Magazine article American Banker

Home Loan Bank Tactic to Avoid Payments on Bailout Bonds Is Banned

Magazine article American Banker

Home Loan Bank Tactic to Avoid Payments on Bailout Bonds Is Banned

Article excerpt

The Federal Housing Finance Board has banned the 12 Federal Home Loan banks from using resale agreements to extend credit to their members.

In late 1993, the Home Loan Bank of San Francisco began pushing the resales - which entail selling securities to a member bank or thrifts that agree to buy them back later at a higher price - alongside its traditional advances.

By using resales, also known as reverse repos, the San Francisco bank cut its share of interest payments due on Resolution Funding Corp. bonds, which were sold to finance the work of the Resolution Trust Corp.

How much a Home Loan bank owes is calculated partly on the amount of advances it makes to Savings Association Insurance Fund-insured members.

The San Francisco bank's practice raised the ire of other Home Loan banks, and on Wednesday the Housing Finance Board heeded their protests and voted unanimously to ban all the banks from entering into resale agreements with members.

"I applaud the finance board for taking action to once again level the playing field," said Alfred DelliBovi, president of the Federal Home Loan Bank of New York. "We think the 'bootleg advances' were unconscionable, because they constituted under-the-table advances that avoided Refcorp taxation."

Gary Curley, senior vice president for banking and community investment services at the San Francisco bank, acknowledged that avoiding Refcorp payments was crucial to the making the resale agreements both low priced and profitable.

But even with the growth in resales - from $2.5 billion at the end of 1993 to $10. …

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