Home Loan Banks Seek Bank Business with Some Success

ABA Banking Journal, March 1991 | Go to article overview

Home Loan Banks Seek Bank Business with Some Success


Among the rows of exhibitors' booths at last October's ABA Annual Convention was an unfamiliar face, the Federal Home Loan Bank of Atlanta.

The Federal Home Loan Bank System traditionally sat on the thrift side of the financial services arena. However, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 divorced the 12 home loan banks from the thrift regulatory system and opened membership in the home loan banks to qualifying financial institutions.

Hence, the Atlanta home loan bank attended the ABA show to drum up commercial bank membership. As of late January, 80 financial institutions had been accepted for system membership nationwide-71 of them commercial banks, according to the Federal Housing Finance Board. The Washington, D.C.based board assumed control over the 12 banks from the defunct Federal Home Loan Bank Board.

Although banks that joined the home loan bank system have done so for different reasons, all those interviewed are active in some facet of real estate finance and say membership has enhanced their ability to compete. Need for options. Peoples Bank of Mount Washington, Ky., joined the Federal Home Loan Bank of Cincinnati in August 1990 to find a way to fund fixed-rate mortgage loans. Good economic growth in nearby Louisville has kept local housing demand strong, according to Barry Armstrong, president.

The $53 million-assets bank has long been making adjustable rate mortgages, says Armstrong, but found it couldn't meet consumer demand or beat the competition from Louisville without offering fixed-rate choices. Problem was, the bank's CD customers generally don't go beyond two-year maturities, and the bank had no desire to get caught in the trap of borrowing short and lending long.

Borrowing mortgage funds from the home loan bank was the answer. This money is available for long terms and at rates just a bit above those on Federal funds, Armstrong says. Since joining the Cincinnati home loan bank, Peoples has made more than $1 million in fixed-rate mortgages. The bank matches maturities of the funds it borrows to the mortgages it extends. The longest term on the latter is 20 years.

"Because we're locked in on both sides," says Armstrong, "it's been a good tool for asset-liability management. " While there are prepayment fees on advances from the home loan bank, Armstrong says these pose no problem because the bank is able to protect itself by including prepayment penalties in its mortgage contracts. Shift in thought. Using this new strategy required some adjustment in thinking, according to Armstrong, because the bank was used to selling mortgages to the Federal Home Loan Mortgage Corp. For the most part, the credit risk for mortgages sold into the secondary market is transferred to investors.

When funding fixed-rate loans with home loan bank advances, however, all the credit risk remains with Peoples. Thus, if a mortgage loan goes bad, Peoples still owes the entire advance to the home loan bank.

At Trust Company Bank of South Georgia, N.A., the acquisition of a savings and loan nudged the 400 million-assets bank towards membership in the Federal Home Loan Bank of Atlanta.

Larry D. Mauldin, president and CEO of the SunTrust Banks subsidiary, says the bank turned the thrift's mortgage function into a new real estate department. The S&L charter was dissolved. The decision to boost the Albany-based bank's mortgage activities, plus the thrift's outstanding home loan bank advances, drew the bank to its own membership, approved in late 1990.

While new advances haven't been tapped yet, Mauldin says he likes the ability to match longer-term liabilities to mortgage assets. He explains that the institution's relatively small size doesn't permit it to obtain longer-term funding in open markets as readily as larger subsidiaries of SunTrust can. …

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