President Trump's
The letter from Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, suggests the order could be a springboard for doing things like partnering with the Fed on an emergency funding resource or increasing bank member options for nontraditional loans.
"We wanted to offer a roadmap for implementing the provisions for Home Loan Banks," Donovan said in an interview about the order and related letter he sent to Bill Pulte, director of U.S. Federal Housing. Pulte oversees the entity traditionally known as the Federal Housing Finance Agency. The FHFA regulates the Federal Home Loan Banks.
Some of the suggestions Donovan sent to Pulte based on conversations with council members follow:
New emergency funding through a letter of credit
The executive order calls for "modernizing collateral valuation and transfer systems" between the Federal Reserve and the FHLBanks. The council's letter suggests this could specifically be used to help members get emergency funding more quickly by issuing a letter of credit.
The proposal calls for the Federal Reserve Bank, as a beneficiary, to adopt the letter of credit. The letter of credit would be issued by a Federal Home Loan Bank, and it could be used by institutions that are members of both systems to secure a discount window advance on an interim basis. Collateral previously pledged to the FHLBank would secure the letter of credit.
"Discussions that have been ongoing for at least the last couple of years on how do you deal with a situation similar to what we encountered in
The letter of credit would be used in situations when it might otherwise be difficult to get emergency funding in the short term because of concerns that occur outside of regular business hours.
The council has gotten "encouragement" from Federal Reserve Bank representatives to submit the proposal for consideration, according to Donovan's letter. He said conversations related to whether the Fed will support the idea and in what form are ongoing.
Non-QM implications for Federal Home Loan Banks
A portion of the executive order that suggests
"The FHLBanks are prepared, consistent with safety and soundness requirements, to review and, where appropriate, adjust collateral eligibility and AMA purchase criteria," Donovan wrote. "This would help ensure that community banks and credit unions (particularly those under $30 billion in assets) can continue to access FHLBank funding for prudently underwritten non-QM."
Support for rate buydowns and builders
The letter also laid out some ideas in line with the executive order's goals to refocus the Federal Home Loan Banks' affordable housing program in ways that will produce "faster-cycle execution and greater financial leverage for small-scale and owner-occupied housing projects."
Two ways to do this that could potentially benefit the single family market include providing AHP credit for rate buydown and builder support programs, Donovan wrote. Roughly one-third of the program's benefits go to single-family, consumer borrowers.
A call to rethink risk management guidelines
The letter also asserts that the order's focus on ways to expand mortgage credit for smaller players contrasts and provides a reason to rethink some risk-focused advisory bulletins that impose constraints, one of which came out
Those bulletins "impose highly detailed, model-driven expectations on AMA price-risk governance and risk management that are not standard in the broader secondary market," Donvan said in the letter.
He added that the council encourages its oversight agency to "revise or or rescind" the bulletins or "at least take them through a notice and comment process to understand the impact."
