4101 et seq.);
    (x) Securities representing an interest in pools of mortgages (MBS) 
issued, guaranteed, or fully insured by the Government National 
Mortgage Association (Ginnie Mae), the Federal Home Loan Mortgage 
Corporation (Freddie Mac), or the Federal National Mortgage Association 
(Fannie Mae), or Collateralized Mortgage Obligations (CMOs), including 
Real Estate Mortgage Investment Conduits (REMICs), backed by such 
securities;
    (xi) Other MBS, CMOs, and REMICs rated in the highest rating 
category by a NRSRO;
    (xii) Asset-backed securities collateralized by manufactured 
housing loans or home equity loans and rated in the highest rating 
category by a NRSRO; and
    (xiii) Marketable direct obligations of state or local government 
units or agencies, rated in one of the two highest rating categories by 
a NRSRO, where the purchase of such obligations by a Bank provides to 
the issuer the customized terms, necessary liquidity, or favorable 
pricing required to generate needed funding for housing or community 
development.
* * * * *

    Dated: February 13, 2002.


[[Page 10339]]


    By the Board of Directors of the Federal Housing Finance Board.
John T. Korsmo,
Chairman.
[FR Doc. 02-5459 Filed 3-6-02; 8:45 am]
BILLING CODE 6725-01-U