Magazine article American Banker

Can FHLBs Be Solution to So Many Problems?

Magazine article American Banker

Can FHLBs Be Solution to So Many Problems?

Article excerpt

WASHINGTON -- The 12 Federal Home Loan banks often get lost in the shuffle of major policy debates, but policymakers are increasingly turning to the system to provide the credit markets much-needed liquidity.

Three plans related to the Federal Home Loan Bank System advanced this week. The House Ways and Means Committee voted Wednesday to let the banks guarantee tax-exempt bonds to help fund local lending projects, and a key House Financial Services Committee member introduced a bill a day earlier to let the banks assist the student loan market.

The Federal Housing Finance Board also issued a proposal to establish set-aside funds as part of a program that would support refinancing or modifying nontraditional or subprime mortgages for low- or moderate-income borrowers.

The renewed interest in the system is not a surprise to Home Loan bank representatives, who say helping with liquidity is what the banks were created to do.

"The fact that we can bring liquidity to these markets that are having a difficult time is critically important," said John von Seggern, the president of the Council of Federal Home Loan Banks.

The Ways and Means Committee included the Home Loan bank provision in a bill to create tax incentives to help stem the housing crisis. The provision would amend the Internal Revenue Code to let the banks back tax-exempt bonds.

Community banks currently have the power to issue a letter of credit, which commits the bank to repaying a debt if the issuer defaults. The problem for many institutions is that they typically do not have a credit rating strong enough for a letter to offer projects significant savings. But each Home Loan bank has a triple-A rating, which, if the bill were enacted, its member banks could use to help customers raise money at lower interest rates or under more flexible terms.

"This could be a tremendous help for the infrastructure of these communities that is not being attended to," said Rep. …

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