Watching Washington with the Federal Home Loan Banks…

January 3, 2011

Among other things, when the 112th Congress convenes on Wednesday with a Republican majority in the House of Representatives, it could mean more scrutiny for the 900-lb gorillas of housing finance: Fannie Mae, Freddie Mac and, quite possibly, the less-familiar but still big Federal Home Loan Bank System, which underpins much of the residential mortgage industry.

Certainly, the FHL Bank of New York seems concerned, in the person of bank President Alfred A. DelliBovi, despite reports that GOP ire may be cooling over the federally-controlled entities. In a monthly report to the bank’s owners that it filed with the SEC after 4:30 p.m. on Thursday — pretty close to the last moment possible in 2010 — DelliBovi included this in his “Washington Update” section:

“This Congress will grapple with, among other issues, the reform of Fannie Mae and Freddie Mac. It will be our task to help keep the D.C. policymakers informed and help them build on what works. Community lenders and the Federal Home Loan Bank System fall into this productive category. We are reaching out to the Members of the 112th Congress and their staffs so that they understand the full scope and importance of the FHLBank System and community lenders for both our communities and our economy.”

The country’s 12 FHL banks aren’t publicly traded, but they’re a pretty significant part of the country’s financial and mortgage-lending system as it exists now, and as it existed when it plunged into the financial crisis that culminated in the fall of 2008. A kind of lending society for their thousands of member banks, they nonetheless make filings with the SEC both individually and as a system. And despite their collective professions of success and rosy outcomes — “The System worked because it stuck to its mission,” the New York bank letter quoted another FHLB official as saying — they haven’t been without their problems.

In Spring 2009, for example, the chairman of the system’s office of finance resigned out of concern over its financial reporting. As Bloomberg’s Jonathan Weil put it when he broke the news,

“The job Bowsher left is a crucial one. The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt — $1.26 trillion as of Dec. 31 [2009], making the FHLBank System the largest U.S. borrower after the federal government.”

More recently, Weil also highlighted some questionable accounting at two of the banks in illustrating concerns over accounting rule-changes made during the heat of the crisis. As of this fall, the Seattle FHL bank was operating under a consent order from its regulator, the Federal Housing Finance Agency, that prevents it from paying dividends through mid-2011 or so.

Bank shareholders, of course, care what happens to it, because it underpins a lot of their borrowing and lending. Taxpayers should care too, since the system pretty much exemplifies the too-big-to-fail problem — few are under any illusions that the federal government would step in if the banks, which guarantee one another’s liabilities, began to topple domino-fashion.

And so, as the volume begins to rise again over Fannie Mae and Freddie Mac, we can join DelliBovi in keeping one ear cocked for what is, and isn’t, said about the FHLB system.

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