America's Credit Unions

Sponsored: Changes in store for FHLB system?

• CUNA News Podcast

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The Federal Housing Finance Agency (FHFA) released a report outlining roughly 50 recommendations for the Federal Home Loan Bank (FHLB) System.

One recommendation that’s particularly relevant concerns the types of collateral credit unions can pledge when they borrow from FHLBs, says FHLB Council President/CEO Ryan Donovan, who rejoins the CUNA News Podcast.

In this episode, sponsored by the FHLB Council, Donovan outlines the report’s key findings and recommendations, and potential implications for credit unions.

Yeekeng: Welcome back to the CUNA News Podcast. I'm Yeekeng Yang, Digital Media Design Specialist at CUNA. On this episode, we have a returning guest, Ryan Donovan, President and CEO of the Council of Federal Home Loan Banks. Last time we spoke, Donovan shared his insights on the upcoming FHFA report on the FHLB and the impact it might make on credit unions.

Now that the report is published, Donovan rejoins us on this topic and shares his thoughts. His insights include the pros and cons of the recommendations of the report, what the FHFA plans to do next, and how this all impacts credit unions. Enjoy!

Yeekeng: Well, Ryan, welcome back to the podcast. Uh, You were just here last month. But for those who need to catch up, let's just do a quick little intro on you and the FHLB.

Ryan: Sure. Well, thanks for having me back. I was here just a few weeks ago. I appreciate the opportunity to come back. My name is Ryan Donovan. I'm president and CEO of the Council of Federal Home Loan Banks. We're the trade association for the 11 federal home loan banks. Home loan banks are financial cooperatives that serve credit unions, banks,

thrifts, insurance companies, and CDFIs, and we provide liquidity for them to meet the needs of their members, customers, and communities. And we also support affordable housing and community development across the country.

Yeekeng: Great. So again, you were just here last month. Why are you back so soon?

Ryan: It's a good question. You know, when we were together last month we were waiting for a report from our regulator. Federal Housing Finance Agency that was based on a comprehensive review that they did of the Home Loan Bank System. That report has been published. It was published in early November.

And so we thought it was an, it was important to offer some perspective on it and talk a little bit about how credit union members of the Home Loan Bank System may be impacted.

Yeekeng: right. And thinking back to our last conversation you noted that if there was one key theme throughout FHFA's review that came through loud and clear. It was that stakeholders want more, not less, from the home loan banks, and that it would be reasonable to conclude that FHFA's report would be additive in nature.

So, I guess my first question is whether or not you feel this held true.

Ryan: I'll give you the best Washington answer that I can. In some ways, yes, and In other ways, no. You know, listen, the report, it contained about 50 recommendations. You know, that's a, that's a pretty substantial number. It was a comprehensive process, you know, and if you looked at some of them and they were just, you know, all that you, all that you saw, you could say, okay, this is, you know, this could be additive.

For example there's a recommendation and they're actually pretty relevant to, to credit unions that would expand the types of collateral that that's small credit unions, credit unions under a billion dollars or so. And CDFIs can pledge when they they borrow from us. Basically, what the agency is recommending to Congress here is that they expand what's called the Community Financial Institution definition to include, CDFIs and, and credit unions you know, so that, you know, that would certainly, I think, expand the impact the home loan bank system has on, on credit unions and their members.

But, you know, there are other recommendations that may sound additive, but actually have the potential to subtract from the ability to continue to be a reliable liquidity provider, you know, so for example, there, FHFA is recommending, that there be a 10 percent ongoing mortgage asset test.

So when a credit union or other home loan bank member joins the system, they have to demonstrate that they have 10 percent of their assets in mortgage related assets. And what FHFA is proposing here is that there be an ongoing Test. You know, on the surface it sounds like it would add to our housing finance nexus.

We've got a big concern that this could actually negatively impact the ability of our members to access liquidity and that would ultimately lead to reduced mortgage lending activity, reduced funding and it would reduce the funding that we make available for affordable housing. Right now, the nexus to housing, the thing that all of our members have in common is that when they approach the home loan bank, they're bringing, Housing finance related assets for the most part, right?

And that's the strength for housing finance. This ongoing test would complicate matters. It would force our members to consider whether or not they have enough assets on their books. It could slow down the availability of advances. So again, it's the type of thing that sounds. Like it could be additive, but we think it would actually subtract from the impact.

You know, I think that there, the thing to remember about this report, Yeekeng, is that none of these recommendations, and we've talked about two, there are 50 of them, none of them exist in a vacuum. Right. There's there's going to be some challenges the agency is going to face in in implementing some of these.

It's going to be, they're going to be subject to, you know, certainly advocacy from, from member groups. And, and that's where we all really need to, to be engaged. You know, I think the last thing that I'd say just up front is that this report in it, the agency says that they want to bolster and improve the system.

So, listen, I think that it's clear that the agency heard what we did. When we were listening to stakeholders, that everybody wants more from the system. I think the real question is whether each of these recommendations will actually do that. And you, you gotta look at them as a, as a whole as opposed to individually.

Yeekeng: And that leads me to my next question. Last time we talked, you said that publication of the report was likely to be merely the beginning of a process. That could take as many as 10 years to complete. Do you still think this is the case?

Ryan: Yeah, it's definitely going to take a long time, right? It's really hard if you have 50 recommendations to say, Hey, all of these things are priorities, you know, there's a lot of ground for them to cover. And I think, you know, I also said last time we expected that some of these recommendations would, you know, involve changes to regulations. Some would require legislation from Congress and, and some would be things that the agency could try to address through the supervisory process. And, and that proved to be true. I mean, the report includes recommendations on all of these fronts. And it's clear that it's going to take a really good amount of time and energy to to get to them all.

And that's, that's really, you know, one of the reasons why I'm here and why. We'll continue to be engaged with America's credit unions going forward because it's important as the agency proceeds that the credit union system remains engaged. There are key stakeholders in the home loan bank system and we want to make sure that you all have the information that you need to engage in this process.

Yeekeng: And what do you expect FHFA will try to tackle first?

Ryan: Yeah, it's, it's difficult to say right now, but based on what they've said so far, particularly since the report was issued, I think that one of the one of the things that I expect out of the gate is for FHFA to try to update and clarify its regulatory mission statement for home loan banks. They've said mission is is, you know, the top priority and they.

You know. That's where I think they're going to go first. Now we believe that our mission is pretty clearly laid out in statute and that it's to provide liquidity for our members to support housing finance and to support affordable housing and community development. And you know, listen, the report talks a lot about the changes that have taken place in the mortgage finance market over the years.

We don't disagree with that, but the liquidity that The home loan banks provide their members has had a very positive impact on housing finance. There was a paper a few years ago, very recently at from the University of Wisconsin that showed that the home loan bank system saves mortgage borrowers 13 billion dollars in interest each year, and it leads to more than a a 16 percent increase in mortgage origination.

So, you know, we're having an impact and it's, it's through our members, it's having an impact on what home buyers see in the market. Now, how does it happen? Well, the answer is that through the collateral that our members are required to pledge in order to borrow from us you know, that's, that is the key.

Congress has very clearly indicated that that collateral What that collateral is allowed to be. And for the most part, it's mortgages, mortgage backed securities. So basically if a credit union gives one of its members a mortgage loan, it can keep that loan on its books until it's paid off, which many credit unions do.

But if they're interested in making more mortgage loans to more members, They can take that original mortgage, pledge it to the home loan bank as collateral, and get additional funding to make additional loans. It's a basic example, but if you multiply that by hundreds or thousands of home loan bank members, and then multiply that by hundreds or thousands of mortgage loans, you can see the real impact that the liquidity CUNA has on the housing finance market and how that helps drive housing affordability.

And that's, you know, that's where the nexus has been, right? That's where the nexus to housing has always been through the collateral that our members pledge. And I think that's going to be important for FHFA to keep that in mind as they move forward with any attempts to mission to clarify our mission.

Now, the other thing I'll tell you, Yiqing, is that we are going to get. A clearer sense of where the agency is headed. I think very early next year when the Biden administration puts out its unified regulatory agenda. And I know from my time at CUNA, we would always look at that unified regulatory agenda because it laid out what the CFPB planned to do or the NCUA.

was positioning to, to tackle. And so my, my call to America's credit unions is when that comes out, make sure that you're also looking at what FHFA is saying that they're going to try to accomplish in the, in 2024.

Yeekeng: All right, so let's loop this all back to credit unions now. So what are the top two or three things that credit unions should be concerned about?

Ryan: Sure. So, I, I think as FHFA moves forward there are a couple of of key things. First is that ongoing asset test. If there's a proposed rule that changes membership requirements requiring an ongoing asset test, that is going to be something that Credit unions should be concerned with and be ready to engage in the, in the rulemaking process on.

We've talked with the folks at America's Credit Unions. We've talked with you know, the, the banking trades and others to make sure that they're keeping an eye on this and and actively engaged. The second is a recommendation that would change. The definition of a long term advance. Now, this is a, this will be a recommendation to Congress.

And basically what FHFA is doing is they're saying, let's change the definition of a long term advance from 5 years to 1 year. Why does this matter? A long, A long term advance, the proceeds of a long term advance need to be used for additional housing finance. And so by taking that from five years to one year you're limiting how a member can use that shorter term advance.

Again, it would require, we think, congressional action to to implement. Congress isn't the most effective right now. But it bears watching. And then, you know, the third is, is, is broader, but I think credit unions ought to pay attention for anything coming out of the agency that fundamentally impacts our ability to serve as a reliable source of liquidity in all market environments.

I think one of the things that We demonstrated very well during March of 2023, just as we did in COVID, just as we did during the great financial crisis, is our, is our ability to meet our members liquidity needs during times of stress. And that's, I think, really critical. One of the beauties of this system is that our members have confidence.

That we're going to be there when we need them to be. And so as FHFA moves forward whether it's through a rulemaking, supervisory action, or, or a legislative proposal. Credit unions should pay attention to how that would impact our ability to serve them as a reliable source of liquidity.

Yeekeng: And finally, how can credit unions and the home loan bank system work together to make sure that these recommendations don't have an adverse impact on credit unions?

Ryan: Well, you know, first of all, I would encourage credit unions that aren't currently members of the home loan bank system to reach out to their home loan bank and find out more about membership. For those that are, we at the Council of Federal Home Loan Banks are going to continue to a deepen and strengthen our relationship with America's credit unions and the State Credit Union Leagues.

And, so I'm hopeful that as we move forward, this will become a part of the advocacy agenda for America's credit unions, and that we will have a very close working relationship so that when there are proposed rules, When there are other issues, whether it's a supervisory action or a legislative proposal that the folks at America's Credit Unions have what they need to make sure that their membership understands the concern and is ready to engage and have an impact.