Oversight hearing on the Federal Home Loan Bank System : hearings before the Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises of the Committee on Banking and Financial Services, House of Representatives, One Hundred Fourth Congress, first session, September 27, 28, 1 online

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OVERSIGHT HEARING ON THE FEDERAL HOME
^""^ LOAN BANK SYSTEM



Y4,B 22/1:104-33

Dversiglit Hearing on the Federal Ho...

HEARINGS

BEFORE THE

SUBCOMMITTEE ON

CAPITAL MAKKETS, SECURITIES, AND GOVERNMENT

SPONSORED ENTERPRISES

OP THE

COMMITTEE ON BANKING AND
FINANCIAL SERVICES

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION



SEPTEMBER 27, 28, 1995



Printed for the use of the Committee on Banking and Financial Services



Serial No. 104-33




buoerintendent of Documents
lEPOSITORY

JUL 2 6 1996

Boston Public Library

Government Documents Dept.



OVERSIGHT HEARING ON THE FEDERAL HOME
LOAN BANK SYSTEM



HEARINGS

BEFORE THE

SUBCOMMITTEE ON

CAPITAL MARKETS, SECURITIES, AND GOVERNMENT

SPONSORED ENTERPRISES

OF THE

COMMITTEE ON BANKING AND
FINANCIAL SERVICES

HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION



SEPTEMBER 27, 28, 1995



Printed for the use of the Conunittee on Banking and Financial Services

Serial No. 104-33




U.S. GOVERNMENT PRINTING OFFICE
94-027 CC WASHINGTON : 1996



For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-052731-7



HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES



JAMES A. LEACH, Iowa, Chairman
BILL McCOLLUM, Florida, Vice Chairman



MARGE ROUKEMA, New Jersey

DOUG BEREUTER, Nebraska

TOBY ROTH, Wisconsin

RICHARD H. BAKER, Louisiana

RICK LAZIO, New York

SPENCER BACHUS, Alabama

MICHAEL CASTLE, Delaware

PETER KING, New York

EDWARD ROYCE, California

FRANK D. LUCAS, Oklahoma

JERRY WELLER, Illinois

J.D. HAYWORTH, Arizona

JACK METCALF, Washington

SONNY BONO, California

ROBERT NEY, Ohio

ROBERT L. EHRLICH, Maryland

BOB BARR, Georgia

DICK CHRYSLER, Michigan

FRANK CREMEANS, Ohio

JON FOX, Pennsylvania

FREDERICK HEINEMAN, North Carolina

STEVE STOCKMAN, Texas

FRANK LoBIONDO, New Jersey

J.C. WATTS, Oklahoma

SUE W. KELLY, New York



HENRY B. GONZALEZ, Texas
JOHN J. LaFALCE, New York
BRUCE F. VENTO, Minnesota
CHARLES E. SCHUMER, New York
BARNEY FRANK, Massachusetts
PAUL E. KANJORSKI, Pennsylvania
JOSEPH P. KENNEDY II, Massachusetts
FLOYD H. FLAKE, New York
KWEISI MFUME, Maryland
MAXINE WATERS, California
BILL ORTON, Utah
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Ilhnois
LUCILLE ROYBAI^ALLARD, California
THOMAS M. BARRETT, Wisconsin
NYDIA M. VELAZQUEZ, New York
ALBERT R. WYNN, Maryland
CLEO FIELDS, Louisiana
MELVIN WATT, North Carolina
MAURICE HINCHEY, New York
GARY ACKERMAN, New York
KEN BENTSEN, Texas

BERNARD SANDERS, Vermont



Subcommittee on Capital Markets, Securities, and Government Sponsored

Enterprises

RICHARD H. BAKER, Louisiana, Chairman
J.D. HAYWORTH, Arizona, Vice Chairman



FRANK CREMEANS, Ohio
JON FOX, Pennsylvania
STEVE STOCKMAN, Texas
FRANK LoBIONDO, New Jersey
J.C. WATTS, Oklahoma
SUE W. KELLY, New York
MARGE ROUKEMA, New Jersey
RICK LAZIO, New York
SPENCER BACHUS, Alabama



PAUL E. KANJORSKI, Pennsylvania
MAURICE HINCHEY, New York
GARY ACKERMAN, New York
KEN BENTSEN, Texas
JOHN J. LaFALCE, New York
CHARLES E. SCHUMER, New York
FLOYD H. FLAKE, New York
MAXINE WATERS, California
BILL ORTON, Utah



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CONTENTS

Page

Hearings held on:

September 27, 1995 1

September 28, 1995 41

Appenoixes:

September 27, 1995 103

September 28, 1995 239

WITNESSES

Wednesday, September 27, 1995

Fiechter, Hon. Jonathan L., Acting Director, Office of Thrift Supervision 13

McCool, Tom, Assistant Director for Financial Institutions and Market Issues,
General Accounting Office; accompanied by Dennis Fricke, Assistant Direc-
tor, Housing Group; and William Kruvant, Assistant Director, Financial

Institutions and Market Group 29

Morrison, Hon. Bruce A., Chairman, Federal Finance Housing Board 5

Retsinas, Hon. Nicolas P., Assistant Secretary for Housing, Department of
Housing and Urban Development 9

APPENDIX

Prepared statements:

Baker, Hon. Richard H 104

Leach, Hon. James A 106

Fiechter, Hon. Jonathan L 134

McCool, Thomas J. (with appendix) 148

Morrison, Hon. Bruce A 109

Retsinas, Hon. Nicolas P 121

Additional Material Submitted for the Record

Baker, Hon. Richard H.:

Camell, Hon. Richard S., written response to questions submitted in
Chairman Baker's letter dated September 13, 1995, to the Department

of the Treasury 183

Greenspan, Hon. Alan, written response to questions submitted in Chair-
man Baker's letter dated September 7, 1995, to the Federal Reserve

Board 170

Heifer, Hon. Ricki, written responses to questions 203

Ludwig, Hon. Eugene A., written response to questions submitted in
Chairman Bake?s letter dated September 7, 1995, to the Comptroller

of the Currency 196

McCool, Thomas J., written response to question submitted by Hon. Ken

Bentsen 169

ConneU, Thurman C, President of the Federal Home Loan Bank of Des

Moines, written statement 208

Hecer, Martin L., President and CEO, Federal Home Loan Bank of Indianap-
olis, written statement 217

Jessee, Michael A., President and CEO, Federal Home Loan Bank of Boston,

written statement 227

Schultz, Dean, President and CEO, Federal Home Loan Bank of San Fran-
cisco, written statement 233



(III)



IV

WITNESSES
Thursday, September 28, 1995

Crawford, Barry D., President and CEO, Fidelity Federal Savings Bank 53

Darr, John K., Managing Director, Office of Finance, Federal Home Loan

Bank System 83

DelliBovi, Alfred A., President and CEO, Federal Home Loan Bank of New

York 78

Irwin, Joseph R., Executive Vice President and Chief Investment Officer,

PNC Bank Corp 54

Pollock, Alex J., President and CEO, Federal Home Loan Bank of Chicago 80

Rinehart, Charles R., Chairman and CEO, Home Savings of America 56

Smith, Charles W., Chairman, President and CEO, Granite Bank 58

Stanton, Thomas H., Fellow, Center for the Study of American Government,

Johns Hopkins University 41

Watson, Winthrop, Vice President, J.P. Morgan 43

APPENDIX

Prepared statements:

Baker, Hon. Richard H 240

Kanjorski, Hon. Paul E 242

Crawford, Barry D 276

Darr, John K 347

DelliBovi, Alfred A. (with attachment) 295

Irwin, Joe R 283

Pollock, Alex J. (with attachment) 320

Rinehart, Charles R 286

Smith, Charles W 290

Stanton, Thomas H 244

Watson, Winthrop 269

Additional Material Submitted for the Record

Darr, John K.:

Testimony questions and answers in answer to the subcommittee's letter

dated ^ptember 12, 1995 354

Exhibit I— 12CFR-CH DC - Part 941 - Operations of the Office of

Finance 361

Exhibit II — "Decision Memorandum of the Finance Board Acting Without

a Quorum" 369

EXHIBIT HI— Federal Home Loan Banks Master Underwriting

Agreement 372

Federal Home Loan Bank System Offering Notices 390

Federal Home Loan Bank of New York, Mr. DelliBovi's written response

to question submitted by Hon. Paul E. Kanjorski 313

Federal Home Loan Bank of New York, Mr. DelliBovi's written response

to question submitted by Hon. Spencer T. Bachus, III 314

Pollock, Alex J., supplemental testimony addressing the issue of MBS invest-
ments by home loan banks 343

Stanton, tliomas H.:

Letter dated October 12, 1990, from Mr. DelliBovi to Mr. David O. Max-
well, Chairman of the Board and CEO, Federal National Mortgage

Association 254

Letter dated August 29, 1990, from Mr. David 0. Maxwell to Hon. Jack
Kemp (with enclosure) 257



OVERSIGHT HEARING ON THE FEDERAL
HOME LOAN BANK SYSTEM



WEDNESDAY, SEPTEMBER 27, 1995

House of Representatives,
Subcommittee on Capital Markets, Securities

and gtovernment-sponsored enterprises,
Committee on Banking and Financial Services,

Washington, DC.

The subcommittee met, pursuant to call, at 10:00 a.m., in room
2128, Raybum House Office Building, Hon. Richard Baker [chair-
man of the subcommittee] presiding.

Present: Chairman Baker, Representatives Hayworth, LoBiondo,
Bentsen, LaFalce, and Orton.

Also present: Representative Leach.

Chairman Baker. I would like to call this hearing of the Sub-
committee on Capital Markets to order, and first thank those who
are here this morning for what I believe will be an informative and
important hearing.

To outline the framework, direction, and purpose of these hear-
ings, I have requested and have received and wish to express my
appreciation to the district bank presidents' systemwide for infor-
mation concerning the history of investment and advance practices,
as well as operational information. And it certainly was helpful in
coming to a better understanding of what the Federal Home Loan
Bgmk System is all about.

I think it important at this hearing that we should establish
clearly and understandably the purpose and mission of the Federal
Home Loan Bank System. There has been much debate in public
forums and in many discussions among bank members themselves
as to what new directions or goals the Federal Home Loan Bank
should pursue in light of all of the market changes which are
occurring.

Second, if we define the purpose and mission, it is helpful to ana-
lyze how successful the system has been to date in meeting its obli-
gation of facilitating home ownership. I found of extreme interest
the information relating to the percentages of loans, whole loans,
for example, to those purchasing properties of less than $100,000.

I found it veiy interesting in looking at the operational condi-
tions of the various banks to determine how efficient they are in
their respective operations in providing this important product at
the lowest possible cost. It is important I think to understand the
variances from district to district in the operational policies and the
resulting cost of the programs. It certainly leads me to ask the

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question: What would be the value in adoption of a single systemic
standard for the conduct of business?

Perhaps someone later in the course of these hearings will sug-
gest even more radical change that on its face should at least be
investigated before we dismiss the alternative of consolidation. In
looking at the current practices, there are some questions I think
with regard to the level of advances versus the level of invest-
ments. Much has been given by way of explanation as to the reason
for the investment strategies because of the obligations of the
REFCORP and Affordable Housing requirements now equaling
some $400 million per year, and that necessitates the banks' cre-
ative investment strategies in order to fully fund those obligations
and provide a reasonable return to shareholders. But looking at
system wide profitability well over $1 billion, one simply has to
question the value of such investment policies in light of the poten-
tial risk that one assumes.

With regard to risk, I think we should address the question of
unsecured debt, particularly that which is held by foreign debt
holders, but even that of domestic holders which is unsecured. Of
concern is the dependency by various banks on a very small num-
ber of very large customers, and given the inevitable change from
mandatory to voluntary membership, the systemic risk that poses
to those who find themselves in that unfortunate circumstance.

And then, frankly, much needs to be done simply in creating uni-
formity in the metnod of reporting. Many of my own observations
and conclusions may not be based in proper fact because the dif-
ferences in the way each district bank outlines its financial condi-
tion varies greatly, even to the simple question of the treatment of
REFCORP, some citing it as an operational expense while others
call it an off-balance sheet obligation, so it is very difficult.

And perhaps I should conclude my remarks by saying, given our
recent discussion over the reallocation formula ror REFCORP, hav-
ing been engaged in that now for some years, I thought I under-
stood how difficult it was to get the 12 district operations to look
alike. After having been given the opportunity to review this data
and information, it is very clear that each district operates in a dis-
tinctly different fashion to meet distinctly different purposes and
reports those activities in distinctly different ways. So much of my
observations may not be fair or well-founded but based on the in-
formation provided, there certainly is reason for this subcommittee
to ask many questions about where we are headed and how we are
going to get there.

I think the members of the subcommittee will certainly find
those who are here to testify today to be of great interest in giving
us proper perspective in the way that the bank system operates.

And before I recognize Mr. LaFalce, I would just recognize Chair-
man Leach who has joined us for this hearing this morning.

Certainly I want to say how much I appreciate your interest in
the bank system, Mr. Cnairman, and would just ask if you have
any comments.

[The prepared statement of Hon. Richard H. Baker can be found
on page 104 in the appendix.]

Mr. Leach. Mr. Chairman, if you could go to the Democratic side
and then come back.



Chairman Baker. I think Mr. LaFalce waived his right.

Mr. Leach. He did.

Chairman Baker. I wanted to make sure we hear from you while
you are here.

Mr. Leach. I appreciate that, Mr. Chairman.

I have a bit of a lengthy statement and I would like to ask unan-
imous consent to have it considered read

Chairman Baker. Without objection.

Mr. Leach. And simply make a couple of points.

First, at the outset, I would like to commend you particularly for
scheduling these hearings. It has been a long time since we have
last looked at the Federal Home Loan Bank System and a profound
question exists whether it is in need of a face lift.

As some of you know, I have a special fondness for the system.
Before coming to Congress, I served on the Board of the Des
Moines Bank, but that was a time when the Federal home loan
banks were conservatively run; inflation had vet to cut a swath
through the industry; S&L deregulation, the subsequent upheavals
had yet to occur; Fannie Mae and Freddie Mac had yet to achieve
their massive market inroads.

Today the banks represent a system in search of a rationaliza-
tion for existence. A majority of their activities can be or are pro-
vided by other sources, notably Freddie Mac and Fannie Mae,
which have created a deep and highly liquid market for conforming
residential real estate loans.

It is the history of government-sponsored enterprises that when
left too long to their own devices, they have a tendency to stretch
their powers and transform their functions. In this case, a system
designed to provide liquidity to S&L's for American housing holds
multimillion dollar investments in Japanese bank products.

A system designed to assist institutions serving individual home
borrowers is involved in multibillion dollar arbitrage activities. In
a Kafkaesque circularity, one government-sponsored enterprise is
using its agency status to purchase another's products.

I would like to stress as strongly as I can that this Congress has
an obligation to look very, very closely at the activities of the
GSE's. I think there are a number of alternatives for reform and
I outline some of them in my opening statement. But I wish to
stress that, if the system is to be continued, it would be a mistake
to move in the direction of putting any controls in any place other
than the U.S. Treasury.

It is Treasury that has responsibility for policing the debt mar-
kets, and without controls, these institutions could, with great
ease, grow explosively, while serving almost no public interest and
crowding out the private sector to boot. Let me particularly com-
pliment the chairman for insisting that we have comprehensive
hearings.

He has insisted that we hear from independent sources. Legisla-
tion which is disproportionately influenced by those who run the
system, are clients of the system, or are hired by the system, will
inevitably lead to a result in which the system will feed on public
powers rather than serve the public interest.

And so I want to thank you very much for holding these hearings
and for the witness list that you have developed.



Thank you very much, Mr. Chairman.

[The prepared statement of Hon. James A. Leach can be found
on page 106 in the appendix.]

Chairman Baker. Thank you, Chairman Leach. I certainly ap-
preciate your interest and your participation here this morning and
look forward to working with you and the members of the full com-
mittee on legislative initiatives.

Mr. Bentsen has waived.

And Mr. Hay worth, do you have a comment?

Mr. Hayworth. Mr. Chairman, I only want to make a brief
statement. But I would like to take this opportunity to thank you
for ^y'our leadership for the past several years on the need to mod-
ernize the Federal Home Loan Bank System. I think largely be-
cause of your hard work, we finally achieved a bipartisan solution
to the REFCORP payment problem which stalled further consider-
ation of legislative cnanges to this system. Now with that conten-
tious issue resolved, it is my hope we can move ahead with consid-
eration of the other measures you have suggested to modernize the
Federal Home Loan Bank System.

I look forward to today's testimony, would like to thank all of
those who are here to offer their insights and hope to continue
working with you on this vitally important issue.

Chairman Baker. Thank you, Mr. Hayworth.

Mr. LoBiondo.

Mr. LoBiondo. Thank you, Mr. Chairman.

Let me begin by first commending you and Congressman Kan-
jorski, who is not able to be with us so far today, for your work
the last week in negotiating the REFCORP allocation formula. I
hope now that we have resolved that issue this subcommittee can
proceed with efforts to reform the Federal Home Loan Bank Sys-
tem for the next century.

Several months ago, I first learned of the existence of a govern-
ment-sponsored enterprise known as the Federal Home Loan Bank
System. Like most Americans, I was not aware of the role of the
system in our Nation's financial markets. As a result of discussions
surrounding Chairman Baker's legislation, I have learned a great
deal about this relatively obscure quasi-governmental agency. How-
ever, as we proceed with a modernization bill, many new questions
arose which I believe should be answered before we attempt to
mark up any legislation.

One such question involves the investment authority of the
banks. Some banks would like to enhance their current powers
while others would not engage in such activities even if empowered
to do so.

Before proceeding with any enhancement or expansion of invest-
ment authority, I think that the subcommittee should first evaluate
the current investment activities of the banks and only then should
we look at what might be done to change these powers.

Related to this same topic, and I hope that today's first panel of
witnesses will address this, is whether or not congressional action
is necessary to effect such changes. It has been suggested that the
Finance Board has the authority to make these cnanges today. If
they do indeed have this power, I would be very interested in hear-
ing from our witnesses why they have not acted in this area.



5

Another issue that I hope will be addressed by these hearings is
the larger question of what is best for the system as a whole for
the long term. In the second district of New Jersey that I rep-
resent, there are a total of 14 financial institutions tnat are mem-
bers of the Federal Home Loan Bank of New York.

Over the past several months, my office has discussed the bank
system with nearly every one of those members and the response
has been quite remarkable. Rather than focusing on what is in
their best short-term interest, the thrifts and banks in my district
told me that we should do what is in the best interest of tne entire
system for the long term.

They all stress the point that Congress should pass legislation
that provides enough flexibility for the system to endure whatever
economic ups and downs that may come in the future. In the spirit
of future oriented reform, I think that we should evaluate the role
of the Home Loan Bank System as a government-sponsored enter-
prise and ask whether this could or should be privatized.

If we determine that the United States should continue to lend
its implied faith and credit guaranteed to the bank system, then
I think that significant reform should be passed in order to allow
the system to grow at a healthy rate and provide much-needed li-
quidity to our housing markets. In order to accomplish these goals,
I believe that the subcommittee must make some very difficult de-
cisions such as balancing programs whose funding mechanisms ac-
cording to the GAO affect the way the system functions and impose
constraints on reform efforts, which in turn increase the extent of
the risk to the Home Loan Bank System as a whole.

I look forward to the hearings both today and tomorrow and I
hope that with this new information we will be able to move on
comprehensive reform measures in the near future.

Again, thank you, Mr. Chairman.

Chairman Baker. Thank you, Mr. LoBiondo.

It is my pleasure to call our first witness, the chairman of the
Federal Housing Finance Board, Mr. Bruce Morrison.

Welcome back, Bruce.

STATEMENT OF BRUCE MORRISON, CHAIRMAN, FEDERAL
HOUSING FINANCE BOARD

Mr. Morrison. Thank you very much, Mr. Chairman. And let me
start by joining your colleagues in thanking you for scheduling
these hearings and giving us all an opportunity to answer ques-
tions that Members have and to explain circumstances giving rise
to the legislative proposals that are pending both by your author-
ship and from the Administration.

It is no exaggeration to say that at a time over the last few years
when few in Congress were even aware of the activities of the
Home Loan Bank System, you made it your business to become an
expert and that expertise has been reco^ized certainly among the
members of the bank system and certamly at the Finance Board.
We appreciate that expertise because we think it gives all of us the
opportunity to work through the legislative process and the over-
sight process in a very constructive way. And we hope to supply
you whatever information you need through this hearing process,
and also in answer to questions that may arise subsequently.



I also want to thank you sincerely, along with your colleague and
ranking Member, Congressman Kanjorski, for last week's effort on
the REFCORP formula matter, because I think by that amend-
ment, which you authored with Mr. Kanjorski, we have opened the
door to doing things that a few months ago seemed impossible, and
I

Chairman Baker. Let me in on that point while you are men-
tioning Mr. Kanjorski. I should have at the outset explained his in-
ability to be here today. He is back home with our great Governor
Tom Ridge making an important announcement of great signifi-
cance to his district. So he is — ^wishes me to express his regret for
not being able to be here, but important business keeps him at
home.

Thank you very much.

Mr. Morrison. Thank you. And his staff also informed us of
that, and I am glad that they have something in the economic
sphere to celebrate.

Now, let me say that it is important as a baseline for this discus-
sion to understand that the Home Loan Bank System is not in cri-
sis. There is no looming threat to the system. There are no looming
threats to any district banks. There is no huge risk not being mon-
itored and controlled for. There is nothing that the system is failing
to do that it is required to do.

It is paying its REFCORP obligation. It is operating the Afford-
able Housing Program and providing the funds for it. It is a system
that is OK and it is important that we start with that proposition.
The regulatory process is healthy and we should not be in any
mood of panic.

On the other hand, as has been observed by such agencies as the
CBO and the GAO and the Department of Housing and Urban De-
velopment through reports mandated by the Congress and pre-
pared over a year ago, there are many things that ought to be done
to address changes that have occurred in the marketplace and in
the system since the Finance Board was established and since the
home loan banks were revised in their authorities in the 1989
FIRREA legislation. It is to those changes that your bill, Mr. Chair-
man, and the Administration's bill were addressed. It is important
that we focus on those changes as what they have been called,
modernization, not a response to any kind of an immediate crisis