While Fannie Mae and Freddie Mac continue to await their fate, the country's Federal Home Loan Banks (FHLBs) are helping America's community lending institutions play an increasingly larger role in the housing finance system. And they're doing it with so-called skin in the game, an FHLB executive said during the opening session at the Mortgage Bankers Association's (MBA's) 99th Annual Convention & Expo in Chicago in October.
Many lenders worry that under the Dodd-Frank Wall Street Reform and Consumer Protection Act, they will be required to keep on their books a prohibitive share of the mortgages they sell on the secondary market. But Matthew Feldman, president and chief executive officer of the Federal Home Loan Bank of Chicago, said the FHLB system's 7,700 member institutions are already producing high-quality mortgages while retaining a piece of the action.
"Some people lost sight of the basic role of liability, but not our members," Feldman said.
The 12 district FHLBs are cooperatives that were chartered 80 years ago to act as a secure source of mortgage money to thrift institutions, insurance companies, commercial banks and credit unions. The system now has more than 8,000 members, about 1,200 of which participate in the secondary market through the Mortgage Partnership Finance[R] (MPF) Program offered by six FHLBs.
Tight underwriting standards and capital requirements imposed on MPF participants result in stronger loan performance, with delinquency rates far below national averages, Feldman told a rare Sunday session at the MBA convention. That they have had less than $9 million in losses under the program speaks "to the high quality of their loans and having skin in the game," he said. "Our experience provides valuable lessons for the future. Lenders should be rewarded for making sound loans, and the skin-in-the-game component makes for solid loans."
While FHLB members are gaining market share, the secondary market institutions that support other lenders are hoping to become less dominant. "We recognize that we play an outsize role," said Fannie Mae President and Chief Executive Officer Timothy Mayopoulos.
Fannie Mae alone touched a 41 percent piece of the mortgage market last year--a share that Mayopoulos said "should not be so large."
But over the last four years, he added, there's been little evidence that private capital is ready to return. "The major participants have either pulled away or left the market...