[Federal Register Volume 67, Number 98 (Tuesday, May 21, 2002)]
[Rules and Regulations]
[Pages 35713-35715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12637]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 966

[No. 2002-19]
RIN 3069-AB10


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

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
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."

EFFECTIVE DATE: This rule will become effective on June 20, 2002.

FOR FURTHER INFORMATION CONTACT: Scott L. Smith, Acting Director, 
Office of Policy, Research and Analysis (202) 408-2991; Charlotte 
A. Reid, Special Counsel, Office of General Counsel (202) 
408-2510; Federal Housing Finance Board, 1777 F Street, NW., 
Washington, DC 20006.

SUPPLEMENTARY INFORMATION:   

I. Background

    On March 7, 2002, the Finance Board published for notice and 
comment a proposed rule to amend  966.3(a) of the Finance 
Board's regulations, which 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  932.2 of the regulations.\1\ Under 
 966.3(a)(1), each Bank generally is required to maintain a 
leverage ratio not in excess of 21-to-1. However, 
 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. Thus, this rule 
is in a transitory stage because as the Banks' capital plans are 
approved and implemented, this leverage requirement will yield to the 
new leverage limit in  932.2 of the Finance Board 
regulations.
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    \1\ 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).
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    Under  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  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

[[Page 35714]]

(FMP),\2\ 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.
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    \2\ 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 compmliance with the Finance Board's new 
regulations on Bank capital. See 12 CFR parts 930-933.
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    While serving as a vehicle to transition the Banks from this 
leverage requirement to their new capital structures and the new 
leverage limit set forth in  932.2 of the Finance Board 
regulations, the final rule amends  966.3(a)(2) to: (1) 
Exclude from the scope of the definition of "non-mortgage 
assets" United States government-insured single family and 
multifamily 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. This clarification will provide the Banks with an 
unambiguous standard for assets that are to be excluded from the 
definition of non-mortgage assets in leverage limit calculations.
    The Finance Board received four comment letters, all of which were 
favorable comments, on the proposed rule. The comments are discussed 
below. Accordingly, the final rule adopts the proposed rule with only 
one clarification as discussed below.

II. Analysis of Comment Letters and Changes Made in the Final Rule

    The Finance Board received four comment letters from Banks. All of 
the commenters supported the rule change. Two commenters suggested that 
the list of excluded assets contain certain additional items. 
Additionally, one commenter recommended that the Finance Board add a 
provision to codify a Finance Board regulatory interpretation 
(2001-RI-02) that the Banks may, at their option, calculate 
the non-mortgage asset ratio on a monthly average. Upon consideration 
of the comments, the Finance Board has determined that, with one 
exception, the recommendations would not substantively improve the 
rule, especially in light of the transitional nature of the rule. 
Ultimately, of course, the issue is best served by the Banks' new 
capital structures. In the unlikely event that a question arises in the 
interim concerning whether an asset may be excluded from the definition 
of non-mortgage assets, the Finance Board believes that the analysis 
may best be undertaken on a case-by-case basis.
    One Bank requested that the definition of the government-insured or 
-guaranteed loans be broadened to include government insured or 
guaranteed multi-family residential mortgage loans in the list of 
excluded assets. The Finance Board agrees with the comment that all 
government-insured (or guaranteed) residential mortgage 
loans-single family and multi-family-should be excluded 
from non-mortgage assets, and has amended the final rule to reflect 
that change. As proposed, the final rule also amends
     966.3(a)(2) to eliminate any cross-reference to CMA 
assets and in its place adds "acquired member assets, including 
all United States government-insured or guaranteed whole single-family 
and multi-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 under this rule.
    In addition to the above-described revision, as proposed, the final 
rule also eliminates the reference in  966.3(a)(2) to 
"assets described in sections II.B.8 through II.B.11 of the 
FMP" and replaces that reference with an explicit enumeration of 
the assets to be subtracted from a Bank's total assets in calculating 
the percentage of non-mortgage assets. By including all relevant 
information in the published regulatory text, the definition of non-
mortgage assets is made clearer and more transparent, without any 
substantive change.
    The Finance Board received several recommendations for additions to 
the enumerated list of excluded assets. One Bank requested that standby 
bond purchase agreements for state housing finance agency bonds be 
excluded from non-mortgage assets, stating that to do so would be 
consistent with the exclusion of standby letters of credit. The Finance 
Board has considered the suggestion and determined that the rule should 
not be amended to include such contracts. Such bonds may be counted as 
mortgage assets for purposes of this rule only at such time as the 
purchase is executed.
    Another Bank requested that the accrued interest carried on a 
Bank's books with respect to assets enumerated in 
 966.3(a)(2) be added to that list as a stand-alone 
category of excluded assets. Upon consideration, the Finance Board 
rejects this suggestion. While accrued interest may be related to an 
asset, it is shown as a separate line item on a balance sheet. Once an 
interest payment is made it is removed from the balance sheet and flows 
through the income statement. An outstanding interest payment due is 
not the equivalent of a Bank advancing funds to a member. Thus, the 
Finance Board has determined that the interest due is not a 
"mortgage asset" for purposes of the final rule. 
Additionally, the Finance Board is not persuaded that principal amounts 
carried as receivables on a balance sheet should be granted separate 
asset status for purposes of this rule.
    The Bank also suggested that the list of excluded assets should be 
broadened to include any adjustments made to the book value of the 
asset categories stated in  966.3(a)(2) resulting from the 
application of SFAS No. 133 under Generally Accepted Accounting 
Principles (GAAP), and the book value of derivative assets that hedge 
similar provisions embedded in advances, such as a cap on the floating 
rate of an advance. The commenter correctly noted that under SFAS No. 
133 the Bank includes in the book value of assets hedged with 
derivatives any fair value gains or losses on those assets. The Finance 
Board does not believe that the rule should be amended to take such 
values into account. Nevertheless, the Finance Board has determined 
that a Bank may value an asset under GAAP, as appropriate, for purposes 
of this final rule.
    Finally, one Bank suggested it would be beneficial to codify in the 
final rule the Finance Board's regulatory interpretation (2001-
RI-02) that the Banks may, at their option, calculate the non-
mortgage asset ratio on a monthly average basis. Again, the rule is a 
transitional provision with a limited shelf life. The Finance Board 
does not believe that amending the rule is necessary at this late stage 
in the transition process. Accordingly, the final rule does not 
incorporate the requested amendment.
    As stated, the final rule is a transitional mechanism. In the 
interim, in the unlikely event that any of these issues arise, the 
Finance Board is prepared to address such matters on a case-by-case 
basis in a regulatory interpretation or other appropriate regulatory 
adjudication.

[[Page 35715]]

III. Regulatory Flexibility Act

    The final 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 final rule will not have a 
significant economic impact on a substantial number of small entities.

IV. Paperwork Reduction Act

    The final 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 amends 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. Revise  966.3(a)(2) to read as follows:


 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 or multi-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: May 8, 2002.

    By the Board of Directors of the Federal Housing Finance Board.
John T. Korsmo,
Chairman.
[FR Doc. 02-12637 Filed 5-20-02; 8:45 am]
BILLING CODE 6725-01-P