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A Healthy FHLBank System Is In Housing's Best Interest

The FHLBank System has been a good partner for housing and housing lenders for 60 years. We believe this partnership should be strengthened and enhanced.

First, FHLBank advances enable members to create assets which do not conform with national underwriting guidelines. The FHLBank System has a solid and growing role in assisting financial institutions in meeting their community investment needs. Despite the recent changes in the financial services industry, there is still an important role for community lenders. Portfolio lending that does not rely on national standard underwriting criteria can be much more responsive to local housing credit needs and development conditions. The FHLBanks also assist smaller community institutions in developing the technical capacity to do community lending. The Affordable Housing Program already has been successful in this regard, and the Community Investment Program can assist in larger economic

development goals.

Second, from a safety and soundness standpoint, the FHLBank System can mitigate against some of the safety and soundness concerns associated with mortgage lenders, such as the interest rate risk resulting from funding long term mortgages with short

term deposits.

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The FHLBank System enables housing lenders to

match fund their mortgages, thereby alleviating such interest

rate risk. This function will become even more important with the adoption of interest rate risk capital guidelines.

Third, with either the elimination or reduction of brokered deposits, some financial institutions will lose access to a

source of liquidity.

The FHLBank System can address this

potential need for mortgage lenders while providing users with a potential cost advantage to brokered deposits.

Fourth, many community lenders have expressed concerns about the impact of interstate banking on their deposit base and on their ability to effectively compete with larger regional institutions with direct access to the capital markets. The FHLBank System can help address these concerns. Low-cost FHLBank advances can serve as a competitive replacement for lost retail deposits. Furthermore, the FHLBank System can provide community banks with their own access to the capital markets.

The nation's diverse housing needs require a diversity of lenders as well as a diversity of product. Public policy should facilitate this goal. The new capital rules encourage mortgage securitization and consequently standardization.

The capital and

leverage profile of Fannie Mae and Freddie Mac further place portfolio lenders, institutions important to the nation's diverse

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needs, at a significant competitive disadvantage.

With some

changes, the FHLBank System can help to offset this disadvantage and assist in achieving our housing goals. We look forward to working closely with this Subcommittee on these issues.

Thank you, Mr. Chairman. I would be pleased to answer any questions.

Equity capital is composed of common stock, additional paid-in-capital, and retained eamings.

Assets include the following off-balance sheet items: FHLBank System- outstanding letters of credit; Fannie Mae- outs MBS not held in portfolio, Freddie Mac- outstanding PCs not held in portfolio.

Source: DBIMS and Treasury Report on GSE's; Treasury and DBD, Bank Analysis Calculations