Freddie Mac, Fannie Mae Face New Challenges
September 1, 2004
Seattle Bank Seeks Broader Loan Options For Home Buyers
The Federal Home Loan Bank of Seattle has filed an application with the Federal Housing Finance Board to purchase mortgage securities from cooperative bank members and resell them to bank system members, other federal home loan banks and investors outside the system.
This proposed MortgageChoice program, an extension of the bank's existing Mortgage Purchase Program, would give the bank a greater role in offering a secondary market alternative for mortgages, which would extend more options to home buyers seeking home loans through the bank's member financial institutions, according to an announcement today by the Federal Home Loan Bank of Seattle. The new offering could also enable the Seattle Bank to better manage its financial risk, bank officials announced.
Under its Mortgage Purchase Program, the Seattle Bank can purchase mortgage loans – not securities – and hold them in portfolio. With approval from the finance board, the bank could purchase mortgage securities from its members and resell them to a broad base of financial institutions and investors.
"The Federal Home Loan Banks are always looking for ways to provide more opportunities for consumers, who are working with member community banks, to afford a home of their own," said Norman B. Rice, president and CEO of the Seattle Bank. "With MortgageChoice, the Seattle Bank will be able to provide more choice and flexibility in the marketplace, which will help reduce the costs of mortgages for consumers."
MortgageChoice is also designed to reduce market risk through the purchase of securities instead of individual mortgages. This means the Seattle Bank will own a much more liquid and transparent asset that can be readily sold from its balance sheet, when appropriate, according to the announcement.
Unlike the securities of other housing-related government-sponsored enterprises (GSEs), such as Freddie Mac or Fannie Mae, the MortgageChoice securities "would comply with all Securities and Exchange Commission registration and disclosure requirements. The additional transparency provided through compliance with these disclosure practices will allow rating agencies, investors and regulators to accurately assess the risks associated with the securities that are created. MortgageChoice securities would not be guaranteed by the Seattle Bank," bank officials said.
By purchasing only those securities that carry "AAA" or "AA" ratings, the bank would seek to limit risks to taxpayers.
A profitable MortgageChoice program would increase funds available to the Seattle Bank's member financial institutions for grants that fund construction and rehabilitation of houses and apartments for low-income and very low-income households. The Federal Home Loan Banks are the largest source of private affordable housing grants in the country, according to the announcement.
The Federal Home Loan Banks were chartered by Congress as government-sponsored enterprises to increase American home ownership. In addition to providing loans to member community financial institutions, the Home Loan Banks purchase mortgages from their members, which returns money to the community bank to lend for additional home loans.
"The Seattle Bank – and other Home Loan Banks – were urged to compete in the secondary mortgage market by the members of our system – the nation's home lenders who own our cooperative," Rice said. "These home lenders can better serve consumers – the nation's home buyers – when there are choices and competition in the secondary mortgage market."
The Seattle Bank began its Mortgage Purchase Program in 2001, in conjunction with the Federal Home Loan Banks of Cincinnati and Indianapolis, to provide program participants with a more profitable alternative for the sale of whole mortgage loans in the secondary mortgage market. As of second quarter 2004, the balance of loans held for portfolio by the Seattle Bank totaled $11.2 billion. Bank System-wide, 1,024 financial institution members participate in the Home Loan Banks' mortgage programs and have sold $181 billion into these programs since their inception.
The 12 regional Federal Home Loan Banks were established to meet the credit needs of local communities through more than 8,000 member institutions. There are at least two important differences between the Home Loan Banks and the other two housing GSEs, Fannie Mae and Freddie Mac: Unlike the housing GSEs that are owned by investors and trade publicly, the Federal Home Loan Banks are a cooperative owned by their member institutions – the community banks, thrifts and credit unions that provide mortgage loans and other financial services; and the Federal Home Loan Banks give 10 percent of all profits as affordable housing grants, making them the largest source of private affordable housing grants in the country. In 2003 the Banks contributed $200 million in profits for this purpose.
The Home Loan Banks have played a role in the stability of the nation's financial system by providing loans to community financial institutions for more than 70 years. The banks are often the only avenue to the capital markets for many community financial institutions.
With $50 billion in assets, the Federal Home Loan Bank of Seattle builds financial partnerships that assist local banks in assisting their communities. The Seattle Bank provides funding and other financial services that allow more than 370 financial institution members to make more housing and business loans at more competitive rates. The Seattle Bank is a member-owned cooperative and the value generated by the company benefits member banks and the communities they serve. The Seattle Bank serves financial institutions in Alaska, Hawaii, Guam, Idaho, Montana, Oregon, Utah, Washington, Wyoming and American Samoa.
Copyright 2004 Inman News
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