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A Guide to the
Federal Home Loan Bank System
FHLB System Publication Corporation
Washington, D.C.
March 1987
First Edition-1952
Second Edition-1961
Third Edition-1971
Fourth Edition-1980
Fifth Edition-1987
Published by the FHLB System Publication Corporation, 655 Fifteenth
Street, N.W., Suite 510, Washington, D.C. 20005.
Printed in the United States of America.
The illustration on page 58 is adapted from an illustration ("Secondary
Markets: Trading Mortgages for Cash") that appeared in Secondary Mortgage Markets, volume 1, number 1 (February 1984), page 31. Used by
permission. Secondary Mortgage Markets is published under copyright by
the Federal Home Loan Mortgage Corporation.
Contents
Preface ............................................... vu
Introduction ........................................... 1
Chapterl
History of the Bank System . . . . . . . . . . . . . . . . . . . . . 5
The Industry Develops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Need for a Central Credit System . . . . . . . . . . . . . . . . . . . . . . 7
Shaping the Bank System {1929-1939) ....................... 8
Federal Home Loan Bank Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Home Owners' Loan Act of 19 33 . . . . . . . . . . . . . . . . . . . . . . . . . 9
National Housing Act ofl 9 34 ........................... 10
The System Matures (1940-1969) ............ . .......... . ... 11
Adjustment and Reorganization ..................... . .... 12
Prosperity Fades in the 1960s ............................ 13
Expanding Opportunities ............................... 13
Emergency Home Finance Act of 1970 .... . ................ 14
Modem Times {1970-1985) ................ . ..... . ........ 15
Neighborhood Reinvestment Corporation ....... . .......... 15
The Question of Regulation ............................. 16
Trial by Interest Rates .................................. 18
The Garn-St Germain Depository Institutions Act of 1982 ...... 19
The Decline in Interest Rates ............................. 21
A Steady Purpose ..................................... 23
Chapter2
The Bank Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Office of the General Counsel. ...................... . .... 26
Office of District Banks ...................... . ......... 26
Office of Policy and Economic Research .................... 2 7
Office of Community Investment ......................... 27
Office of Enforcement ................................. 28
Office of Congressional Relations ......................... 28
Communications Office ............................. . .. 29
Office of the Secretariat, Planning and Management
Coordination ............. . ........................ 29
Office of Inspector General .............................. 29
Personnel Management Office ........................... 30
Office of Minority Affairs ........................... . .. 30
Administration Office ................................. 30
The Federal Savings and Loan Advisory Council ..... . . ...... 31
Chapter3
The District Banks. . . . . . . . . . . . . . . . . . . . . . . . . . 33
Structure of the District Banks ................... . ....... 34
Bank System Offices ................................... 35
Sources of Funds ...................... . .......... . ..... 37
Consolidated Obligations ............ . ..... . ............ 38
Member Deposits ................... . .... . ............ 39
iv
Capital Stock ........................................ 41
Retained Earnings ..................................... 41
Other Sources ......... . ............... . ............. 42
Uses of Funds ........ . ................................. 43
Advances ........................................... 43
Current Advances Policy ............................... 44
Interest Rate Swaps ................................... 45
Cash and Investments . ................................... 46
Chapter4
The Federal Savings and Loan
Insurance Corporation. . . . . . . . . . . . . . . . . . . . . . . 47
A Brief History ....................................... 47
Reserves ............................................ 48
When Institutions Fail .............. . .................. 49
Federal Asset Disposition Association ....... . .... . ........ 53
Chapters
The Federal Home Loan Mortgage Corporation. . . . 55
Market History ...................................... 55
Freddie Mac's Role .................................... 57
Purchase Programs ..... . .............................. 5 7
Sales Programs .............................. . ........ 60
Other Sources of Funds ................................ 62
Chapter6
The Member Savings Institutions . . . . . . . . . . . . . . . 63
Creating a Federal Thrift ........................... . ... 64
V
Bank System Membership .............................. 64
Organization .... •.................................... 65
Regulation .. . .......... . ............................ 67
Taxation .......... . ..... . .... . .... . ................. 70
Sources of Funds ..................................... 71
Uses of Funds ........................................ 71
Appendixes . ............................... 73
Appendix A
Addresses and Telephone Numbers ........................ 73
AppendixB
Legislative Milestones ............. . .................... 7 6
AppendixC
Members of the Federal Home Loan Bank Board .............. 80
AppendixD
Abbreviations and Acronyms ........ . .......... . ........ 82
vi
Preface
This book describes a system that has played a key role in providing
1 housing for Americans and a safe and convenient means for saving.
Although this extraordinary system involves hundreds of billions of dollars,
its most valuable resources are the people who make it work. I had the
privilege of working with many of them while researching and writing this
book. Collectively, they spent hundreds of hours answering my questions
and allowing me to look over their shoulders as they went about their work.
They helped me gather information, offered insightful comments and
suggestions, and helped in countless other ways to make this book possible.
It is to them that this book is dedicated, with gratitude, appreciation, and
respect.
Paul H. Lockwood
vii
Introduction
A
t one time, savings institutions were as integral to the neighborhood
business community as were corner grocery stores. But the corner
grocery stores have largely given way to supermarket chains, and although
savings institutions remain a primary source of home mortgages, they
operate in a rapidly and dramatically changing financial services market. In
the 1980s, economic changes, technological advances, new competitors,
and financial deregulation have created unprecedented challenges to thrift
institutions. For help in meeting these challenges, thrifts must rely on an
effective Federal Home Loan Bank System.
The Bank System originated with the Federal Home Loan Bank Act,
passed by Congress and signed into law by President Herbert Hoover in
July 1932. The act was a response to the Great Depression, which had
undermined the nation's banking system and created an urgent need for a
reserve credit system to ensure the availability of funds for home financing.
The system has three major components: the Federal Home Loan Bank
Board; the twelve regional (district) federal home loan banks; and the
individual savings institutions that make up the thrift industry.
The Federal Home Loan Bank Board, an independent agency in the
executive branch of the federal government, is governed by a chairman and
two board members. The name Federal Home Loan Bank Board refers both
to that three-member panel, which determines policy, and to the federal
agency, which carries out that policy.
The Bank Board is responsible for all federal regulation of the thrift
industry. It charters federal thrift institutions; formulates and enforces
regulations governing many thrifts' operations; and, through the Federal
Savings and Loan Insurance Corporation (FSLIC), insures savers' accounts.
The Bank Board and the states share regulatory responsibility for statechartered thrift institutions insured by the FSLIC.
The FSLIC, a permanent government entity created by the National
Housing Act of 1934, insures savings accounts to a maximum of $100,000
per individual per institution. Since the FSLIC's inception, no saver has lost
a cent of insured savings when an insured institution has been forced to
close. The Bank Board governs the FSLIC and the Federal Home Loan
Mortgage Corporation.
1
A Guide to the Federal Home Loan Bank System
Congress established the Federal Home Loan Mortgage Corporation
(Freddie Mac) in the Emergency Home Finance Act of 1970. The corporation operates a secondary, or resale, market for conventional home
mortgages. ("Conventional" mortgages are those not insured by a federal
agency.) By paying cash to purchase existing mortgages from the original
lenders, Freddie Mac replenishes the amount of money available for new
mortgages. After acquiring the mortgages, the corporation packages them
as backing for investment instruments, which it sells in public capital
markets.
The Bank Board, with other federal financial regulatory agencies, also has
a voice in the policies of the Neighborhood Reinvestment Corporation,
which seeks to revitalize older, urban neighborhoods.
The second major component of the Bank System comprises the twelve
federal home loan banks. These district banks operate within guidelines
established by the Bank Board and assist in carrying out the Board's
responsibilities.
Each district bank is wholly owned by the member thrift institutions in its
area. The district banks are controlled by their boards of directors, the
majority of whom are elected by the banks' member institutions, with the
Bank Board appointing the remainder.
The district banks-which are located in Boston, New York, Pittsburgh,
Components of the
Federal Home Loan Bank System
2
Introduction
Atlanta, Cincinnati, Indianapolis, Chicago, Des Moines, Dallas, Topeka,
San Francisco, and Seattle-serve thrift institutions in their respective
geographic areas. Just as individuals turn to their neighborhood thrift
institutions for loans to buy houses, the thrifts turn to their district banks
for additional funds to meet unexpected savings withdrawals or seasonal
needs or to expand mortgage lending when the demand for home loans
exceeds local savings supplies. The district banks also accept deposits from
thrift institutions and provide them with such services as economic analyses, safekeeping of securities, and processing of checks and negotiable order
of withdrawal (NOW) account drafts.
One of the most important functions of the district banks is to help carry
out the Bank Board's responsibility to monitor and supervise the thrift
industry. In this role, certain district bank employees are empowered by the
Bank Board to act as the Board's agents, examining thrift institutions and
supervising corrective measures when problems are found.
The district banks accumulate funds in the form of deposits from member
thrift institutions, retained earnings, and member institutions' mandatory
purchases of stock. They obtain most of their funds in the public credit
markets, primarily by selling consolidated bonds and discount notes that
are joint debt obligations of all twelve district banks. The banks market
these securities nationwide through the Bank System's Office of Finance,
securities dealers, and commercial banks.
The Bank System's third major component consists of its more than
3,000 member thrift institutions. Most of these institutions are FSLICinsured savings and loan associations; savings banks form the majority of
other members of the Bank System. Approximately one-half of savings and
loan associations are federally chartered (a federal charter must be reflected
in an institution's name), and thus subject to all Bank Board regulations.
State-chartered thrift institutions that choose to carry FSLIC insurance, or
that are required by state law to carry it, are subject to some regulation by
the Bank Board in addition to state regulation. Other Bank Board regulations apply to all members of the Bank System, including state-chartered
thrift institutions that do not carry FSLIC insurance and the five life
insurance companies that are members.
The Federal Home Loan Bank System thus blends government authority
and private enterprise in a cooperative arrangement: the Bank Board and
the FSLIC are government entities staffed by federal employees; the twelve
district banks and the Federal Home Loan Mortgage Corporation operate
under federal charters with employees who are not part of the federal civil
service system; and the individual thrift institutions are private entities. This
book examines how the Bank System's various components operate and
interact to help make home ownership possible for Americans and to
provide them with a convenient and safe means to save.
3
A Guide to the Federal Home Loan Bank System
Comly Rich house, Philadelphia, Pennsylvania, was the first home in the United States to be
purchased with a loan from a savings and loan association. (Photograph courtesy of
Foundation for Savings Institutions.)
4
Chapter 1
History of the Bank System
T
he earliest thrift institutions began with a simple idea: a group of
neighbors pooled their savings and, as money accumulated, each
member of the group in turn received funds to buy a house.
These early groups filled an unmet need. In nineteenth-century America,
banks concentrated on commercial and agricultural accounts. In those days,
the banks did not cater to individual savers with small accounts, and they
generally did not make home loans. To buy a house, a person had to
borrow from a wealthy individual or save the entire purchase price. People
hoarded savings at home, because there was no other convenient place to
save.
The first cooperative home-financing society in the United States, the
Oxford Provident Building Association of Philadelphia County, was organized on January 3, 1831, in Frankford, Pennsylvania (now part of Philadelphia). Modeled after building societies begun in England during the 1770s,
Oxford Provident boasted 37 members, who held equal shares in the
association. Each member paid an initial contribution of $5 into the pool
and pledged to continue depositing $3 per month thereafter until all
members had obtained the funds they needed.
On April 11, 1831, village lamplighter Comly Rich received the first
loan. Of the $500 he received, Rich spent $375 to buy a frame house with
less than 500 square feet of floor space and spent $125 on refurbishing.
(The house still stands, at 4276 Orchard Street, Philadelphia.) Unfortunately, Rich also became the first savings and loan customer to fall behind
on his mortgage payments; a family member eventually had to assume the
mortgage.
In 1836, the Brooklyn Building and Mutual Loan Association in New
York became the second cooperative home-financing society in the United
States. The third opened for business in South Carolina in 1843.
The early associations charged no interest on loans, and determined the
order in which members would receive loans by holding drawings. Members contributed equal monthly amounts until all the original subscribers
who wanted to purchase homes had done so. At that point, the mortgages
were canceled and the association terminated-a practice that lent the
groups the name terminating associations.
5
A Guide to the Federal Home Loan Bank System
Before long, however, the associations began to auction loans to the
highest-bidding members and to charge interest on the amounts borrowed.
This arrangement allowed association members to choose not to build
homes but to receive their contributions back with interest. Gradually, the
associations became permanent, and new members were allowed to join and
invest in shares at any time. As the associations grew, they moved out of
members' homes and into offices, acquiring professional staffs and all the
other accoutrements of ongoing businesses. Sometimes, entrepreneurs started
associations, which retained community orientations even without the
benefit of neighborhood sponsors.
These new associations adopted various names. Most called themselves
"savings and loan" or "building and loan" associations. Some New England
associations labeled themselves "cooperative banks," and some Louisiana
groups chose to be called "homestead associations." Nonetheless, almost all
associations shared two attributes that continue to characterize the thrift
industry: they were safe places for individuals to deposit their savings, and
they provided mortgage loans within the immediate community.
Although savings and loan associations are the nation's most prominent
thrifts, another type of institution-the mutual savings bank-actually
entered the thrift business earlier. The first two mutual savings banks in the
United States-the Provident Institution for Savings in the Town of Boston
and the Philadelphia Savings Fund Society-began operations in 1816.
Mutual savings banks remain concentrated in the northeastern states.
Whereas savings and loan associations could finance only residential
housing, savings banks could lend money for other types of real estate.
Savings banks also invested in government and high-quality corporate
bonds, as well as blue-chip stocks.
A third type of financial institution that matured during the 1800s and
remains part of the Bank System is the insurance company. Since colonial
times, insurance companies have invested in residential and other real estate
mortgages, as well as in other types of securities. In contrast to the many
thrift institutions that generally have concentrated their activities locally,
the larger insurance companies very early began making mortgage loans
nationwide. Five such companies are members of the Bank System.
The Industry Develops
As the nineteenth century progressed, an expanding American urban middle
class provided fertile soil for the growing thrift industry. A survey
conducted by the U.S. Commissioner of Labor in 1893 listed more than
5,800 institutions having nearly 1,750,000 shareholders (savers) and
more than 450,000 borrowers. Thirty-five years later, at the end of 1928,
6
History of the Bank System
the thrift industry included 12,666 institutions with assets of just over
$8 billion.
The industry's growth encountered predictable setbacks, prospering or
faltering along with the nation's economy. During the depression of 1893 to
1897, for example, hundreds of associations failed. And the industry's
reputation suffered from the activities of some national savings and loan
associations, known as "nationals," which sold their shares on commission
in many states through local agents or by mail. Because these firms made
loans on extremely risky projects at very high interest rates, and because the
firms managed their assets poorly, they were among the first to fail when
the 1893 depression hit. The nationals inflicted such damage on public
confidence that many sound local thrifts failed when panicking savers
suddenly pulled their money out.
Throughout the 1800s, government did little to regulate the thrift
industry. The State of New York, the first government to move in that
direction, began in 1875 to require annual reports on the financial condition
of savings and loans. Yet by 1900, only half the states regulated thrifts, and
what regulation existed was no more than a patchwork of rules.
The Need for a Central Credit System
As thrifts grew from small neighborhood associations to large businesses,
the increasing variety of demands for mortgage funds created substantial
disparities. In some areas, demand for home loans exceeded the sum of
savings available from local depositors; in other areas, the reverse was true.
Savings institutions needed a central credit facility to accept deposits from
thrifts that had excess cash and to make loans to thrifts that needed extra
funds.
New York was the first state to establish a statewide credit facility for
thrift institutions. Created in 1914, the Land Bank of the State of New York
(later the Savings and Loan Bank) tapped the capital markets by selling
securities that were backed by mortgages held by thrifts affiliated with the
bank.
The need for a nationwide credit facility, however, soon became apparent. The first serious proposal for such a nationwide system came in 1918,
with the postwar boom in new housing demand, which far outstripped the
amount of mortgage money available in many areas of the country.
Legislation and hearings followed-in 1919, 1920, and 1927-but the
proposal died each time. The country was prospering, and few people
worried about mortgage money running short.
As the 1920s drew to an end, thrifts continued to operate as they had for
some time, extending one-year mortgages to home buyers. The full amount
7
A Guide to the Federal Home Loan Bank System
of a mortgage came due in one balloon payment at the end of the period. If
the customer could not repay the loan, the thrift simply created a new
mortgage. And why not? Despite scattered strains, mortgage money
generally was secure, stable, and plentiful-and most people assumed it
always would be.
SHAPING THE BANK SYSTEM (1929-1939)
The Crash of 1929 brought chaos tp the thrift industry and panic to its
customers. More than 1,700 thrifts failed in the Great Depression, and their
depositors lost $200 million, or about one-third of the value of their
deposits. Unable to meet burgeoning demands for withdrawals, many
otherwise healthy thrifts simply froze their depositors' accounts in place.
Customers feared they would lose their entire savings, and many, desperate
for cash, resorted to selling their passbooks at a loss in the black markets.
Federal Home loan Bank Act
The Depression made the need for a central credit facility for thrifts
overwhelmingly clear. Late in 1931, President Herbert Hoover appointed a
President's Conference on Home Building and Home Ownership, which
officially endorsed his proposal for such a facility on December 4, 1931. For
the next seven months, Congress considered legislation to translate the
proposal into reality. Savings and loan associations supported the plan, but
savings banks, insurance companies, and commercial banks opposed it on
the ground that it would constitute excessive government intervention. On
July 16, 1932, however, Congress approved the Federal Home Loan Bank
Act, which President Hoover signed into law six days later.
The Federal Home Loan Bank Act's primary purpose was to rescue the
failing savings and home-financing industry by channeling cash to thrift
institutions. The legislation authorized the creation of eight to twelve
district banks to lend money to thrifts and established the Federal Home
Loan Bank Board to oversee the district banks. The act also authorized the
district banks to raise money by selling bonds. (The banks did so for the
first time in April 1937, marketing a total of $25 million worth of
securities.)
The first task was to organize the district banks. The Bank Board decided
to create twelve banks, determined the locations, drew the boundaries, and
appointed the directors. The district banks officially opened in October
1932, although they did not make their first loans to savings and loan
associations until December of that year.
8
History of the Bank System
The district banks began operations with $125 million in capital provided
by the U.S. Treasury, which received 125,000 shares of stock in the banks.
The banks also raised money by selling their stock to the savings and loans
that became their clients, or members. The 1932 Federal Home Loan Bank
Act required district banks to start repaying their Treasury loans once these
stock sales equaled the federally provided seed money. Repayment began in
1948 and by 1951, the district banks had completely repaid the federal
government and were wholly owned by their member institutions, as they
are today.
Home Owners' Loan Act of 1933
In approving the 1932 Federal Home Loan Bank Act, Congress had hoped
that, in addition to helping thrift institutions, the newly flowing district
bank funds would help hard-pressed individual home buyers. The act even
provided for the district banks to make loans directly to home buyers who
could find no other mortgage source. Some 41,000 persons applied for
direct loans within a few months, but the banks granted only three such
loans, and Congress eliminated the direct-loan provision a year later. The
authors of the 19 32 act had hoped that savings and loan associations would
use some of their district bank funds to refinance delinquent mortgages, but,
by and large, the thrifts did not do so. Even though the district banks could
provide advances, or loans, for this purpose, the thrifts were not eager to
lend additional money to home owners who had already proved themselves
poor credit risks by missing numerous payments.
Yet clearly something had to be done. By 1933, 40 percent of the
country's $20 billion in home mortgage debt was in default, and, through
foreclosures, Americans were losing their homes at the rate of 26,000 ·per
month. Congress reacted quickly; before President Franklin Delano Roosevelt had been in office four months, the legislators had passed and sent to
him the Home Owners' Loan Act of 19 33. The act, which was the second
major piece of legislation to shape development of the Bank System,
authorized the Federal Home Loan Bank Board to begin granting federal
charters for savings and loan associations. The act also created the Home
Owners' Loan Corporation (HOLC).
The establishment of the HOLC had the most immediate effect on thrifts
and their customers. The Bank Board administered the HOLC, which
bought delinquent mortgages from lenders and refinanced the loans at
lower interest rates, lowered the monthly payments, and extended the
period for repayment, in an effort to help people keep their homes. During
three years of lending activity-June 1933 to June 1936-the HOLC
refinanced $2.75 billion in home mortgages held by savings and loans,
9
A Guide to the Federal Home Loan Bank System
banks, and other lenders. The HOLC further aided savings and loan
associations by taking over 13 percent of their mortgage loan portfolios in
exchange for $770 million worth of HOLC bonds. Through these activities,
as well as through loans to acquire, refinance, or repair and recondition
property and loans made directly to lending institutions, the HOLC
ultimately processed 1.8 million loans totaling $6.2 billion and allowed one
million Americans, who otherwise would have suffered foreclosure, to keep
their homes.
The legislation creating the HOLC also provided for the corporation to
terminate automatically. The HOLC stopped making loans in June 1936
and slowly liquidated its holdings by auctioning its remaining mortgage
loans to savings and loan associations and other lenders. Most HOLC
activity had ended by 1951, and the corporation's last office closed in New
York in July 1953. The HOLC legally expired on February 3, 1954, having
repaid all the money it had received from the federal government and
having earned a small profit for the Treasury.
Although the HOLC provisions of the Home Owners' Loan Act affected
thrifts immediately, the provision establishing federally chartered savings
and loan associations brought about the most far-reaching changes in the
industry by giving the Federal Home Loan Bank Board its first powers to
regulate and supervise federal associations. These powers expanded greatly
in the years that followed.
National Housing Act of 1934
Although the Federal Home Loan Bank Act of 1932 established a central
credit facility, and the Home Owners' Loan Act of 1933 saved a million
homes, neither act restored public confidence in the nation's thrift institutions. That task fell to a third major piece of legislation, the National
Housing Act of 19 34. This act created the Federal Housing Administration
(FHA) to insure mortgages and the Federal Savings and Loan Insurance
Corporation (FSLIC) to insure deposits.
FEDERAL HousING ADMINISTRATION. FHA insurance was designed to
guarantee lenders full repayment when borrowers failed to make their
mortgage payments. Recipients of FHA-guaranteed loans financed this
insurance by paying fees that were added to their monthly payments.
Because FHA insurance made lower down payments permissible (by
removing much of the lenders' risk), many more people could qualify for
home loans than had previously been able to qualify.
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION. The FSLIC was
established to provide insurance of deposits in savings institutions, as the
Federal Deposit Insurance Corporation provided insurance of deposits in
10
History of the Bank System
commercial banks. Both insurance corporations began operating in 1934,
and their coverage has been parallel since then. The limit on insuranceoriginally $5,000 for each saver in each institution-rose steadily, to
$10,000 in 1950, to $15,000 in 1966, to 520,000 in 1969, to $40,000 in
1974, and to Sl00,000 in 1980.
To commence operations, the FSLIC raised Sl00 million by selling its
capital stock to the Home Owners' Loan Corporation in 19 34. Those shares
were transferred to the Secretary of the Treasury in 1948. In 1950, the
FSLIC began to buy back its stock, using 50 percent of each year's net
income to retire the shares. By 1958, the FSLIC had repurchased all its
outstanding stock.
Despite its obvious benefits to thrifts, FSLIC insurance gained acceptance
only slowly. One reason was that state-chartered institutions were reluctant
to accept FSLIC insurance because doing so would subject them to federal
regulation, examination, and supervision. Many state-chartered thrifts also
chafed at paying the premiums required for the insurance. As a result, by
mid-1936, only 1,336 thrifts, with 30 percent of thrift assets, were
FSLIC-insured. All but 237 of these were federally chartered thrifts, which
were required by law to carry the insurance. It took until 1951 for
FSLIC-insured institutions to outnumber non-FSLIC-insured institutions.
By then, however, insured thrifts held more than 90 percent of all the assets
in the savings and loan industry. By the end of 1985, the FSLIC insured
2,960 savings and loan associations-92.6 percent of the total-which held
98.5 percent of the assets of the savings and loan industry.
As part of its role in insuring accounts, the FSLIC worked to stabilize
insured thrifts that were verging on failure. If possible, the FSLIC provided
loans to the troubled institution, arranged for it to be taken over by a
stronger institution, or took other steps to prevent default. Only if the
institution was beyond help did the FSLIC take it over and pay out its
insured deposits to savers.
By 1939, the nation's economy was recovering, and the Bank Board had
existed for seven years. During that time, the Bank Board had established
the system of district banks, rescuing the thrift industry from potential
collapse; had shepherded federally chartered thrifts into existence across the
country; had established the FSLIC insurance program; and, through the
HOLC, had enabled some one million Americans to retain their homes
despite crippling economic conditions.
THE SYSTEM MATURES (1940-1969)
During the early 1940s, the nation directed its economic resources toward
fighting World War II. Although the volume of deposits increased for
11
A Guide to the Federal Home Loan Bank System
savings institutions, few homes were built; thrifts used most of their funds
to buy war bonds, and builders diverted materials for residential construction into military housing.
Nevertheless, the thrift industry changed substantially during this period.
Perhaps the most significant change was a trend toward consolidation,
which continues today. In 1940 alone, for instance, some 2,000 associations
(most of which were small institutions) voluntarily began gradual liquidation, making no new loans and accepting no new deposits. Also, the
industry began increasingly to serve specialized constituencies. In many
large cities, thrifts sprang up in ethnic neighborhoods, often conducting
business in the customers' native languages. Some thrifts prospered by
serving employees of a single company. Others began opening branch
offices, which multiplied from almost none in 1950 to nearly 3,000 in 1960.
Adjustment and Reorganization
The Federal Home Loan Bank Board also underwent substantial adjustment
and reorganization. The Bank Board was originally established as an
independent agency under a five-member governing panel, but in 1939
President Franklin Delano Roosevelt's Reorganization Plan No. 1 placed the
Bank Board and other federal financial and credit agencies under the Federal
Loan Agency. The arrangement lasted three years.
Subsequent wartime needs led President Roosevelt, on February 24,
1942, to issue Executive Order 9070, creating the National Housing
Agency. The agency consolidated sixteen government agencies, including
the Bank Board, all of which were involved in building housing with public
funds or trying to stimulate housing with private funds. The Bank Board, as
one of the National Housing Agency's three units, became the Federal Home
Loan Bank Administration. A single administrator replaced the Bank
Board's governing panel.
The severe housing shortage that followed World War II sparked further
regulatory restructuring. In July 1947, President Harry S Truman issued
Reorganization Plan No. 3, which replaced the Bank Board's single administrator with a panel of three members serving four-year terms and placed the
Bank Board under the jurisdiction of the newly created Housing and Home
Finance Agency {now part of the Department of Housing and Urban
Development). Finally, on August 11, 1955, Congress enacted the Housing
Act of 1955, restoring the Bank Board's status as an independent agency.
The early 1950s brought changes in the legislation governing the Bank
System's operations. In 1950, Congress authorized the Bank Board to
impose liquidity requirements on thrift institutions that were members of
the Bank System. And in 1954, Congress granted the Bank Board power to
12
History of the Bank System
issue cease-and-desist orders against federal savings and loan associations
that violated laws or regulations. The new authority lacked teeth, however,
because errant institutions could use court appeals to delay compliance for
years.
Prosperity Fades in the 1960s
Savings institutions had grown and prospered in the 1950s largely because
of stable interest rates. In the 1960s, conditions began to change. Commercial banks began seriously courting small savings accounts and, in 1965,
obtained the Federal Reserve Board's permission to pay 5 .5 percent on time
deposits and savings deposits, an interest rate few savings and loans could
match.
In 1966, 1969, and 1970, thrifts endured periods of severe disintermediation
(the flow of funds out of depositors' accounts to other investment vehicles).
The problems were compounded by tight credit, rising interest rates, and
higher taxes on thrift profits. As a result, many associations fell into such
poor financial shape that the FSLIC had to intervene to protect insured
deposits. In 1966, FSLIC assistance was required to allow ten institutions
either to avoid default or to recover from default. And between 1965 and
1968, the FSLIC had to close five associations and pay off their depositors.
Expanding Opportunities
The Housing Act of 1964 took the first steps toward expanding business
opportunities for thrift institutions. By permitting federal savings and loan
associations to make unsecured personal loans for college or vocational
education expenses, the law for the first time allowed federal associations to
lend money for purposes other than acquiring real estate.
The act also expanded the geographic areas in which federally chartered
thrifts could operate. Until 1964, an association could lend money for
mortgages only on property within a 50-mile radius of the association's
home office. The 1964 legislation extended the radius to 100 miles.
(Congress in 1970 expanded the area to encompass an association's home
state. In 1983, the Bank Board removed all geographic restrictions on
lending, allowing federally chartered associations to make loans nationwide. Unless prohibited by state law, state-chartered associations with
FSLIC insurance were permitted to do the same.)
The 1964 legislation made two other significant changes. It allowed
thrifts to issue mortgages and buy property in urban renewal areas; and it
permitted thrifts for the first time to buy securities issued by state and
13
A Guide to the Federal Home loan Bank System
municipal governments, and broadened their authority to invest in securities of federal agencies.
In 1966, Congress passed two major laws affecting the Bank System. The
first, the Financial Institutions Supervisory Act of 1966, required thrifts to
comply immediately with cease-and-desist orders issued by the Bank Board,
and gave the Board power to remove officers and directors of associations
that had engaged in unsafe and unsound practices or had violated the law or
Bank Board regulations.
The second law, the Interest Rate Adjustment Act of 1966, authorized the
Bank Board to limit the interest rates member thrifts could pay on savings
accounts. However, the act provided that the Bank Board, in conference
with the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (which set commercial bank rates),
could allow thrifts to pay depositors a slightly higher rate than commercial
banks were allowed to pay. This provision, adopted by the Bank Board,
helped hold back competition from the banks.
Finally, in 1968, Congress passed legislation allowing savings and loan
associations to make loans for mobile homes; for second or vacation homes;
for housing fixtures; and, in cooperation with the U.S. Agency for International Development, for housing in friendly foreign nations. With new
powers, savings and loan associations began making their first forays into
business areas long considered the exclusive domains of commercial banks.
Emergency Home Finance Act of 1970
In response to the tight monetary and mortgage market conditions of the
late 1960s, Congress enacted the Emergency Home Finance Act of 1970.
This act established the Federal Home Loan Mortgage Corporation (FHLMC),
a federally chartered corporation operating under the direction of the
Federal Home Loan Bank Board.
The FHLMC, popularly called Freddie Mac, was designed to establish and
maintain a secondary market for conventional home mortgages so that
mortgages could be sold and resold much like any other commodity. In the
secondary market, original lenders, such as savings and loan associations,
sell their existing mortgages to the FHLMC, generating cash with which to
make new home mortgages. Freddie Mac purchases either whole mortgages
or participations in mortgages from original lenders.
Freddie Mac's activities are directed toward three important goals:
turning home mortgages into liquid assets; attracting new money for home
loans from investors who normally did not invest in home mortgages; and
providing a balancing mechanism to move funds from areas of the country
with capital surpluses to areas with capital deficiencies.
14
History of the Bank System
MODERN TIMES (1970-1985)
Total assets of all savings and loan associations-both FSLIC-insured and
non-FSLIC-insured-more than doubled between 1960 and 1970, rising
from $7l billion to $176 billion. By 1980, assets topped $629 billion, and
by the end of 1985, they had reached $952 billion.
Growth in capital did not keep pace with this impressive asset growth.
The savings and loan industry's ratio of net worth to total assets declined
from 7 .03 percent of assets at the end of 1970 to 4 .4 percent at the end of
1985. Disintermediation again plagued the thrift industry during this
period. Increased competition from commercial banks and such new
challengers as money market mutual funds helped to produce bouts of
disintermediation in 1973 and 1974 and in 1981 and 1982. A combined net
deposit outflow in excess of $30 million was recorded for the years 1981
and 1982. Although thrifts experienced some highly profitable yearsincluding 1978, when the industry's return on assets reached a high of
0.82 percent-the industry operated at substantial losses in 1981 and 1982,
when high interest rates pushed the cost of funds higher than return on
assets.
Congress reacted to these developments by significantly altering the thrift
industry's legal and economic environment, in an effort to strengthen the
industry's financial base and improve its ability to compete for savers'
funds.
Neighborhood Reinvestment Corporation
In the tight mortgage markets of the 1970s, urban areas often suffered
disproportionately because of a host of disincentives to mortgage investment, such as decaying properties, poor services, and the low incomes of
residents. The Bank System established an office in 1970 that was designed
to address these problems. Over the next few years, that office expanded
into the Urban Reinvestment Task Force, transformed by Congress in 1978,
through the Housing and Community Development Act, into the Neighborhood Reinvestment Corporation.
The Neighborhood Reinvestment Corporation's primary role was, and is,
to help establish locally run self-help coalitions of business leaders, residents, and local government officials-collectively known as Neighborhood
Housing Services (NHS) programs-to encourage communities to revitalize
depressed urban neighborhoods and, thus, make lenders more willing to
finance home-buying.
By 1985, NHS programs operated in 135 cities in 41 states and the
District of Columbia. These programs have generated more than $2.4
15
A Guide to the Federal Home Loan Bank System
billion of reinvestment in urban neighborhoods nationwide, with funds
coming primarily from residents, private lenders, and local government.
Today, more than two million people live in the revitalized neighborhoods.
The Question of Regulation
Throughout much of the 1970s, thrifts faced increasing government
regulation. For instance, Congress in 1975 set into law the traditional
interest rate differential, which allowed thrifts to pay an interest rate 25
basis points (one-fourth of one percent) higher than that allowed commercial banks.
At the same time that regulation was expanding for thrifts came the first
ripples of what would grow into a tide of deregulation. As early as 1973, for
example, the Financial Institutions Act (whose purpose was to begin
deregulating interest rate controls) was introduced into Congress. The
legislation was stalled until 1980, when it reemerged as the Depository
Institutions Deregulation and Monetary Control Act. But by then, the Bank
Board, acting with other federal financial regulators, had already begun
using its regulatory authority to remove restraints on interest rates. In 1978,
for example, the Bank Board permitted savings and loans to offer money
market certificates with interest rates tied to Treasury bill rates, and in
1980, it authorized the 30-month Small Savers' Certificates.
The new savings instruments proved an expensive way to attract
savings-the more so because thrifts' options for investing funds remained
tightly regulated. In 1979, the Bank Board began allowing mortgage rates to
keep pace (in a limited way) with changes in interest rates paid on savings
accounts, authorizing all federally chartered associations to offer variablerate mortgages, which had been introduced experimentally by federally
chartered associations in California a year earlier. (California's large
state-chartered associations had been marketing variable-rate mortgages
since 1975, and her small state-chartered institutions had offered them as
early as 1961.)
The 1970s were indeed a fertile ground for legislative activity. The
Housing and Community Development Act of 197 4 liberalized lending
powers for federally chartered associations. The Real Estate Settlement
Procedures Act of 1974, as amended in 1976, required lenders to inform
loan customers in advance of the total estimated charges to be assessed in
granting mortgages. The Equal Credit Opportunity Act of 1974 prohibited
discrimination in credit transactions on the basis of sex, marital status, race,
color, religion, national origin, receipt of public assistance benefits, or the
borrower's good-faith exercise of rights under the Consumer Credit Protection Act.
16
History of the Bank System
The Home Mortgage Disclosure Act of 1975 required most depository
institutions to disclose to the public the number and dollar amount of
mortgage loans they originate or buy in each census tract. The Community
Reinvestment Act of 1977 required federal agencies that regulate financial
institutions to encourage those institutions to meet the credit needs of all
segments of their communities, including low- and moderate-income neighborhoods. And the Financial Institutions Regulatory and Interest Rate
Control Act of 1978 gave the FSLIC an important new tool in dealing with
insolvent thrifts by authorizing it to contribute financial assistance in
Federal Home loan Bank Board
Regulatory Influence
Maximum
Relative
Number
of
Thrifts
Moderate
Federally chartered
savings and loan
association and savings
bank members of the
Federal Home Loan
Bank System
FSLIC-insured statechartered member
institutions
State-chartered
members without FSLIC
insurance
None
Nonmember statechartered institutions
17
A Guide to the Federal Home Loan Bank System
arranging the merger or acquisition of a failed institution by a strong
institution.
The Depository Institutions Deregulation and Monetary Control Act of
1980 mandated the gradual removal, by 1986, of all interest rate controls
on federally regulated depository institutions. Authority to implement the
phase-out was assigned to a new umbrella group, the Depository Institutions Deregulation Committee (DIDC), a panel composed of the Secretary
of the Treasury and the heads of the federal financial regulatory agencies,
including the Federal Home Loan Bank Board, the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation, the
Comptroller of the Currency, and the National Credit Union Administration.
Trial by Interest Rates
Market interest rates were both exceptionally high and extremely volatile in
1979 and 1980. By the end of 1980, many thrifts were in deep trouble, with
a severe negative mismatch between the yields on their assets and the costs
of their liabilities. Most of the industry's interest-bearing assets were in
long-term home mortgages with low, fixed rates of interest, while more than
half of its interest-bearing liabilities were in short-term (one year or less)
certificates of deposit paying high, deregulated market rates. By the first
half of 1981, the industry's cost of funds, at 10.31 percent, exceeded the
average return on its mortgage portfolio, which was 9 .72 percent. By the
second half of 1981, conditions had deteriorated further; associations paid
an average rate of 11.53 percent while earning an average rate of only
10.02 percent.
But thrifts had little choice. They had to pay high rates to savers in order
to avoid losing their deposits to the money market funds, which had no
regulatory limit on earnings. Even so, during 1981 and 1982, savers
withdrew 531.8 billion more than they deposited in FSLIC-insured thrifts.
In the face of its negative yield/ cost mismatch and heavy deposit
outflows, the thrift industry experienced staggering losses-a total of $8.9
billion in 1981 and 1982, with a record S3.3 billion loss in the first half of
1982 alone-and a $6 billion decline in net worth. The losses were not
confined to any particular segment of the industry; in the last six months of
1981, 85 percent of all associations insured by the FSLIC operated at a loss.
Moreover, in the two-year period of 1981 to 1982, 813 savings institutions disappeared, most of them merged into other institutions. The Bank
Board arranged 342 of those mergers, and of that number, 92 required
financial assistance from the FSLIC to forestall liquidation; two other thrifts
were liquidated. So intense was the search for healthy merger partners that
in September 1981 the Bank Board began allowing the FSLIC to arrange
18
History of the Bank System
assisted interstate mergers, breaking the long-held ban on branching across
state lines.
It is noteworthy that, although the industry's troubles were common
knowledge, the public did not panic as it had during the depression of the
1930s. No long lines formed of people desperate to withdraw their savings;
the public had faith in federal deposit insurance.
The Garn-St Germain Depository Institutions Act of 1982
The crisis in the thrift industry evoked the most significant thrift legislation
in half a century, the Garn-St Germain Depository Institutions Act of 1982,
signed into law by President Ronald Reagan on October 15, 1982. GarnSt Germain contained three landmark provisions, giving thrifts new (although limited) business opportunities to help them survive financial
storms; granting the Bank Board and the FSLIC new powers to deal with
financially troubled associations; and authorizing an emergency rescue program to assist savings institutions that were troubled, but basically sound.
Garn-St Germain differed fundamentally from the reforms of the 1930s
in that it deregulated rather than regulated. The act set out to correct the
existing imbalance in the very strict regulation of how thrifts could invest
their assets (which limited return on assets) and the more liberal regulation
of deposit interest rates (which had increased thrifts' cost of funds). The act
was designed to give the industry the flexibility it needed to respond to
rapidly changing market conditions. The legislation mandated the phaseout of the interest rate differential by January 1984, and had two other
main deregulatory aspects. First, it allowed the DIDC to authorize thrifts
and banks to issue a new type of account-the money market deposit
account-that bore no interest limit and, thus, could compete directly with
money market mutual funds. Second, the act gave savings institutions
limited authority to expand into additional business areas, such as commercial lending, traditionally reserved for banks.
The money market deposit account was introduced in December 1982.
During its first four months, it proved an enormous success, attracting more
than $108 billion in savings to FSLIC-insured institutions. A portion of that
amount represented funds transferred internally from other thrift accounts,
but enough outside money flowed into the new instruments so that, for the
first time in nearly two years, savers were depositing more funds in thrifts
than they were withdrawing.
The new asset powers also proved beneficial. Although Garn-St Germain
actually removed very few of the distinctions between banks and thrifts, the
new business opportunities allowed thrifts to bolster their financial strength
enough so that they could continue to carry out their primary mission 19
A Guide to the Federal Home Loan Bank System
financing home ownership. To that end, Garn-St Germain allowed thrifts to
broaden their holdings of short-term assets (which could be adjusted more
quickly to changing interest rates) as well as hold long-term mortgages. In
particular, the act gave all federal associations the power to:
■ Make commercial, corporate, business, or agricultural loans, which after
January 1, 1984, could constitute up to 10 percent of an association's assets.
■ Increase from 20 percent to 30 percent the amount of assets that could be
invested in consumer loans, and make inventory and floor-planning loans
beyond existing authority.
■ Offer individual or corporate demand-deposit accounts (although corporate checking accounts could be opened only by companies having other
business with the association).
■ Increase from 20 percent to 40 percent the amount of assets that could
be invested in loans secured by nonresidential real estate.
■ Invest up to 10 percent of assets in personal property for rent or sale.
■ Make education loans for any educational purpose, instead of just for
college or vocational training.
■ Invest up to 100 percent of assets in state or local government
obligations.
■ Invest in other thrifts' time deposits and savings deposits and use the
investments to help meet liquidity requirements.
Garn-St Germain realigned the industry's structure, eliminating differences in the kinds of business in which federal savings and loan associations
and federal savings banks were allowed to engage. Moreover, the act made
it easier for savings and loan associations to become savings banks and vice
versa, and it allowed existing institutions to select either the stock or the
mutual form of ownership.
Garn-St Germain also ended an advantage thrifts had enjoyed for nearly
two decades: the privilege of paying savers a slightly higher interest rate
than commercial banks could pay. In addition, the act imposed on thrifts
the same anti-tying prohibitions that applied to commercial banks. This
move prevented associations from requiring applicants for one type of
service, such as a loan, also to use other services as a condition for receiving
the original service.
Beyond giving thrifts new business opportunities, Garn-St Germain
expanded federal regulators' powers to deal with financially troubled
institutions. Perhaps most important, the legislation granted the Bank
Board the power to override state authorities, if necessary, in order to
appoint the FSLIC as receiver of bankrupt state-chartered FSLIC-insured
thrifts. Garn-St Germain also reaffirmed the FSLIC's and the Bank Board's
authority to cross state lines, if necessary, to merge a failed institution with
another insured institution. And the act gave the FSLIC new authority to
keep thrifts solvent by depositing money in them or buying their securities.
20
History of the Bank System
Finally, Garn-St Germain authorized a new capital assistance program
for troubled thrift institutions. Under this program-called the Net Worth
Certificate Program-qualifying associations with less than 3 percent net
worth were permitted to secure promissory notes from the FSLIC in
exchange for instruments, issued by thrifts, called net worth certificates.
Because the FSLIC's promissory notes guaranteed the notes' face amounts,
thrifts could use them to raise their net worth to the required minimum, and
thereby hold off a FSLIC takeover. As institutions regained financial health,
they would begin trading back the promissory notes for the net worth
certificates, and, if all went well, the obligations eventually would be
canceled out, with no cash ever changing hands.
The Decline in Interest Rates
As dramatic and far-reaching as Garn-St Germain was, the act alone
probably could not have saved the thrift industry. For one thing, although
thrift institutions were experts in home financing, they needed time to
master other types of loans, and the act could not grant them the time.
In the second half of 1982, however, interest rates began declining, and
by the end of the year associations were again earning more interest than
they were paying out. During the first six months of 1983, for example, the
industry's overall cost of funds was 9.81 percent, while the average
portfolio yield was 11.04 percent.
Nonetheless, 35 percent of all FSLIC-insured thrift institutions were still
losing money by the end of 1983, and the ratio of regulatory net worth to
total assets was less than 3 percent at more than one-fourth of all
FSLIC-insured institutions. The industry's earnings and net worth figures
would have been even lower without certain temporary accounting techniques the Bank Board permitted thrifts to use.
During 1984, the thrift industry continued to grow rapidly. Deposits in
FSLIC-insured institutions increased by 17 percent to $784.7 billion, and
assets grew by 19 percent to $978.5 billion. By contrast, the FSLIC's
reserves declined 12.7 percent to $5.6 billion, and at the end of 1984, the
ratio of FSLIC reserves to insured savings deposits had dropped to 0.78
percent.
In 1985, reined in by new Bank Board regulations, the pace of deposit
growth slowed sharply, to about half that of 1984. Liability growth, which
had risen by 19.4 percent over 1983 in 1984, was down to 7.5 percent
above the 1984 figure. But the FSLIC's reserves dropped further, to $4.6
billion, and the reserve ratio fell to 0.55 percent.
The FSLIC's difficulties stemmed from the continuing high levels of thrift
failures. But whereas the failures during 1981 and 1982 resulted primarily
21
A Guide to the Federal Home Loan Bank System
from high interest rates, the failures in 1984 and 1985 resulted primarily
from poor assets-loans and investments in default. In the 35 cases the
FSLIC resolved during 1985, 26 of the institutions failed because of
problems related to the quality of their assets-problems that were expensive for the FSLIC to resolve and that therefore played a major role in
decreasing the FSLIC's reserves. In 1984 and 1985, 19 institutions were
placed in FSLIC receivership for liquidation; prior to 1983, the FSLIC had
liquidated only 15 institutions in its entire 50-year history.
To reduce the FSLIC's risk of exposure to asset-related problems in the
future, the Bank Board took a number of steps to curb risk-taking by
insured institutions and to provide closer monitoring of their activities. In
January 1985, for example, the Board adopted regulations that linked net
worth requirements to growth rates. The regulations also required thrifts to
get supervisory approval before undertaking potentially risky venturesspecifically, before investing more than 10 percent of their assets in equity
securities, real estate, or subsidiary service corporations.
Because thrifts' freedom of choice in investing had grown, regulators
found increased examination and supervision necessary. To strengthen the
examination of institutions, the Bank Board in July 1985 delegated the
responsibility for conducting examinations to the district banks and transferred the Board's examiners and support staff to the employ of the district
banks. The move placed the examiners under the same roofs as the district
banks' supervisory agents. Because the supervisory agents enforce corrective measures at thrift institutions upon the examiners' discovery of
violations, the transfer has made possible faster response to early warning
signals of institutions' financial problems.
As 1984 came to a close, the net worth of the Bank System's member
institutions received a boost in the form of 15 million shares-with a
market value of about $600 million-of participating, preferred, nonvoting
stock in the Federal Home Loan Mortgage Corporation. Freddie Mac
distributed the stock as a special dividend and provided that nearly all of its
future dividends would go directly to member thrift institutions, rather than
to the district banks, which hold Freddie Mac's common stock. By including
the dividend, FSLIC-insured thrift institutions posted earnings for all of
1984 amounting to $1.l billion, representing a return on assets of 0.12
percent.
In 1985, market interest rates fell, and most institutions reduced their
interest rate risk and improved their profitability. Firms insured by FSLIC
achieved their highest aggregate return on assets since 1979, earning net
income three and a half times that of 1984. Gross mortgage lending was up,
and the market value of the industry's residential mortgage holdings
appeared to exceed book value for the first time since 1979.
However, a significant minority of the industry, some 15 percent,
22
History of the Bank System
continued to experience operating losses. A much smaller number of firms
encountered serious problems because of unsound lending and investment
practices. And more than one-fifth of the industry had a regulatory net
worth ratio below 3 percent. Still, 1985 was a good year, and the industry
moved with confidence and some optimism into 1986.
A Steady Purpose
From the earliest mutual savings banks and home-financing societies, the
thrift industry has grown with the nation it serves. There have been hard
times and times of prosperity, years of stability and periods of rapid change,
remarkable successes and noteworthy failures. The thrift industry today is
structurally very different from the nascent industry of the 1830s. But as the
goals of the first associations were to enable their members to buy homes
and to provide a safe place to save, the Federal Home Loan Bank System
today remains committed to making home ownership possible by providing
thrifts with access to a national pool of credit, and to encouraging thrift by
ensuring the safety of depositors' savings.
23
A Guide to the Federal Home Loan Bank System
Bank Board Organization
BOARD
MEMBER
BOARD
CHAIRMAN
MEMBER
CHIEF
OF
STAFF
_ _I
OFFICE
0F
ENFORCEMENT
I
I
I
OFFICE
OF
GENERAL
COUNSEL
OFFICE
OF
POLICY AND
ECONOMIC
OFFICE
OF
DISTRICT
OFFICE
OF
CONGRESSIONAL
COMMUNIOO'IONS
OFFICE
RELATIONS
__I
ADMINISTRATION
OFFICE
I
I
I
OFFICE OF THE
SECRETARIAT.
PLANNING AND
MANAGEMENT
COORDINATION
PERSONNEL
MANAGEMENT
OFFICE
MINORITY
AFFAIRS
OFFICE
OFFICE
OF
INSPECTOR
GENERAL
24
~~
RESEARCH
OFFICE
OF
COMMUNITY
INVESTMENT
Chapter2
The Bank Board
T
he Federal Home Loan Bank Board adopts the policies and regulations
that guide the Federal Home Loan Bank System, that promote efficiency
in its operation, and that ensure the safety and soundness of the nation's
thrift institutions. The Bank Board consists of two elements: a governing
panel that makes policy, and an independent federal agency that carries out
Bank Board policy in regulating, monitoring, and supervising the savings
and loan industry.
The Bank Board panel is composed of three members appointed by the
President and confirmed by the Senate to serve four-year terms. The
President designates one member of the panel as chairman. No more than
two board members may belong to the same political party.
The agency is self-supporting and uses no tax revenues; its operating costs
are paid from a Treasury account funded by assessments on the twelve
district banks and by assessments on the Federal Savings and Loan
Insurance Corporation (FSLIC). The district banks, in tum, charge the
individual thrift institutions fees when they are examined.
The Bank Board members meet in formal session as often as necessary,
usually once a week. During these meetings, the Board adopts or amends
regulations affecting the entire thrift industry and also rules on matters
affecting individual thrift institutions. The types of decisions the Bank
Board makes include creating new savings institutions by granting federal
charters, granting new FSLIC deposit insurance, telling associations how
they must keep their books, how they may invest their assets, and so on.
The Bank Board also decides when to close or merge failing institutions. In
any single year, the Board makes hundreds of decisions of all types that
affect the safety and soundness of the Federal Home Loan Bank System's
member institutions as well as the thrift industry in general.
In addition, the Bank Board members sit as directors of the Federal Home
Loan Mortgage Corporation; direct the policy and make final administrative decisions for the Federal Savings and Loan Insurance Corporation; and
oversee and regulate the twelve district banks. Specific responsibility for
carrying out the Board's numerous missions and supporting its needs is
vested in one or more of its offices, each of which is responsible to the Bank
Board chairman.
25
A Guide to the Federal Home Loan Bank System
Office of the General Counsel
The Office of the General Counsel (OGC) functions as the Bank Board's
lawyer. The Office employs some hundred or more attorneys to handle the
Bank Board's legal affairs.
The OGC staff prepare the final drafts of all Bank Board regulations,
advise Bank Board members on agency regulations and interpretation of
laws affecting the Bank System, and draft the legislation the Bank Board
submits to Congress. In addition, the OGC staff prepare legal opinions on
applications submitted by thrift institutions to the Bank Board and the
FSLIC, and conduct all litigation involving the agency. The Office also
provides legal services to other Bank Board offices.
Office of District Banks
The Office of District Banks (ODB) operates as the Bank Board's primary
liaison with the twelve federal home loan banks. As such, the ODB works
with the district banks to develop and implement Bank Board policy,
reviews the district banks' performance and operating procedures, monitors
the district banks' processing of thrift institutions' applications, and processes certain other applications that require Bank Board action.
One of the ODB's primary responsibilities is to oversee the district banks'
operations to ensure their conformity with federal law and Bank Board
regulations and policies. To this end, the ODB coordinates the twelve
district banks' operations, evaluates the district banks' budget requests, and
monitors the district banks' service charges to member institutions. In
addition, the ODB assists the Bank Board in selecting and appointing the
district banks' public interest directors and conducts the elections of other
district bank directors, who are chosen by Bank System member institutions.
The ODB's Application Analysis Division reviews, analyzes, and recommends final action on the various thrift institutions' applications that
require Bank Board approval, including applications for new federal
savings and loan associations or savings banks, for new branch offices, for
FSLIC insurance, and for permission to merge with other institutions. The
division also reviews applications that the district banks have approved
under authority from the Bank Board to verify that the applications have
been handled in accordance with Bank Board policy and regulations.
In addition to these supervisory responsibilities, the Office of District
Banks collects financial and operating data on the twelve district banks,
which it then incorporates into the Bank Board's various financial reports
and into the district banks' combined financial statements, which the ODB
publishes.
26
The Bank Board
Office of Policy and Economic Research
The Office of Policy and Economic Research (OPER) studies the workings
of the financial marketplace in order to advise the Bank Board on
regulatory policies. The OPER looks backward, evaluating the results of
previous policies under historical conditions, and looks forward, simulating
what would be likely to happen if the Bank Board followed a given policy
under various economic circumstances. Such information is vital to the
Bank Board's understanding of how its regulations have affected the district
banks and their member thrift institutions in the past and how proposed
regulations might affect them in the future.
The Office's staff members review, analyze, and aggregate monthly and
quarterly reports filed by every FSLIC-insured savings institution. The
resulting compilations, along with special surveys that OPER conducts, give
a comprehensive picture of what has happened and is happening in the
housing finance industry. To gauge future economic trends and to provide
tools for planning, the OPER uses a variety of econometric techniques and
computerized models.
The Office sponsors or participates in a number of seminars each year,
including the annual Thrift Industry Outlook Conference, and publishes
research papers. The OPER also publishes several monthly statistical series
and several annual financial compilations.
Office of Community Investment
The Office of Community Investment (OCI) seeks to stimulate thrift
industry investment in older communities. Created in 1977, the OCI
expanded programs begun in the 1960s by the Bank Board's former Office
of Housing and Urban Affairs. One of the most important of OCI's
programs has been the Community Investment Fund. In its five years of
operation, from 1978 to 1983, the Community Investment Fund helped
underwrite the construction of 571,515 housing units in older urban and
rural communities. In 1984, following the termination of the national
program, the Bank Board gave each district bank the option of initiating
such a program on its own.
The Office of Community Investment also supplies training materials and
technical assistance to the district banks to encourage the growth, safety,
and soundness of minority-owned savings institutions. The OCI monitors
and helps enforce industry compliance with civil rights and consumer
legislation and guides the district banks' supervisory agents in investigating
complaints against individual savings and loan associations.
The OCI coordinates the Bank Board's technical assistance to other
27
A Guide to the Federal Home Loan Bank System
nations, administering a contract funded by the U.S. Agency for International Development to assist other countries in developing their own thrift
and home financing systems, and handles arrangements for the several
hundred foreign visitors who come to the Bank Board annually. The OCI
also represents the Bank Board in coordinating the thrift industry's compliance with the Home Mortgage Disclosure Act.
Office of Enforcement
Created in 1986, the Office of Enforcement (OE) helps the Bank Board
ensure that FSLIC-insured institutions and their managers, directors, and
other officials comply with laws, regulations, and safe and sound operating
practices. The Office accomplishes its task by issuing temporary and final
cease-and-desist orders, removing wrongdoing or negligent officers or
directors, entering into various kinds of enforceable agreements, and, in the
most serious cases, establishing conservatorships or receiverships.
When it cannot find a remedy on an informal or consent basis, the OE
prosecutes such matters in administrative enforcement proceedings or in a
U.S. District Court. To determine if formal action is needed, the OE often
investigates suspected violations or unsound practices by thrift institutions,
their officials, or persons doing business with the institutions.
The OE also serves as counsel to the supervisory agents at the district
banks and to the Office of Regulatory Policy, Oversight and Supervision. In
addition, OE attorneys prepare detailed criminal referral letters to the U.S.
Department of Justice when information developed during investigations
reveals evidence that crimes have occurred.
Office of Congressional Relations
The Office of Congressional Relations (OCR) serves as the primary link
between the Bank Board and Congress. The OCR works closely with the
Senate Banking, Housing, and Urban Affairs Committee and the House
Banking, Finance and Urban Affairs Committee, which generally handle
legislation affecting the Bank System.
Among its other duties, the OCR coordinates the submission of the
agency's budget to Congress. Because funds for the Bank Board's operating
expenses come from the industry it regulates, Congress does not appropriate
any funds from the U.S. Treasury for Bank Board use. However, the House
and Senate Appropriations Subcommittees on HUD-Independent Agencies
review the Bank Board's annual budget, and Congress approves an authorization bill containing limits on the total funds the Bank Board may spend.
28
The Bank Board
Communications Office
The Communications Office informs the news media and the public about the
Bank Board and its policies, programs, and decisions. It accomplishes the
spread of information by circulating press releases, scheduling press conferences, and arranging for news reporters to interview Bank Board members
and staff. The Office also circulates texts of new or amended Bank Board
regulations as they are adopted, texts of speeches and public testimony delivered by Bank Board members, and other public statements. The Communications Office also handles hundreds of telephoned and written inquiries from
the news media and the general public each month. The Office also provides
graphic, photographic, audiovisual, and video services to the Bank Board.
Office of the Secretariat, Planning and Management Coordination
The Office of the Secretariat, Planning, and Management Coordination
maintains the official records of the Bank Board, as well as of the former
Home Owners' Loan Corporation and Federal Home Loan Bank
Administration.
Among its other duties, the Office schedules Bank Board meetings,
organizes the agendas, coordinates transmission of staff papers, prepares
minutes, records decisions, transmits new regulations to the Office of the
Federal Register for official publication, briefs new Bank Board members,
advises the Bank Board on compliance with the Sunshine Act, releases
information under the Freedom of Information Act and Privacy Act, and
maintains a research facility the public may use to inspect records and
documents that are open to public view. The Office also organizes the Bank
Board's planning meetings; provides inter-office coordination of issues
being developed for Bank Board consideration; prepares, distributes, and
records federal thrift charters, FSLIC insurance certificates, Bank System
membership certificates, and certifications of the election and appointment
of directors of the federal home loan banks.
Office of Inspector General
The Office of Inspector General (OIG) functions as the Bank System's
internal watchdog. At the Bank Board's direction, the OIG conducts audits
and investigations within the Bank Board, the Federal Savings and Loan
Insurance Corporation, the district banks, the Office of Finance, and the
Neighborhood Reinvestment Corporation to promote efficiency, economy,
and effectiveness and to uncover any fraud or abuse. The OIG also
29
A Guide to the Federal Home loan Bank System
administers contracts with the district banks' outside auditors, and serves as
liaison between the Bank Board and the U.S. General Accounting Office.
Personnel Management Office
The Personnel Management Office (PMO) advises Bank Board members
and staff regarding personnel management practices, programs, recruitment, and compliance with the regulations of the Bank Board and the U.S.
Office of Personnel Management. The PMO also coordinates staff training
programs and other developmental activities.
Office of Minority Affairs
The Office of Minority Affairs works closely with the Personnel Management Office, the Bank Board members, and other Bank Board offices to
develop and implement the Bank Board's equal employment opportunity
(EEO) policies, which include an affirmative action program, federal
women's program, a process for handling and resolving EEO complaints,
and other actions designed to remove barriers to equal employment and
advancement opportunity.
Administration Office
The Administration Office helps develop and deliver many services needed
by the Bank Board and the FSLIC. These services include accounting,
preparing budgets, data processing, and managing facilities.
The Administration Office's Information Systems Division designs and
operates computer systems allowing the Bank Board, the FSLIC, and the
district banks to process and store the vast amounts of financial data
generated by the Bank Board, the district banks, and member institutions
across the country. The Office's Budget Division plans, develops, and
controls the Bank Board's budget and helps implement programs mandated
by the federal Office of Management and Budget. The Controller's Division
prepares bills for the agency's services, receives and disburses agency funds,
and safeguards securities and other valuable documents. The Controller's
Division also makes arrangements for personnel traveling on agency
business.
The Administrative Services Division is responsible for property management, including supervising the agency's building and equipment; procuring
supplies and services; and operating a copy center, a library, and a mail
30
The Bank Board
room. The responsibilities of the Office's management analysis staff include
ensuring agency compliance with the Paperwork Act, controlling the forms
used by the agency, and standardizing the agency's word processing
operations.
The Federal Savings and Loan Advisory Council
Congress established the Federal Savings and Loan Advisory Council in
1935. Although it is not part of the Bank Board, the Council brings the
concerns of the thrift industry to the Board's attention, providing a bridge
between the regulated and the regulator.
The Council's twenty-four voting members represent a broad crosssection of the thrift and housing industries and the public. The council
includes one member from each of the twelve district banks, elected
annually by the district bank's board of directors. The Bank Board annually
appoints the other twelve members to represent the public interest. The
Council meets at least twice a year to consider major issues facing the
savings and loan industry and to make recommendations to the Bank
Board.
31
Chapter3
The District Banks
he district banks are the thrift industry's bankers. Whereas most
commercial banks rely on one of the twelve federal reserve banks for
bank-like services, the majority of savings and loan associations and savings
banks turn to one of the twelve federal home loan banks for financial and
technical assistance. The district banks link the Bank System's other two key
elements-the Bank Board, in Washington, and the more than 3,000
federally chartered and state-chartered savings and loan associations and
savings banks throughout the country.
The district banks opened for business in October 19 32, at the lowest
point of the Great Depression. They came into being under the Federal
Home Loan Bank Act, which authorized eight to twelve district banks. The
Bank Board created twelve district banks, now located in Boston, New
York, Pittsburgh, Atlanta, Cincinnati, Indianapolis, Chicago, Des Moines,
Dallas, Topeka, San Francisco, and Seattle.
The district banks' primary mission has not changed: to channel money
into the housing finance industry by making loans to individual thrift
institutions, which use the funds to make loans to home buyers or to meet
demands for deposit withdrawals. The district banks work to balance funds
according to local needs, transferring money from areas with surplus
deposits to areas with insufficient savings to meet mortgage demands. The
twelve-bank network is thus responsive to economic variations in different
regions of the United States.
The district banks normally make advances available at interest rates that
are lower than those of the commercial market, particularly on longer-term
funds. This practice helps member savings institutions manage their interest
rate gaps (the differences between the rates the institutions pay on the funds
they borrow and the rates they earn on the funds they lend). The district
banks also provide thrifts with such services as check clearing, safekeeping
of securities, demand and time deposit accounts, technical assistance,
economic analysis, and access to the federal funds markets. By design, the
district banks are profit-making intermediaries, which provide earnings that
can return dividends to the banks' stockholders. And, by examining and
supervising their member institutions, they ensure that thrifts comply with
federal law and Bank Board regulations.
T
33
A Guide to the Federal Home Loan Bank System
Structure of the District Banks
The district banks are hybrid organizations, wholly owned by their
members-savings and loan associations, savings banks, and insurance
companies-but ultimately controlled by the federal government. Every
federally chartered thrift institution must become a member of a district
bank. Membership is optional for state-chartered institutions, but nearly all
of them become members, in part because the Federal Savings and Loan
Insurance Corporation (FSLIC) will not insure any institution that is not a
member. A thrift joins the district bank that serves the state in which the
thrift's home office or principal place of business is located.
A thrift institution becomes a member of a district bank, and hence of the
Bank System, by purchasing the district bank's stock. Unlike most common
stock, district bank stock is not traded on any exchange; the banks may sell
stock only to their member institutions. A member institution of one district
bank may not buy stock in another district bank, nor can the district banks
buy each other's stock. Moreover, a member that finds it holds more than
the required amount of district bank stock may sell the excess back only to
the district bank. (On rare occasions, some district banks have permitted
their stock to be exchanged directly between member institutions within the
same district.) Each share of stock entitles its owner to one vote in the
district bank corporation. To prevent the largest institutions from dominating the district banks, no one institution is permitted more votes than the
average number of shares held by all members in that institution's home
state.
Each district bank is governed by a board of at least fourteen directors,
two of whom are designated by the Bank Board each year to serve as the
district bank's chairman and vice-chairman. The district bank's member
institutions elect eight of the directors, and the Bank Board in Washington
appoints six. (In districts that include more than five states, the Bank Board
may increase the number of directors on the district bank's board as long as
there are no more than thirteen elected members, and the elected members
must outnumber the appointed members by a ratio of four to three.)
Although each bank has more locally elected directors than federally
appointed directors, the appointed directors serve longer terms-four years,
compared with two years for the elected directors.
The elected directors are chosen by state. Member institutions in each
state are entitled to at least one director, but not more than six directors; the
number of elected directors is proportionate to the percentage of the district
bank's stock held by member thrift institutions in the state. The Bank Board
chooses the directors it appoints, called public interest directors, to represent various community groups, including business, law, academia, and
religion. The directors must reside in the district they serve.
34
The District Banks
The Bank Board has final authority over the actions that each district
bank's board of directors takes, such as adopting the district bank's annual
budget. The Bank Board has delegated to the individual district banks the
authority to set dividend rates on their capital stock and to appoint the
district banks' officers. In theory, nearly every action by district banks
technically comes under Bank Board review, although in practice the Bank
Board delegates substantial operating authority to the banks.
Some of the most important of these delegated functions are those
involving supervisory responsibilities. The Bank Board designates a number
of employees at each district bank as supervisory agents, who are responsible for instituting corrective measures at thrift institutions and for providing
day-to-day supervisory oversight. The district bank's president usually
serves as the Bank Board's principal supervisory agent (PSA), holding
district-level authority on such matters as approving some types of applications from member institutions and enforcing federal law and regulations.
Because of the importance of this position, the district bank president,
although appointed by the district bank's board of directors, must be
approved by the Bank Board.
The Bank Board also gives district banks broad authority for providing
services to member thrifts. Thus, while functioning within the Bank Board's
guidelines and regulations, the district banks can develop services according
to the needs and wishes of the local thrift industry. As long as the banks
meet the Bank Board's basic requirements, the district boards of directors
are generally free to decide which additional services to offer members and
what to charge.
Bank System Offices
The following four offices are funded by the district banks to serve specific
needs of the Bank System.
OmcE OF fiNANCE. The Office of Finance (OF) issues consolidated debt,
manages investments, clears securities, conducts financial planning and
research, develops computer programs, and provides support services to aid
the banks in their financial management. The Office's director is responsible
to the Bank Board as well as to the twelve district bank presidents. In
carrying out its tasks, the OF acts as liaison between the district banks, the
FSLIC, and the Bank Board.
As fiscal agent for the district banks, the OF sells consolidated bonds
generally having terms of from one year to ten years and discount notes
with terms of from one month to one year. In addition, the OF investigates
and uses alternative debt sources to meet the needs of the district banks. For
instance, during the period from 1984 to 1986, the OF several times
35
A Guide to the Federal Home loan Bank System
reopened previously issued bonds for sale as a means of satisfying the
district banks' demand for additional maturities, placed an issue in the
Eurodollar market, and issued bonds denominated in yen and in European
Currency Units.
The OF's research and product development go beyond searching for
alternative debt instruments. The OF has been active in establishing
policies, programs, and reporting systems for the district banks in a variety
of areas, including futures options and cash hedging, interest rate swaps,
and asset-liability management. The OF also undertakes financial research
projects at the request of the Bank Board, the district banks, and the FSLIC,
as well as for its own purposes.
The Office of Finance manages both a centralized portfolio (the Consolidated Securities Fund), comprising approximately 20 percent of each
district bank's liquidity portfolio, and the FSLIC portfolio. The OF also
provides securities clearing and reporting services for the district banks and
the FSLIC.
OFFICE OF REGULATORY PoucY, OVERSIGHT AND SuPERv1s10N. The Office
of Regulatory Policy, Oversight and Supervision (ORPOS), located in
Washington, D.C., was established by the Bank Board on October 1, 1986.
It took over all of the functions and most of the personnel of the former
Office of Examinations and Supervision (OES), which was then abolished.
Like the other Bank System offices, the ORPOS is not an office of the
federal government, and so the transformation ended civil service constraints on staffing, salaries, and personnel practices. The privatization of
the OES followed by just over a year the transfer of federal OES thrift
examiners to the employ of the district banks.
The ORPOS monitors the activities of Bank System examiners, who
ensure that individual thrift institutions follow federal law and Bank Board
regulations. Bank System examiners check the books and operations of all
FSLIC-insured savings institutions. Each institution must pay a fee for its
examination.
Bank System examiners bear sole responsibility for examining federally
chartered institutions. Federal and state examiners work side by side to
examine state-chartered thrifts in more than half the states, undertaking
joint examinations and issuing joint reports. In a few states, federal and
state examiners examine institutions at the same times and share the work,
but issue separate reports. And in other states, federal and state examiners
take turns conducting examinations and share the results.
If an examination uncovers a problem, a supervisory agent from the
district bank will work with the institution to solve the problem, usually in
informal meetings between supervisory officials and the association's
management. But if necessary, the Bank Board may issue a cease-and-desist
order, which the institution must obey. The ORPOS may recommend other
36
The District Banks
corrective action, including removing a thrift institution's officers or
directors. The ORPOS also may help arrange the merger of a troubled thrift
with a healthy financial institution; by taking such action early enough, the
ORPOS often can prevent the need to involve the FSLIC.
How often an institution is examined depends on its condition. Those
institutions in the best financial shape may be subject to full-scale examinations every 18 to 22 months, whereas those with serious problems may be
examined every 6 months or-in the worst cases-on a continuous basis.
Continuous monitoring, however, is relatively rare; normally, only about
3 percent to 5 percent of thrift institutions at any given time require
continuous federal supervision.
The ORPOS also instructs Bank System staff on how thrift institutions
should comply with Bank Board regulations and drafts examination and
supervision procedures. And the ORPOS helps formulate proposed regulations dealing with the examination and supervisory process, the operation
of the thrift industry, and the determination of accounting standards.
FHLB SYSTEM PUBLICATION CORPORATION. The FHLB System Publication
Corporation, established in August 1984 and operated by the district
banks, publishes the Bank System's bimonthly magazine, Outlook of the
Federal Home Loan Bank System. The corporation's headquarters are in
Washington, D.C.
FHLB SYSTEM OmcE OF EoucATION. The Office of Education provides
comprehensive and specialized education and training to employees of the
Bank Board and the district banks to help managers and staff learn new
policies and procedures and become more effective. Established in June
1984, the Office of Education maintains its headquarters near Dallas,
Texas. In 1985, the Office began training examiners, who were transferred
that year from the federal civil service system to the district bank staffs.
SOURCES OF FUNDS
The federal home loan banks obtain funds from three principal sources. The
largest source is the sale of the federal home loan banks' own obligations
(bonds and discount notes). At the end of 1985, the outstanding balance of
the district banks' obligations totaled $74.4 billion. The district banks' next
largest source of funds is member institutions' deposits, which totaled
$25 .2 billion at the end of 1985. The third major source is the sale of district
bank stock to member institutions; at the end of 1985, outstanding capital
stock totaled $8.3 billion.
Far smaller portions of the district banks' resources derive from retained
earnings; the interest earned on money lent to member institutions, other
district banks, and other borrowers; and fees for various services the district
A Guide to the Federal Home Loan Bank System
banks perform for members. Under unusual circumstances, the district
banks could also obtain funds from the U.S. Treasury or the Federal Reserve
System.
Consolidated Obligations
The district banks borrow money in the capital markets by selling consolidated debt obligations-bonds and discount notes jointly offered by the
twelve district banks-that combine all of the district banks' borrowing
needs at a given time. Because these instruments are the "joint and several
obligations" of the district banks, each bank is legally responsible for
repayment of its own debt plus the debt of all the other district banks.
The consolidated debt obligations are marketed by the Bank System's
Office of Finance, which serves as the banks' fiscal agent. The Office of
Finance does not sell directly to investors; instead, it places the debt through
a primary network of securities dealers and banks. The primary network
then sells to investors or to banks and other dealers that acquire the
securities for sale. The agents in the primary network also maintain a
secondary market in which already marketed obligations may be bought
and sold an unlimited number of times.
Under certain circumstances, the Bank Board may authorize private
placement of consolidated bonds or discount notes. In these cases, the
obligations are sold to specific investors and are not offered to the public.
Such transactions are normally placed through a securities dealer. Regardless of the kind of debt sold by the banks, approval for the sale must be
obtained from the Bank Board, and, under the Government Corporation
Control Act, from the Secretary of the Treasury.
The district banks' outstanding consolidated obligations may not exceed
twelve times the aggregate of the district banks' capital stock and their
reserves. And the district banks must secure their consolidated obligations
with at least an equal amount of unpledged assets, consisting of a
combination of cash; obligations of the United States or obligations that are
guaranteed by the United States; secured advances to member institutions;
and mortgages guaranteed or insured by the United States or an agency of
the United States.
Consolidated obligations, then, are supported by the combined assets of
the twelve district banks and, indirectly, by the assets of their member
institutions. Although these instruments are not obligations of the United
States and do not carry government guarantees, the instruments' solid
financial backing means that they are considered exceptionally safe in the
securities markets. Moreover, the tax status of district bank obligations is
comparable with that of federal government securities. Income from district
38
The District Banks
bank securities is exempt from state and local taxation but is subject to
federal taxes. (Gains from sale or other disposition of the obligations, as
well as transfers by gift or inheritance, are subject to federal and state
taxation.)
Bonds and discount notes, the two types of securities district banks use to
raise capital, have different characteristics and are used to meet different
credit needs.
CONSOLIDATED BONDS. To raise long-term funds, the district banks issue
consolidated bonds whose maturities range from less than one year to
twenty years. The district banks generally sell bonds once each month,
subject to Bank Board and Treasury approval. The minimum bond issue is
$300 million for issues of less than five years, and $200 million for longer
issues. These are the minimum sizes required for eligibility for Federal
Reserve purchases.
Interest on domestically issued consolidated bonds is paid semiannually,
at rates somewhat higher than those offered on U.S. Treasury obligations.
Bonds may be redeemed at any commercial bank that belongs to the Federal
Reserve System, at a federal reserve bank, or at the U.S. Treasury.
D1scouNT NOTES. The district banks issue discount notes to raise shortterm funds. The banks sell discount notes as often as necessary, which
means nearly every business day, subject to overall approval from the Bank
Board and the U.S. Treasury.
Because the notes are discounted, investors buy them for less than their
face amount and redeem them at par (face value) when they mature. The OF
sets slightly higher rates on notes with maturities that coincide with the
district banks' current needs. If, for example, the district banks wish to
borrow money for 160 to 180 days, the Office of Finance offers its most
attractive interest rates on notes in that maturity range and offers lower
rates on notes of other maturities. Registered securities dealers described
above conduct the actual sales to the public. Investors may redeem the notes
at any commercial bank that belongs to the Federal Reserve System.
Member Deposits
Deposits by member thrifts constitute the district banks' second largest
source of funds. Under certain circumstances, the district banks may also
accept deposits from institutions that are applying for federal home loan
bank membership. And a district bank may accept deposits from another
district bank.
Deposit accounts give member institutions a safe, interest-bearing form in
which to hold their liquid assets. The accounts also afford the thrifts a
convenient means of satisfying the Bank Board's liquidity requirements.
39
A Guide to the Federal Home loan Bank System
And the deposits can quickly be converted into cash to meet deposit
withdrawal demands.
The Bank Board imposes reserve requirements on deposits in district
banks, meaning that the district banks must hold a percentage of deposits in
liquid form and not use the funds for long-term advances. Prior to 1975, the
reserve requirement was stringent. Since 1975, the Bank Board has varied
the percentage of deposits that must be held as reserves from zero percent to
50 percent. The reserve ratio thus has been issued as a tool for stimulating
or discouraging the accumulation of member deposits as economic conditions warrant.
The kinds of deposit accounts offered vary from one district bank to
another. In general, however, the district banks are authorized to offer four
categories of accounts: demand deposits, overnight deposits, term deposits,
and special series deposits.
DEMAND DEPOSITS. Demand deposit accounts permit member institutions
to write checks on their deposits whenever they have to pay out moneywhen a thrift depositor withdraws funds from a savings account, for
example, or when the institution makes a mortgage and must pay the
amount of the loan to the person selling the property. Demand deposit
accounts carry no withdrawal penalties and, since 1980, have generally
earned interest.
OVERNIGHT DEPOSITS. When a member institution finds itself holding
excess cash and does not want the funds to remain idle even for a few hours,
the institution can place the funds in an overnight deposit account at the
district bank. In this type of account, the thrift may withdraw the funds at
any time. Normally, the interest rate on overnight deposits changes daily,
although district banks may maintain an interest rate for longer periods.
More funds are placed in overnight deposit accounts than in any other type
of district bank deposit account.
TERM DEPOSITS. Accounts into which funds are deposited for a specified
period of time are called term deposits. The depositing thrift receives a
certificate of deposit that either is nonredeemable until maturity or is
subject to an interest penalty upon early redemption. The maturities of most
term deposits range from thirty days to one year, although some term
deposits mature in as few as seven days or in as long as five years.
SPECIAL SERIES DEPOSITS. The special series deposit program, introduced
in 1973, was designed to bring lenders and borrowers into direct contact by
matching specific advances and deposits. Under this program, thrift institutions that have money to lend may negotiate the interest rate and other
terms directly with institutions that wish to borrow money. The individual
district banks serve as brokers: when the respective thrifts reach agreement,
the district banks accept the deposits and issue the corresponding advances.
The district banks also guarantee the loans' repayment and, thus, the safety
40
The District Banks
of the deposits, in exchange for small portions of the interest. Special series
deposits count as liquid funds for the lending institutions. This program is
more often used when interest rates a.re high.
Capital Stock
Sale of stock to thrifts constitutes the district banks' third greatest source of
funds. Every institution that belongs to the Bank System must purchase
stock in its district bank. Since the first issue in 1932, the price of the stock
has remained $100 per share. The Bank Board has the authority to raise
(but not lower) the price of new stock issues.
The amount of stock a thrift is required to purchase is based on the
amount of its investments in residential real estate financing and the amount
of its borrowing from its district bank. The stock held by a member
institution must equal at least 1 percent of the unpaid principal of loans the
institution has made to finance residential real estate (including mortgages
and mortgage-backed securities), calculated on the basis of an institution's
portfolio at the end of each year. In addition, an institution must purchase
more stock whenever its outstanding advances from a district bank exceed
20 times the amount of stock the institution holds in the district bank. Each
institution must own a minimum of $500 worth of stock. The dividend paid
to shareholders varies from one year to the next and from one district bank
to another, depending on economic conditions and the particular district
bank's profitability.
Through the 1950s, sale of stock was a major source of funds for the
district banks. Since then, the amount of funds raised through the sale of
consolidated obligations has far outpaced the amount raised by selling
stock. The excellent credit standing consolidated obligations have enjoyed
in the capital markets, however, exists partly because of the large amount of
outstanding district bank capital stock. Investors find security in the district
banks' being owned by financial institutions that hold large portfolios of
home mortgages, because mortgages traditionally are solid, safe investments.
Retained Earnings
A growing source of funds for district banks is the interest they receive on
their accumulated earnings. The total retained earnings of district banks
grew almost 200 percent through the 1950s, and grew at an even faster pace
in the 1960s. Retained earnings quadrupled to nearly $l billion by the close
of the 1970s and were nearly $1.8 billion by the end of 1985.
Under the Federal Home Loan Bank Act, a district bank's first obligation
41
A Guide to the Federal Home Loan Bank System
in apportioning its earnings is to transfer 20 percent of its net income into a
legal reserve account. The district bank must make the transfers semiannually
until the amount of reserves equals the amount of the bank's outstanding
capital stock. Thereafter, 5 percent of the district bank's net income must be
placed in its legal reserve account.
After transferring 20 percent of net earnings into the legal reserve
account, the district banks use part of the remaining 80 percent to pay
dividends to their stockholders. The rest is split between two other
accounts, the dividend stabilization reserve and the undivided profits
account.
District banks may use funds from the dividend stabilization reserve
account to supplement dividend payments in years of low earnings. (Prior
to 1978, the district banks could make dividend payments only from
current year's earnings.) The Bank Board has, under special circumstances,
let the district banks also use funds from the undivided profits accounts to
help pay dividends.
The total amount of funds in the legal reserve, dividend stabilization
reserve, and undivided profits accounts constitutes a district bank's retained
earnings. The district banks often invest the funds in these accounts in
short-term, liquid securities. Under federal law, the district banks are
exempt from taxes on earnings because any income earned by the district
banks strengthens the Bank System's ability to provide financing for home
ownership.
Other Sources
Congress has given the Bank System access to lines of credit with the U.S.
Treasury and the Federal Reserve System.
•
The Federal Home Loan Bank Act of 1932 authorized the Secretary of the
Treasury to lend up to $4 billion to the federal home loan banks by
purchasing their consolidated obligations. The district banks drew on this
line of credit for the first time in May 1974, when they raised $1.6 billion
and advanced it to the Federal Home Loan Mortgage Corporation, which
used the funds to buy mortgages in an effort to stimulate a slack mortgage
market. The district banks repaid the Treasury by early 1978.
Under a 1974 agreement, reaffirmed in 1981, between the Federal Home
Loan Bank Board and the Board of Governors of the Federal Reserve
System, the district banks also have access to an emergency line of credit
with the federal reserve banks. There is no upper limit to this line of credit,
but it is available only after the district banks have exhausted all other
sources of funds, including the $4 billion line of credit that can be arranged
with the Treasury.
42
The District Banks
USES OF FUNDS
In creating the district banks in 1932, Congress's main intent was to help
thrifts by providing them with the cash they needed. The federal home loan
banks, therefore, use their funds primarily to advance loans to member
institutions.
Advances
The Federal Home Loan Bank Board sets the overall policy governing
advances. Within those federal guidelines, each district bank's board of
directors is free to determine loan policies for its district.
The Federal Home Loan Bank Act of 1932 requires the district banks to
offer advances authorized by the Bank Board. Each district bank also must
apply loan criteria uniformly, without discrimination, but the district bank
has the right to ration available funds and the right to turn down specific
loan applications. The Bank Board reserves the right to approve individual
advances (which it does automatically in practice), but the Bank Board
cannot overturn a district bank's decision to reject an application for an
advance.
Thrifts may use advances for a variety of purposes, such as to meet
unexpected savings withdrawals, to make more mortgage loans than local
savings can fund, or to obtain longer-term funds than available from
deposits. The demand for advances closely follows economic conditions.
For instance, the demand rises sharply during times of heavy withdrawals,
which occurred in 1966, 1969, 1973-1974, and 1978 through 1982. The
demand also rises when there is a sharp increase in consumer spending,
especially spending on housing.
The time of year also affects the balance between savings deposits and
mortgage demand. Savings volume traditionally drops off during the
summer months, which is when mortgage demand generally reaches its
yearly high. Finally, geography influences the savings-mortgage- balance.
New, rapidly expanding communities need more mortgage money than do
older, well-established communities. Therefore, thrift institutions sometimes use their advances to purchase mortgage loans-or interests in loans,
called participations-in locations outside their normal marketing area.
Indeed, the advances themselves may be funded by deposits from institutions that, because of geography, season, or marketing ability, have
accumulated excess savings funds. Advances, then, can help right the
imbalances that occur between local savings and home mortgage lending,
and between geographic areas with surplus savings and areas where
mortgage money is in short supply.
43
A Guide to the Federal Home Loan Bank System
In 197 4, the Bank Board required the district banks to link the pricing of
advances to prevailing market interest rates, and to insist on collateral for
advances. The collateral could consist of first-lien mortgages, obligations of
the U.S. government or guaranteed by the U.S. government, consolidated
obligations of the district banks, time deposits in district banks, or
participation certificates of the Federal Home Loan Mortgage Corporation.
At one time, the Bank Board required that all such collateral be physically
delivered to the district banks. Currently, member institutions generally act
as trustees for their district banks and simply hold the collateral in trust.
The most common collateral arrangement is a blanket lien on all assets,
followed by the segregation and listing of specific collateral. In some
circumstances, a district bank may require that the institution physically
transport the collateral to the district bank as a condition for granting an
advance.
SPECIAL PROGRAMS. The district banks have participated in several special
advances programs, such as the special series deposit program, that were
designed to address particular needs. These special programs have included
the offering of advances at below regular rates and advances earmarked for
certain uses, such as the financing of housing for low- and moderate-income
families.
Current Advances Policy
The Bank Board significantly revised its advances policy most recently in
December 1982. These and subsequent changes returned to the district
banks and their member thrifts several decisions on granting and using
advances, and discarded many rigid constraints that had been imposed at
the federal level. The revised policy emphasized two principal goals:
preserving the district banks' long-term viability by maintaining adequate
net worth and sufficient liquidity to meet the needs of member thrifts; and
providing member thrifts with as broad a range of advance programs as is
prudent, profitable, and practical.
INTEREST RATES. Under the new policy, district banks are to price
advances to reflect actual conditions in the credit markets. For advances
that mature in more than six months, the policy permits each district bank
to set prices within specified ranges above the estimated costs of issuing new
consolidated obligations. The range is intended to promote pricing uniformity among the district banks while giving them necessary flexibility in
managing assets and liabilities.
Thrifts may borrow as much as is permitted by federal and state law-the
Bank Board no longer limits a thrift's borrowing to a percentage of assets,
but delegates limit-setting to the district banks-and they may borrow the
44
The District Banks
funds for up to 20 years. Restrictions on how member thrifts may use their
advances have also been removed; thrifts may use advances for any sound,
authorized business purpose authorized by their charters. And member
thrift institutions may pay off their advances ahead of time, although there
may be certain conditions, such as a fee, attached to the prepayment.
FSLIC ADVANCES. Early in 1983, the Bank Board authorized the district
banks to make collateralized advances to the Federal Savings and Loan
Insurance Corporation. The Bank Board also authorized the FSLIC to
guarantee district bank advances to member thrifts experiencing financial
difficulties.
COMMITMENTS. Under the new advances policy, the Bank Board authorized the district banks to offer commitments to advance specific amounts of
money to member thrift institutions on specific future dates or within
ranges of dates (usually up to 90 days). In this type of agreement, the
interest rate may be fixed at the time the commitment is made, or it may be
established at market levels on the date that funds are actually transferred
to the borrower (takedown). Depending on the commitment's terms, the
borrowers may or may not have the option to cancel the advance prior to
the actual transfer of funds.
Interest Rate Swaps
The district banks are authorized to offer member institutions interest rate
swap programs. These swaps are used as asset-liability management tools,
mechanisms to reduce interest rate risk.
An interest rate swap is an agreement between two parties to exchange
interest payments on an amount of funds (notional principal) for an
agreed-on period of time. Each party to a swap is trying to match interest it
receives on assets to interest it must pay on liabilities. Typically, one party
agrees to make floating-rate payments tied to a specific short-term index,
and the other party agrees to make fixed-rate payments set at the inception
of the swap. Less frequently, the parties swap floating-rate interest payments that are tied to different indexes.
The district banks' interest rate swap programs, developed during 1984,
made it possible for small thrift institutions to participate in the swap
market. Before that, the normal swap offering of some $5 million or more
was far beyond the financial capacity of most smaller thrifts. The district
banks, however, may enter into interest rate swap agreements with member
institutions for notional principal amounts of as little as $500,000. The
district banks are also authorized to provide standby letters of credit to
nonmembers on behalf of member thrift institutions that wish to enter into
interest rate swap agreements on their own.
45
A Guide to the Federal Home Loan Bank System
CASH AND INVESTMENTS
The district banks' cash on hand, their investments, and their demand
deposits in other institutions constitute the district banks' operating funds
and deposit reserves, collectively known as liquidity or liquid assets. Liquid
assets provide cushions against deposit withdrawals by member savings
institutions. They also can be used to supply funds for making advances to
member thrifts and, as such, afford district banks some flexibility in timing
their sales of discount notes and bonds in the capital markets.
The Bank Board restricts the type and average maturity of investments
the district banks may hold. Prior to the 1970s, most district bank
investments were in U.S. Treasury bills. Since then, the Bank Board has
allowed the district banks to invest in obligations of the United States or
federal agencies, obligations guaranteed by the United States or federal
agencies, federal funds sold, resale agreements (repurchase agreements
sold), bankers' acceptances, and commercial bank certificates of deposit. In
practice, the majority of the funds are invested overnight in the federal
funds market.
District banks' investments are grouped into two types of portfolios. Each
district bank manages its own securities portfolio, which contains approximately 80 percent of its investments. The Office of Finance manages the
District Banks' Consolidated Securities Fund, which contains the remaining
20 percent of each bank's investments.
Although the twelve federal home loan banks are bound by the same
authority and under the same rules, they do differ according to the needs of
the region they serve. Each bank is responsible to the Bank Board in its
duties as supervisor and responsive to its members in its role as financier; as
problems and opportunities change across the country, so too do the district
banks' choices and decisions. But the federal home loan banks, with the
Bank Board and the other elements of the Federal Home Loan Bank System,
share a common purpose: to make home ownership possible.
46
Chapter4
The Federal Savings and Loan
Insurance Corporation
our Savings Insured to Sl00,000." More than 100 million American
savers trust these words and the guarantee they represent. The goldand-black emblem indicating an institution's membership in the Federal
Savings and Loan Insurance Corporation has symbolized safety since the
insurance corporation's creation in 19 34.
To the general public, the Federal Savings and Loan Insurance Corporation (FSLIC) is by far the most visible federal presence in the thrift
institutions system. The FSLIC's primary mission is to ensure consumer
confidence in thrift institutions by guaranteeing that insured savings will be
available to depositors even if savings institutions become insolvent. And
the FSLIC has succeeded. Despite periodic failures of savings institutions, no
saver has ever lost a penny of FSLIC-insured deposits.
Y
A Brief History
Congress created the FSLIC to restore the public confidence lost in the chaos
and panic of the Great Depression, when many thrifts failed. The National
Housing Act of 1934 established the FSLIC as a permanent government
instrumentality and placed it under the supervision and authority of the
Federal Home Loan Bank Board. President Roosevelt signed the legislation
into law on June 27, 1934, and on September 29, 1934, the Bank Board
approved insurance for the first ten savings associations to be covered.
The savings institutions industry initially resisted the new insurance.
Although all federally chartered associations by law had to carry it, it was
optional for state-chartered institutions, most of which initially refused to
sign up for the insurance and the federal regulation that came with it. By
mid-1936, only 237 state-chartered associations, along with 1,099 federally
chartered associations, held FSLIC coverage. It was not until 1940 that half
of all savings associations held FSLIC insurance, and not until 1951 that
FSLIC-insured thrifts outnumbered non-FSLIC-insured thrifts.
The FSLIC began operations in 1934 with $100 million in capital, which
the FSLIC raised by selling its stock to the federal Home Owners' Loan
Corporation (HOLC). When the HOLC was phased out in 1948, the FSLIC
47
A Guide to the Federal Home Loan Bank System
stock was transferred to the Secretary of the Treasury. In 1950, the FSLIC
began to buy back its stock, using 50 percent of its income each year for
that purpose. By 1958, the FSLIC had repurchased all of its outstanding
stock.
Today, although it receives some income from the earnings on its
investment portfolio, the FSLIC receives its funding primarily from the
insurance premiums it levies on insured institutions. In 1934, the initial
premium rate was 0.25 percent of an institution's total deposits. The next
year, the premium was reduced to 0.125 percent. Since 1950, each insured
savings institution has paid a regular premium of approximately 0.083
percent of total deposits. In 1985, the Bank Board exercised its authority to
make special premium assessments totaling as much as 0.125 percent of
deposits per year, imposing quarterly assessments of approximately 0.031
percent of insured deposits in addition to the normal premium.
The amount of insurance coverage has gradually been increased. In 1934,
the insurance limit per individual account was established at $5,000 dollars.
The limit was increased to $10,000 in 1950, to $15,000 in 1966, to $20,000
in 1969, to $40,000 in 1974, and to $100,000 in 1980.
Reserves
The FSLIC's commitment to protect savers' deposits is backed by its reserve
funds. As of December 31, 1985, the FSLIC's reserves totaled $4 .6 billion,
or about 0.55 percent of the $844 billion in deposits held by FSLIC-insured
institutions. (Historically, the reserve ratio, or total FSLIC book reserves as
a percentage of total deposits, has averaged 1.2 percent, peaking at 2.12
percent in 1970.)
The federal government directly supports the FSLIC's commitment to
protect insured deposits. Congress restated this federal guarantee when, on
March 16, 1982, it passed H.R. 290, a resolution " ... reaffirming that
deposits up to the prescribed coverage limits in federally insured depository
institutions are backed by the full faith and credit of the United States." The
FSLIC established a $750 million line of credit with the U.S. Treasury in
1950 but had not used the line of credit as of the end of 1985. The FSLIC
also may borrow from the district banks, which it did for the first time in
1984.
SECONDARY RESERVE. Of the $4.6 billion in FSLIC reserves at the end of
1985, $774 million was held in the secondary reserve.
Congress created the secondary reserve in 1961. During the 1950s,
savings deposits had grown at an annual rate of 15 percent to 20 percent,
but FSLIC reserves had grown much more slowly, and, by 1959, stood at
only 0.63 percent of insured savings deposits. Public Law 87-210, which
48
The Federal Savings and Loan Insurance Corporation
took effect January 1, 1962, required each FSLIC-insured savings institution
to pay an additional premium to the FSLIC. The law specified that when the
combined primary and secondary reserves of the FSLIC reached 2 percent
of the total amount of all savings accounts in insured institutions, the
additional premium would be suspended and institutions could draw on
what they had contributed to the secondary reserve to pay current
premiums to the primary reserve. Prepayments to the secondary reserve
would resume if combined FSLIC reserves dropped below 1.6 percent of
savings.
Congress reduced the 1.6 ratio to 1.25 percent in 1973, and also halted
payments to the secondary reserve. In 1974, Congress scheduled a ten-year
payback of the secondary reserve, on the condition that the combined total
of the primary and secondary reserves continue to exceed 1.25 percent of
insurance deposits. In 1979, the reserve ratio fell below 1.25 percent and the
payback was suspended, although interest continues to accrue.
When Institutions Fail
To minimize losses to the insurance fund, the Federal Home Loan Bank
Board, the Bank System's Office of Regulatory Policy, Oversight and
Supervision, and the regulatory staffs of the federal home loan banks
carefully monitor trends within the thrift industry, seeking to ensure that all
thrifts operate in a safe and sound manner. Even with careful monitoring
and regulation, however, some savings institutions cannot meet their debts.
When this happens, the Federal Home Loan Bank Board declares the
institution insolvent and places it in FSLIC receivership, transferring to the
FSLIC the responsibility for managing the thrift.
Section 406(f) of the National Housing Act of 1934 empowers the FSLIC
to use the least expensive way of carrying out its primary obligation of
guaranteeing that depositors do not lose their insured savings. In particular,
the FSLIC is authorized to provide loans or contributions to troubled
institutions, or to acquire their assets or liabilities, as long as the estimated
costs of doing so are lower than the costs of liquidating the institutions. The
FSLIC can financially assist the merger of failed thrifts into other institutions or the acquisition or consolidation of institutions following their
default. The FSLIC is also empowered to convert troubled institutions from
mutual to stock ownership as a means of infusing new capital.
When a troubled FSLIC-insured thrift institution appears to be in
imminent danger of default and requires financial assistance from the FSLIC
as part of a supervisory arranged solution, the Office of Regulatory Policy,
Oversight and Supervision calls on the FSLIC's Mergers and Acquisitions
Division to devise a way of dealing with the problem thrift that minimizes
49
A Guide to the Federal Home Loan Bank System
What Happens When a Thrift Institution Fails
OFFICE OF REGUL.A10RY POLICY,
OVERSIGHT & SUPERVISION (ORPOS)
SUCCESSFUL (SOLVENT)
INSTIT\JTION
UNSUCCESSFUL
INSTIT\JTION
MERGERS & ACQUISITIONS DIVISION OF THE FEDERAL
SAVINGS AND LOAN INSURANCE CORP. IFSUC) PRESCRIBES
ONE OF 1WO SOUJT10NS
LIQUIDATION
SALE
UNASSISTED MERGER WITH ANOTHER
FINANCIAL INTERMEDIARY (1) THRIFT OR
THRIFT HOLDING COMPANY (INTERS'OOE
MERGER) (2) BANK OR BANK HOLDING
COMPANY (INTRASOO'E OR INTERSTATE)
FINANCIALLY ASSISTED MERGER WITH
ANOTHER FINANCIAL INTERMEDIARY
(1) THRIFT IN SAME S'OO'E (2) THRIFT IN
ANOTHER S'OO'E (3) BANK OR BANK
HOLDING .COMPANY
FSUC's INSURANCE
DIVISION SEIZES
INSTITUTION
PLACESINSTIT\JTION
INlO RECEIVERSHIP
MANAGEMENT CONSIGNMENT UNTIL
AN UNASSISTED OR ASSISTED MERGER
CAN BE ARRANGED
INDIRECT IDEPOSIT
ACCOUNT AND
SOUND ASSET
TRANSFER 10 A
NEWLY FORMED THRIFT)
PAYS DEPOSllORS
DIRECT
(BY CHECK)
INDIRECT (ACCOUNT
TRANSFER 10
ANOTMER THRIFT)
POSSIBLE TRANSFER OF BAD ASSETS /fJ ANY SOOE OF SALE
OR LIQUIDATION 10 THE FEDERAL ASSET DISPOSITION
ASSOCI/IJION OR 10 CORPOR/fJE RECEIVERSHIP UNDER FSUC'a
OPERAllONS AND LIQUIDATION DMSION
WORKOUT OR SALE OF ASSETS /fJ HIGHEST PRICE
so
The Federal Savings and Loan Insurance Corporation
the cost to the insurance fund. The division works to make each solution fit
the individual case. Sometimes, the division arranges for the FSLIC to pay a
healthy institution to take over the failed institution (and all the problems
that accompany it). Sometimes, the division arranges for the FSLIC to take
over the failed institution's worst assets or to guarantee the acquiring
institution a certain spread, or return, on those assets. And sometimes the
division arranges for the FSLIC to indemnify the acquiring association
against any losses that might arise out of lawsuits stemming from the
merger or acquisition, or to reimburse the surviving institution for losses
that might be uncovered as the failed institution's books are analyzed.
If a merger is the answer, the division tries to find a merger partner that is
the same kind of financial intermediary (i.e., savings and loan association or
savings bank) as the failed institution, and that is located in the same state.
There have been times, however, when this has not been possible, and in
May 1981 the Bank Board began allowing mergers and acquisitions by
out-of-state institutions when no in-state partner could be found. In 1982,
the Bank Board allowed the first FSLIC-assisted acquisition by a company
outside the thrift industry.
As an alternative to arranging a merger or acquisition, the FSLIC may
give direct financial assistance to the troubled institution. The sharp
increase in problem cases that resulted from the abnormally high interest
rates of the early 1980s led the FSLIC to develop the income capital
certificate (ICC) program in 1981. Under this program, a problem thrift
sells ICCs to the FSLIC, with an agreement that the institution eventually
will buy them back. The FSLIC can pay cash for the ICCs, but is more likely
to give the thrift a promissory note in which the FSLIC promises to pay a
fixed amount of money at a specified future date, usually five years. In
buying ICCs, the FSLIC acquires an equity interest in the institution, and
the institution can list outstanding ICCs as part of its regulatory capital. At
maturity, the FSLIC is obligated to pay the face amount of its promissory
note or to negotiate another note. The institution, however, does not have
to begin repaying its ICCs until it begins to earn profits.
The Garn-St Germain Depository Institutions Act of 1982 authorized
distressed thrifts to issue net worth certificates (NWCs) to the FSLIC in
exchange for the FSLIC's promissory notes. A thrift may use a promissory
note in computing net worth, thus raising the thrift's capital level and
buying time to strengthen the thrift's financial base.
In spring 1985, the FSLIC adopted a new technique for handling troubled
savings institutions: the Management Consignment Program, which allows
early intervention in situations where institutions' assets are being dissipated. Under the program, the FSLIC replaces an institution's management
with new managers hired temporarily from other thrift institutions or other
types of firms. The FSLIC may also provide financial assistance as the new
51
A Guide to the Federal Home Loan Bank System
managers seek to keep the institution from deteriorating further.
The first question, then, when a thrift fails is whether the Mergers and
Acquisitions Division can find an alternative to liquidation. If it can, and if
the Bank Board approves, the case moves to the FSLIC's Financial Assistance Division, which oversees the implementation of the solution. But if
the Mergers and Acquisitions Division can devise no solution other than
liquidation, the case moves to the FSLIC's Insurance Division for payment
of insured savings to depositors.
INSURANCE D1v1s10N. When FSLIC has no other choice but to liquidate a
failed savings and loan association or savings bank, the Insurance Division
seizes the institution and pays the depositors.
Seizure of a failed savings institution is a complex operation, which the
Bank Board must carry out precisely and secretly. Secrecy is especially
important, in order to avoid saver panic, last-minute maneuvers by the
thrift's managers to better their own financial positions, or the destruction
of records. At the moment of takeover, which usually occurs just before
closing time, team members enter the insolvent institution's home office and
all branch offices and present the institution's senior manager on the
premises with the Bank Board's written order of seizure. The written order
may appoint the FSLIC as receiver, to dispose of the institution, or it may
appoint a conservator to conserve the institution's remaining assets until a
permanent solution can be found. Normally, the Bank Board relieves the
failed association's senior managers of their duties at once. Then, within
minutes, the seizure team seals the doors, and federal officials explain what
has taken place to the association's staff.
The managers of any institution that the FSLIC seizes are generally well
aware of the institution's financial problems, because Bank Board officials
typically have spent months or even years working with the institution's
managers in an effort to resolve the problems. Nonetheless, the moment of
actual takeover almost always comes as a shock to the institution-and to
the community it serves. Today, if an association is seized on a Friday
afternoon, its insured savings-including interest, which stops being paid
on the day of seizure-will probably be available to depositors the next
Monday morning.
Once the payout orders are drawn up, the Insurance Division returns
funds to depositors either directly, issuing checks drawn on an account
established at a federal home loan bank, or indirectly, providing funds
through a third party in a technique called transfer of accounts.
Under the indirect method, the Insurance Division transfers the failed
thrift's savings accounts to another insured savings institution (selected at a
bidders' conference held just before or just after the failed thrift is seized).
The Insurance Division pays the acquiring institution the dollar value of the
insured funds, less a premium of a few percentage points that the acquiring
52
The Federal Savings and Loan Insurance Corporation
institution contributes. The transfer-of-accounts procedure offers a number
of advantages to all parties. The acquiring institution may gain the savers
from the failed institution as new customers; with them, it gains a new
marketing area. The FSLIC saves the premium paid by the acquiring
institution, and thus reduces the cost to the insurance fund. The savers
receive immediate access to their accounts, up to the insurance limit, and
can either keep their accounts open with the acquiring institution or
withdraw their money. If the savers keep their accounts in place, the
accounts retain their original interest rates and other terms. And, in many
cases, the acquiring institution keeps the failed institution's office open,
maintaining an important sense of continuity for the community.
In addition to the above methods of liquidation, the FSLIC has adopted a
new technique-the asset-backed transfer. An asset-backed transfer is a
variation of the transfer-of-accounts method whereby the FSLIC transfers
the insured accounts to a newly created mutual thrift institution. To offset
this liability on the new institution's balance sheet, the FSLIC purchases, at
fair market value, the good assets from the closed institution and places
them on the books of the new mutual association. The FSLIC may also
purchase and transfer other good assets from any of its other receivership
portfolios. It is expected that this infusion of good assets will make the new
thrift more attractive to potential acquirers down the road. When appropriate real estate assets cannot be found in other receiverships, the FSLIC
places cash or notes into the new mutual association. Nonperforming assets
remain with the receivership for disposition.
Federal Asset Disposition Association
In every case, the FSLIC's primary concern is to minimize the cost to its
insurance fund. One way of minimizing loss is to ensure that the assets that
the FSLIC has been forced to take over are managed as well and liquidated
as advantageously as possible. To that end, the Bank Board in November
1985 chartered the Federal Asset Disposition Association (FADA), a private
company owned by the FSLIC. The FADA's board of directors includes
some of the most highly respected leaders of the thrift industry; and its staff
are expert, not only at the management of difficult assets, but also in the
specialized art of handling the complex real estate workout negotiations
that so many of these assets demand.
While it has a ten-year charter, FADA is committed to fulfilling its task in
far less time through cost-effective operating efficiencies and by supplementing its staff of professionals with subcontractors in local markets. In
addition to its headquarters in San Francisco, California, FADA has offices
in Washington, D.C.; Denver, Colorado; Los Angeles, California; and
53
A Guide to the Federal Home Loan Bank System
Atlanta, Georgia. Temporary offices are being established as needed in
other cities as well.
The FADA's creation not only helps ensure that the FSLIC will receive the
best possible return on the assets it has had to acquire, but also frees some of
the FSLIC's limited resources for use in other areas of need. Fittingly, the
FADA was created under provisions of section 406 of the National Housing
Act of 1934-the same law that created the FSLIC. The FADA is meant to
help ensure that the FSLIC's work of the past fifty years-insuring deposits
while fostering home ownership-continues into the future.
54
Chapters
The Federal Home Loan Mortgage
Corporation
A
mortgage is a loan, secured by real property, that generates a monthly
flow of interest and principal payments to its maker. In addition to
being backed by property, a mortgage loan, itself, is property; like other
valuable property, it too can be traded. A home owner may be able to pass
the original mortgage agreement on to a new buyer, who assumes the
mortgage and continues making the same kind of payments as the previous
holder made. The original lender might sell an investor the mortgage and
the right to collect interest and principal payments on it.
The market in which lenders sell mortgages to investors is called the
secondary mortgage market. This market is the province of the Federal
Home Loan Mortgage Corporation (FHLMC), more commonly known as
Freddie Mac, and other mortgage traders.
Market History
The first formal secondary mortgage market emerged in 1938, when
Congress created the Federal National Mortgage Association (FNMA), or
Fannie Mae, initially as a subsidiary of the Reconstruction Finance Corporation. Fannie Mae began as a corporation wholly owned by the federal
government but, in 1954, became a mixed corporation owned partly by the
federal government and partly by private shareholders.
In 1968, Congress split Fannie Mae into two organizations. One part
became a federally chartered private corporation, which retained the name
Fannie Mae. Its mission was, and is, to purchase mortgages at interest rates
that are competitive in the open market. The second part of the original
Fannie Mae became a government-owned and -operated corporation called
the Government National Mortgage Association (GNMA), or Ginnie Mae,
which became part of the U.S. Department of Housing and Urban
Development.
In February 1970, Ginnie Mae created the first publicly traded mortgagebacked pass-through securities. The securities, nicknamed Ginnie Maes,
give investors proportionate undivided shares of pools of FHA or VA
mortgages and provide income from the mortgage payments. Private
55
A Guide to the Federal Home Loan Bank System
dealers sell the securities, and Ginnie Mae guarantees them.
Until 1970, Congress generally limited Fannie Mae to purchasing mortgages subsidized under programs administered by the Federal Housing
Administration or the Veterans Administration. In 1970, Congress expanded Fannie Mae's authority so that the corporation could routinely
purchase conventional mortgages as well. And that was the year that
Congress passed the Emergency Home Finance Act of 1970, which created
the Federal Home Loan Mortgage Corporation expressly to establish a
secondary market for conventional mortgages. The chairman and the two
members of the Federal Home Loan Bank Board were designated to serve as
the chairman and directors of Freddie Mac.
Freddie Mac began its operations with $100 million raised by selling
nonvoting common stock to the twelve federal home loan banks. Since
then, Congress has not authorized Freddie Mac to sell any additional
common stock, and the district banks continue to hold all original shares.
Although the price of each share remained fixed at its initial level of $1,000,
the corporation's capital base (including stockholders' equity, reserves for
uninsured principal losses, retained earnings, and subordinated borrowings)
grew from $100 million in 1970 to $1.99 billion by the end of 1985.
In 1981, the Federal Home Loan Mortgage Corporation began paying
dividends on its common stock. In 1982, Congress authorized Freddie Mac
to issue preferred stock, and in December 1984, Freddie Mac distributed 15
million shares of participating, preferred, nonvoting stock through the
district banks to individual member savings institutions around the country. Each institution received stock in proportion to the amount of district
bank stock it held, and in proportion to the amount of Freddie Mac
common stock its district bank held. Although the preferred stock had a
face value of $10 per share, for a total offering of $150 million, the market
value was conservatively estimated at $600 million, which thrifts could list
as earnings. Furthermore, preferred stockholders received the right to the
first $10 million of future dividends declared by Freddie Mac and 90
percent of any dividends over that amount. The preferred stock began
trading on the New York Stock Exchange on January 23, 1985, with trading
limited to institutions that are members of the Federal Home Loan Bank
System.
Although it is a corporate instrumentality of the United States, the
Federal Home Loan Mortgage Corporation is not considered a federal
agency. Its employees are not government employees, and it uses no tax
funds. As a government instrumentality, it historically had been exempt
from all federal, state, and local taxation. Legislation signed into law on
January 18, 1984, however, repealed Freddie Mac's exemption from federal
income tax, effective January 1, 1985. (The securities Freddie Mac sells
continue to be subject to federal and state taxes.)
56
The Federal Home Loan Mortgage Corporation
Initially, in 1970, Freddie Mac established twelve regional offices, many
of which borrowed space and staff from the district banks. In 197 5, the
corporation reorganized its field operations into five regional offices,
located in Los Angeles, Dallas, Chicago, Atlanta, and Arlington, Virginia.
The corporation's headquarters will move to Reston, Virginia in August
1987.
Freddie Mac's Role
Freddie Mac buys mortgages from original lenders and sells investment
securities backed by those mortgages. Freddie Mac's securities are more
valuable than the original mortgages for several reasons. The securities are
more liquid; they can easily be sold and traded in the financial marketplace.
The securities are safer, because Freddie Mac guarantees them, and because
any risk is spread over a large pool of mortgages. And the securities permit
investment in mortgages without imposing the responsibility for collecting
and servicing monthly payments.
By deciding what kinds of mortgages it will purchase, Freddie Mac has
also influenced what kinds of loans primary lenders offer. In addition, in
cooperation with Fannie Mae, Freddie Mac has introduced uniform legal
documents and loan forms that have helped standardize the criteria used to
evaluate the creditworthiness of loan applicants and the condition of
property to be mortgaged. By the end of 1981, an estimated 80 percent of
all conventional mortgages were originated on these standardized documents- a remarkable achievement in an industry that ten years earlier had
nearly as many kinds of mortgage forms and underwriting standards as it
had lenders.
Purchase Programs
Freddie Mac purchases either whole mortgages or participations in mortgages from savings and loan associations, savings banks, and other original
lenders. It is not unusual for the corporation to purchase $100 million
worth of mortgages in a given day.
Freddie Mac is authorized to buy conventional home mortgage loans,
second mortgages, and mortgages on manufactured homes that are principal residences of the borrowers. Freddie Mac can also buy FHA and VA
home loans that are seasoned- that is, at least one year old. All loans that
Freddie Mac purchases must meet its requirements concerning the condition
of mortgaged properties and the creditworthiness of borrowers. New loans
must be written on standardized forms approved by Freddie Mac, and loan
57
A Guide to the Federal Home Loan Bank System
Trading Mortgages for Cash in Secondary Markets
C)
0
.·
LENDING
INSTITUTIONS
• Thrifts
• Commercial banks
• Mortgage bankers
SECONDARY MARKETS
• Private conduits
• FHLMC, FNMA, GNMA
• Mortgage broker-dealers
• Security dealers
(DI.enders sell their
mortgages lo a
secondary markal
finn.
INVESTORS
• Thrifts
• Commercial banks
• Life insurance
companies
• Pension funds
™J
00
CASH
MORmAGE
SECURITY
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The Federal Home Loan Mortgage Corporation
servicers must abide by Freddie Mac's rules for matters such as setting fees
when the mortgage is assumed by a new home buyer.
By law, Freddie Mac may purchase a mortgage only if the loan amount
does not exceed the limits established each year. In 1987, the dollar limits
on loans were S153,100 for a single-family dwelling; $195,850 for a
two-family dwelling; $236,650 for a three-family dwelling; and $294,150
for a four-family dwelling. (The mortgage limits are 50 percent higher for
properties in Alaska, Hawaii, and Guam.) And the loan-to-value limits are
95 percent for one- and two-family units and 90 percent for three- and
four-family units.
Lenders may arrange a commitment with Freddie Mac to sell loans
already on their books as well as loans that have yet to be closed, and the
lenders may take as long as 120 days to deliver the loans to Freddie Mac
regional offices. Lenders may negotiate the terms of sale on very large
mortgage pools (generally those in excess of $10 million) through the
regional offices, which process all loan sales.
Freddie Mac's loan-purchase programs offer savings and loan associations, savings banks, and other lenders several incentives for selling the
mortgage loans they have made. The incentives include increased liquidity,
reduced exposure to interest rate risk, higher yields, and increased profits.
■ Increased liquidity. Rather than wait up to 30 years to get their money
back, lenders can immediately convert illiquid mortgages to cash by selling
them, thereby replenishing the lenders' supplies of lendable funds.
■ Reduced exposure to interest rate risk. By turning over mortgage money
rapidly, lenders can adjust the interest rates they charge on new mortgage
loans, making them more closely match the rates the lenders must pay on
savings and borrowed funds.
■ Higher yields. When interest rates are rising, lenders can sell off their
older, low-interest loans and reinvest in mortgages at higher interest rates.
When rates are declining, lenders can reap the difference between the high
interest rates the lenders collect from borrowers and the lower rates the
lenders of ten pass on to Freddie Mac or other secondary market loan
purchasers.
■ Increased profits. By selling off mortgage loans in the secondary market
and using those funds to originate new mortgages, lenders can generate
additional origination fees, thereby increasing effective yields on their
investment funds. Lenders also can continue to service the loans they sell
and receive a fee from Freddie Mac for doing so.
Freddie Mac buys mortgages under two programs: the Standard Program, in which Freddie Mac pays cash for the mortgages it buys; and the
Guarantor Program, in which the original lender swaps mortgages for an
equal amount of Freddie Mac Participation Certificates (PCs). The choice of
59
A Guide to the Federal Home Loan Bank System
whether to receive cash under the Standard Program or Participation
Certificates under the Guarantor Program is the seller's.
Sales Programs
Freddie Mac sells its interest in most of the loans it buys, often within 24
hours. Freddie Mac sells its interests through securities that provide direct
ownership of a portion of each mortgage in a pool, as in the case of
Participation Certificates, or securities that are backed by the mortgages, as
in the case of Collateralized Mortgage Obligations (CMOs). Freddie Mac
uses the cash it receives from investors to buy still more mortgages. The
sales program transforms illiquid mortgages, with payback schedules locked
into place for many years, into liquid financial instruments that can be sold.
PARTICIPATION CERTIFICATES. Freddie Mac began selling Participation
Certificates in 1971. The PC was the first pass-through security ever offered
for conventional mortgages, although Ginnie Mae had created a passthrough security for FHA and VA mortgages one year earlier. As its name
implies, a pass-through security passes monthly interest and principal
mortgage payments through to the investor who buys the security.
An investor who purchases PCs secures an undivided interest in a specific
group or pool of mortgages. In other words, an investor who purchases a
PC owns a fixed percentage of every mortgage in the pool, and thus is
entitled to a pro rata share of the unpaid principal balance of each
mortgage. The investor receives monthly checks for the pro rata share of the
principal and interest paid each month by the borrowers.
Participation Certificates pay investors fixed rates of interest, normally in
increments of 0.25 percent. The PC rate is slightly less than that generated
by the underlying pool of mortgages. Freddie Mac retains the difference, or
spread, which is usually less than 0.50 percent. Typical PC purchasers
include savings and loan associations, savings banks, commercial banks,
pension funds, life insurance companies, credit unions, state and local
governments, and corporations.
Freddie Mac guarantees the timely payment of interest at the stated rate,
and the eventual full payment of principal. But Freddie Mac does not
guarantee any set maturity for a PC, because the borrowers represented in
the pool may pay off their mortgages early. Thus, although the holder of a
PC is guaranteed payment of a pro rata share of the outstanding principal in
the mortgage pool, nothing prevents that principal from being passed
through to the PC holder faster than scheduled. For some investors, this
inability to lock in a set yield for a predetermined number of years is a
drawback. For this type of investor, Freddie Mac created another security,
called a Collateralized Mortgage Obligation (CMO).
60
The Federal Home Loan Mortgage Corporation
COLLATERAL/ZED MORTGAGE OauGATIONS. Unlike purchasers of PCs,
investors who purchase CMOs do not buy ownership of the mortgages
themselves. Instead, the investors buy bonds backed by pools of mortgages,
the income from which is used to make payments on the CMOs. Thus, as its
name implies, CMOs are obligations of Freddie Mac that are backed, or
collateralized, by mortgages.
In addition to providing the high yields and safety of pass-through
mortgage securities, the CMOs offer a limited form of call protection-that
is, they are less likely than PCs to be paid off before they mature.
The call protection comes from the CMOs' structure. These securities
comprise two or more classes of maturities, which are retired in sequence.
All principal payments are first diverted to the CMO's class-one holders. No
principal payments are made to any other classes until all class-one holders
have been paid in full. When that occurs, say in three years, principal
payments are made to class-two holders until their CMOs are retired, in
perhaps five years. At that time, class-three CMO investors receive their
principal payments, with a guarantee that their CMO bonds will be fully
paid within, say, ten years, and so on. This allows investors to choose the
terms of investment that most closely match their requirements.
For most classes, Freddie Mac makes interest payments throughout the
life of the CMO, generally twice a year. But the longest-term class may be
structured as an accrual class, whose CMO is similar to a zero-coupon
bond. Under this scheme, holders accrue interest but do not receive it until
all other classes of the CMO have been paid off. At that point, interest as
well as principal payments begin.
Freddie Mac guarantees a minimum, or floor, payment to CMO holders
that holds good even if the income from the underlying mortgage pool falls
below the minimum payment amount. (This could happen if, for example,
economic conditions in a particular region of the country were such that
many people could not make their mortgage payments.) Purchasers include
insurance companies, pension funds, commercial banks, and thrifts.
GUARANTEED MORTGAGE CERTIFICATES. Freddie Mac also is authorized to
issue a security called a Guaranteed Mortgage Certificate (GMC). Like the
CMO, the GMC is a bond-like instrument backed by a pool of mortgages
and guaranteed by Freddie Mac. Investors own the GMC, not its underlying
pool of mortgages. Freddie Mac makes principal payments annually and
interest payments semiannually.
Unlike the CMOs, the GMCs are not divided into different maturity
classes and thus do not offer the kind of call protection available with
CMOs. Freddie Mac issued GMCs periodically from 1975 through 1979,
selling a total of some $2.95 billion of these securities.
61
A Guide to the Federal Home Loan Bank System
Other Sources of Funds
In addition to selling PCs, CMOs, and GMCs, Freddie Mac is authorized to
issue long-term debt in the form of debentures. Until the early 1980s, the
corporation also participated in the sale of Federal Home Loan Bank System
bonds; at the end of 1985, Freddie Mac's outstanding Federal Home Loan
Bank System bond debt totaled $1.2 billion. For short-term cash management, Freddie Mac may use reverse repurchase agreements, discount notes,
and lines of credit from commercial banks.
In the first sixteen years of its existence, Freddie Mac has succeeded,
through its securities, in drawing new capital into the housing markets. Like
the federal home loan banks, Freddie Mac's operations also help redistribute
capital from areas with a surplus to areas where the available money cannot
meet mortgage demand. The corporation has become an important part of
the Bank System, a strong support for home ownership in the United States.
62
Chapter6
The Member Savings Institutions
S
avings institutions are financial intermediaries, the crucial financial
links between savers and home buyers. The individual thrifts form the
foundation that supports the Federal Home Loan Bank System and much of
U.S. home financing.
The Federal Home Loan Bank Act of 1932 provided Bank System
membership for three types of mortgage-making financial intermediaries;
■ Savings and loan associations, (also called building and loan associations, cooperative banks, and homestead associations), to accept deposits
from savers and lend money for home mortgages.
■ Saving banks, to accept deposits, make residential mortgages, and lend
money for other types of real estate development, including commercial
projects. Savings banks could also invest in high-quality corporate and
government bonds and in stocks.
■ Insurance companies, to take in premiums from policyholders and
invest some of the money in residential financing.
Whatever their other functions, all three types of institutions have always
shared a common characteristic-their investment in home ownership. The
passage of the Garn-St Germain Depository Institutions Act of 1982
blurred the differences between federal savings and loan associations and
federal savings banks. The legislation permitted the two types of institutions
to engage in the same activities and allowed savings and loan associations to
become savings banks, or vice versa, as long as federal supervisory agents
did not object within 30 days of being notified.
Garn-St Germain also enlarged the scope of activities savings and loan
associations and savings banks could undertake, allowing them to invest
portions of their assets in financial services traditionally restricted to
commercial banks. Thrifts may now make commercial, corporate, business,
and agricultural loans; offer checking accounts; and issue consumer loans,
educational loans, and nonresidential real estate loans, much as commercial
banks do. Despite the new business opportunities for thrift associations,
however, their principal activity remains home financing. The basic intent
of the Garn-St Germain Act's provision for limited expanded powers is to
allow savings institutions to diversify their asset portfolios and thereby
strengthen their balance sheets against the next period of economic adversity.
63
A Guide to the Federal Home Loan Bank System
Creating a Federal Thrih
Until 1933, the states chartered all thrift institutions. The Home Owners'
Loan Act of 1933 gave the Bank Board the power to grant federal charters
to savings and loan associations, and an amendment in 1978 extended this
authority to allow the Bank Board to grant federal charters to savings
banks.
A federal thrift institution may be created by converting an existing
state-chartered institution to a federal charter, or by creating a new thrift,
which requires an application by at least seven U.S. citizens who are of good
character and who reside in the proposed institution's home state. Their
application must show that the community to be served needs the proposed
institution, that the institution has a reasonable probability of success, and
that it would not cause undue injury to existing local thrift and home
financing institutions. The application is first submitted to a district bank,
with a final decision made by the Bank Board in Washington. Before it can
open its doors, a new federal thrift must raise required amounts of capital,
and obtain FSLIC insurance.
Between 1933 and the end of 1985, the number of federally chartered
thrifts (savings and loan associations and savings banks) in the Bank System
grew to 1,756, or 50.4 percent of all the thrifts that belong to the Bank
System. The remaining 1,731 thrifts had state charters. Among FSLICinsured institutions, the federally chartered thrifts tend to be larger than the
state-chartered thrifts. Of the $843.9 billion in deposits held by all thrift
institutions insured by the FSLIC at the end of 1985, federally chartered
thrifts held about $539 .2 billion, or 63.9 percent.
Bank System Membership
The primary qualification for membership in the Federal Home Loan Bank
System has always been the making of long-term mortgages, and most
thrifts join. The organization and management of member thrifts must meet
relevant legal requirements, and the thrifts are subject to regular state or
federal inspection and regulation.
Federal law requires federally chartered savings and loan associations to
carry FSLIC insurance and to belong to the Bank System. Some states
require FSLIC insurance for their state-chartered institutions, but other
states allow thrifts to choose whether to join the Bank System and whether
to accept FSLIC deposit insurance. (The FSLIC will not insure institutions
that are not members of the Federal Home Loan Bank System.) Federally
chartered savings banks that belong to the Bank System have deposit
insurance from either the FSLIC or the Federal Deposit Insurance Corporation.
64
The Member Savings Institutions
Organization
Savings and loan associations and savings banks may be organized either as
mutuals or as stock companies, which differ in ownership.
MuTUAL INSTITUTIONS. Mutual institutions are mutually owned by all of
the institution's savers and borrowers, who elect the institution's board of
directors. Traditionally, a saver is entitled to one vote for every $100 or
fraction thereof in savings, and a borrower is entitled to one vote. In
practice, most depositors and borrowers have no desire to vote or attend the
institution's annual meeting, so when they first do business with the
institution, most individuals sign proxies authorizing the institution's
management to exercise their voting rights. Savers and borrowers may
revoke such proxies at any time.
Throughout most of the thrift industry's history, savers were called
shareholders rather than depositors. Every time savers put money into a
mutual thrift institution, they technically bought shares in the association.
Periodically, the institution declared dividends on the shares. To the savers,
these earnings looked just like interest, but legally they were dividends.
This practice changed in the late 1960s. The Housing and Urban
Development Act of 1968 authorized all federally chartered savings and
loan associations to offer deposit accounts, rather than share accounts, to
savers. Federally chartered institutions began offering deposit accounts on
June 1, 1969. Over the years, most states also passed laws allowing
state-chartered thrifts to offer deposit accounts.
To savers, the change from share accounts to deposit accounts was hardly
noticeable; earnings were earnings, whether labeled interest or dividends.
Although, under the new legislation, depositors earned at stated interest
rates and technically owned the mutual companies, the depositors did not
receive shares of the companies' profits. Legally, however, savers gained
one important advantage: they were guaranteed a known rate of return.
STOCK INSTITUTIONS. Stock thrift institutions belong to persons who buy
stock in the corporation and who may or may not be depositors or
borrowers; ownership of stock is not a condition for doing business with the
institution. Stockholders may receive a share of the institution's earnings in
the form of a dividend, determined by the size of the firm's overall profits.
The Garn-St Germain Act permitted new thrift institutions to receive
federal charters and organize as stock corporations. Previously, all new
federally chartered savings and loan associations had to begin as mutual
companies, and most stock associations had been state-chartered. The 1982
legislation also made it easier for a federally chartered mutual thrift to
convert to stock ownership (or vice versa), although the institution had to
obtain the FSLIC's approval and to offer the new stock first to the thrift's
current owners- that is, to its depositors and borrowers.
65
A Guide to the Federal Home Loan Bank System
HOLDING COMPANIES. The Bank Board defines a holding company as a
corporation, partnership, or similar entity that controls a FSLIC-insured
institution, usually by owning, or holding, more than 25 percent of its
voting stock. A holding company may own one or more savings and loan
associations or savings banks, provided, normally, that they are in the same
state as the holding company. (Holding companies also may own other
types of companies, but holding companies that have more than one
subsidiary with FSLIC account insurance may own only companies that are
in lines of business related to the thrift industry.) A holding company must
have Bank Board approval to acquire thrift institutions, and the Bank Board
Three furms of Thrift Institution Ownership
~
B()RRCJWERS
MUTUAL
INSTITUTION
HOLDING
COMPANY
66
The Member Savings Institutions
then regulates the holding company as well as its subsidiary thrifts. A
relatively small number of thrift institutions are owned by holding companies, and most thrift holding companies are located in California, Texas,
and Ohio.
SERVICE CORPORATIONS. A thrift institution may itself own one or more
subsidiary companies, called service corporations. Service corporations
may belong to a single parent company or to several parent companies.
Many were originally formed to offer financial services that the law
prohibited the parent institutions from offering directly. Bank Board
regulations govern the operation and permissible activities of service
corporations and limit the percentage of assets that a federally chartered
thrift institution can invest in its one or more service corporations.
MERGERS. One way a thrift institution can grow is to merge with another
institution, and voluntary mergers are fairly common. FSLIC-insured thrift
institutions that wish to merge must obtain approval from the Bank Board.
The Bank Board or, in a routine case, a principal supervisory agent at a
district bank, must determine that the proposed merger would not create a
monopoly or otherwise violate antitrust laws, and that the merging
institutions are in compliance with the Community Reinvestment Act and
Bank Board regulations.
BRANCH OFFICES. Branching is one area in which thrift institutions have an
advantage over commercial banks in some states. Under federal law, a
national (federally chartered) bank cannot open branches if it is located in a
state that bans branches for state banks. But there is no comparable federal
law concerning federal thrift institutions-the Bank Board decides where
and when to permit federal thrift associations to open branch offices. With
approval, federal thrift institutions may establish branches anywhere within
their home states. Crossing state lines to open branches is allowed for
federal thrifts only if they are located in a state that permits interstate
branching for its state-chartered thrifts, or in cases where thrifts-with
Bank Board approval-take over failing institutions in other states. Statechartered savings and loan associations, however, must apply to state
authorities, not the Bank Board, for permission to open new branches, even
if the institutions are members of the Bank System or have FSLIC insurance.
Regulation
Despite deregulation, the federal laws and regulations governing savings
and loan associations and savings banks fill a book more than three inches
thick. The rules tell an institution everything from how it may advertise to
how much it may lend its top officers. The rules are numerous and complex,
and different ones apply to different classes of institutions.
67
A Guide to the Federal Home Loan Bank System
Authority to regulate thrift institutions stems primarily from three
statutes. The Federal Home Loan Bank Act of 1932 authorized limited Bank
Board regulation of institutions that became members of one of the twelve
district banks (and thus members of the Bank System). The Home Owners'
Loan Act of 1933 gave the Bank Board broad authority over federally
chartered institutions. And the National Housing Act of 1934 provided for
limited Bank Board regulation of institutions insured by the FSLIC. Roughly
92 percent of all operating savings and loan associations come under some
Bank Board jurisdiction.
Because Bank Board regulations are based on legislated authority, they
fall into three primary categories. Regulations that apply to federally
chartered institutions are called federal regulations; regulations that apply
to FSLIC-insured institutions are called insurance regulations; and regulations that apply to federal home loan bank member institutions are called
Bank System regulations. Additional regulations include general regulations, holding company regulations, and several other types. Among the
most important are those that deal with liquidity, net worth, and interest
rates.
LIQUIDITY. Each thrift institution must keep a portion of its assets in liquid
form, that is, in cash or in a form that can easily be converted into cash.
Federal law directs the Bank Board to determine a minimum required level
of liquid assets within a range of 4 percent to 10 percent of a thrift
institution's liquidity base (the sum of all savings deposited with the
institution, less the unpaid balance of any loans secured by those savings
plus short-term borrowings). In practice, the required rate has fluctuated
between 5 percent and 7 .5 percent.
An institution may use a wide range of assets, generally with maturities of
up to five years, to meet its liquidity requirements. Assets that qualify (as
long as they are not pledged as collateral) include cash; U.S. government
securities; securities of federal agencies; demand deposits and time deposits
at federal home loan banks, commercial banks, and thrift institutions that
are members of the Bank System; bankers' acceptances; general obligations
of state and local governments; certain commercial paper and corporate
debt securities; certain mutual funds; eligible liquid assets, which are held
subject to repurchase agreements; accrued interest on liquid assets; unsecured federal funds; and certain federally guaranteed public housing
authority notes.
Since 1972, the Bank Board has also required institutions to maintain
minimum levels of short-term liquid assets. The same kinds of securities that
may be used to meet the regular liquidity requirements also qualify for the
short-term liquidity needs, except they must mature in no more than six
months, or, for obligations of the United States or its agencies, no more than
twelve months.
68
The Member Savings Institutions
NET WORTH. Net worth is the value of a thrift's total assets less its total
liabilities, or the amount of money that would remain if the institution paid
all its obligations in full. All thrift institutions that carry FSLIC insurance
must maintain specified levels of net worth. The Bank Board adjusts the net
worth requirements from time to time to meet changing economic conditions, generally relaxing them when the industry as a whole experiences
severe economic pressure.
Such was the case in the early 1980s, when the thrift industry struggled to
survive high and volatile interest rates. In response, the Bank Board in 1980
lowered the minimum net worth requirement to 4 percent of liabilities plus
20 percent of scheduled items (loans with payments in arrears). In 1982, the
Bank Board further reduced the net worth requirement to 3 percent of
liabilities and set the minimum reserve requirement at 3 percent of insured
accounts.
As the thrift industry regained financial health, the Bank Board moved to
increase the minimum level of capital that institutions must maintain as a
cushion against possible losses. In January 1985, the Bank Board directed
that institutions that engage in high-risk, fast-growth operations must
maintain higher levels of net worth-up to 5 percent of new liabilities.
Beginning January 1, 1987, the Bank Board began phasing in higher net
worth requirements for all institutions, gradually raising minimum net
worth (which the Bank Board renamed "regulatory capital") from 3 percent
to 6 percent of an institution's liabilities.
The Bank Board ruled that the length of the phase-in period was to be
determined by the overall profitability of the thrift industry-higher profits
resulting in faster increases in required regulatory capital. The Bank Board
anticipated that the phase-in period would last from six to twelve years. All
increases in an institution's liabilities after January 1, 1987, were to be
immediately capitalized at 6 percent. To encourage prudent thrift management and to minimize claims against the FSLIC insurance fund, the Bank
Board ruled that the required regulatory minimum capital can be reduced
somewhat for institutions that reduce their interest rate risk (the risk that
they will have to pay more on liabilities than they earn on assets). The
required capital level can be increased for those institutions that have
higher-than-average-risk investments.
An institution's regulatory net worth, or regulatory capital, may or may
not be the same as its net worth measured under generally accepted
accounting principles (GAAP), as established by the accounting industry's
Financial Accounting Standards Board. The Bank Board may permit, under
regulatory accounting principles (RAP), accounting procedures not sanctioned under GAAP. The Bank Board uses these accounting procedures to
achieve certain policy objectives, such as helping the thrift industry build up
its capital base.
69
A Guide to the Federal Home Loan Bank System
INTEREST RATES. Until 1966, thrifts had been free to pay whatever interest
rate they chose on savings. By contrast, commercial banks and savings
banks insured by the FDIC had been subject to interest rate ceilings since
1933.
The Interest Rate Adjustment Act of 1966 empowered the Bank Board to
establish interest rate ceilings on various types of accounts at thrift
institutions. The act left it to federal financial regulators to decide whether
to establish an interest rate differential between thrifts and commercial
banks-and in fact, such a differential was in effect from 1966 to 1983.
(Congress incorporated the existing differential in the Home Mortgage
Disclosure Act of 1975.) While it lasted, the differential helped thrifts to
compete with banks by permitting thrifts to pay slightly higher rates for
savings.
The end of interest rate restrictions advanced with the Depository
Institutions Deregulation and Monetary Control Act of 1980. That act
established the Depository Institutions Deregulation Committee (DIDC),
composed of the Secretary of the Treasury, the Comptroller of the
Currency, and the chairmen of the Federal Home Loan Bank Board, the
Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, and the National Credit Union Administration. The
DIDC's deregulatory mandate was to phase out interest rate ceilings by
1986; the last federal restrictions on deposit interest rates ended in March
1986.
Taxation
Section 7701(a)(19) of the Internal Revenue Service Code, as amended by
the Tax Reform Act of 1986, provides a special tax deduction, called the
bad-debt deduction, for savings and loan associations and savings banks.
To qualify for the deduction, a thrift institution must meet certain tests,
including having 60 percent of its assets invested in financing home
ownership or such other qualifying assets as mortgage-backed securities,
cash, certain government obligations, student loans, and so-called passbook
loans.
An institution that invested 60 percent or more of its assets in qualifying
assets could shield 8 percent of its income from tax liability. The institution
need not experience actual losses of this amount.
Once it determines the amount to deduct, the thrift places that money in a
reserve fund, which the thrift may then use only to reimburse itself for
losses suffered in foreclosures. The annual deduction may not increase the
institution's reserve fund to more than 6 percent of the outstanding principal
balance in its mortgage loan portfolio.
70
The Member Savings Institutions
Sources of Funds
Like most financial institutions, savings and loan associations and savings
banks conduct most of their business using other people's money-money
borrowed from savers who deposit funds with the institution and money
from lenders who provide funds in the form of loans and advances or who
purchase the securities the institution sells. All of these borrowed funds
count as liabilities for the institution, because the thrift is liable for paying
them back.
By far the biggest source of funds is deposits, which accounted for $843.9
billion, or 82.5 percent of the more than $1.0 trillion in aggregate thrift
liabilities at the end of 1985. The more common deposit accounts offered by
thrifts include passbook (or statement) accounts, money market deposit
accounts, negotiable order of withdrawal accounts, and certificates of deposit.
When a thrift institution needs more money than is supplied by deposits,
it borrows, often from its district federal home loan bank. A thrift can also
secure funds by selling stock, selling mortgage loans or mortgage-backed
securities, and selling commercial paper. And a sizable amount of funds
flows into thrifts each month, as customers make payments on mortgages
and other loans. Thrifts also generate income from retained earnings;
various reserve funds; profits from operations of service corporations; and
interest on funds deposited with district banks, commercial banks, or other
thrift institutions.
Uses of Funds
Thrift institutions use their funds primarily to finance home ownership,
both through construction loans allowing builders to erect housing and
through mortgages allowing buyers to purchase housing. Outstanding loans
are considered part of a thrift institution's assets, because they are investments placed with borrowers that are expected to be repaid with interest.
Nearly all mortgages written in the early 1980s by thrifts have been
conventional loans, that is, loans not insured or guaranteed by an agency of
the U.S. government. During 1985, for example, 97 .6 percent of the dollar
amount of mortgages originated by savings and loan associations for oneto four-family dwellings was in conventional loans, 1.2 percent was
guaranteed by the Veterans Administration, and 1.2 percent was insured by
the Federal Housing Administration.
For years, thrifts relied on the long-term, fixed-rate, fully amortized (paid
off) mortgage. But the fixed-rate mortgage crippled the thrift industry in the
early 1980s, as the deregulated interest rates that institutions paid out on
savings rose far higher than the fixed interest rates they earned on the
71
A Guide to the Federal Home Loan Bank System
mortgages they held.
So that thrifts could better match mortgage (asset) rates and maturities
with the rates and maturities of their deposits (liabilities), and so that
borrowers could afford mortgages at a time of unusually high interest rates,
the Bank Board in the early 1980s authorized thrift institutions to offer a
wide assortment of mortgages. Many of these mortgages were variations of
the adjustable-rate mortgage (ARM), under which the interest rate rises or
falls depending on a national or regional financial index. Today's mortgages
often combine features from several of the common types of mortgage
loans.
Some 65 percent of American households own their own homes, and
thrift institutions financed more than 40 percent of those homes. The thrift
industry thus holds a special place, not only in the U.S. financial industry,
but also in the lives of the nation's citizens. Home ownership has been an
American ideal from the beginning-and from the beginning, thrift institutions have helped to make that ideal reality.
72
APPENDIXES
Appendix A
Addresses and Telephone Numbers
FEDERAL HOME LOAN BANK SYSTEM
Federal Home Loan Bank Board
1700 G Street, N.W.
Washington, D.C. 20552
Telephone: 202/377-6000
Federal Savings & Loan Insurance Corporation
1700 G Street, N.W.
Washington, D.C. 20552
Telephone: 202/377-6000
Office of Finance, Federal Home Loan Banks
65515th Street, N.W., Suite 850
Washington, D.C. 20005
Mail: P.O. Box 28323
Washington, D.C. 20038
Telephone: 202/272-4900
Office of Regulatory Policy, Oversight and Supervision
900 19th Street, N.W., 6th floor
Washington, D.C. 20006
Telephone: 202/887-0145
Federal Asset Disposition Association
One Market Plaza
Spear Street Tower, 38th floor
San Francisco, California 94105
Telephone: 415/543-3232
73
A Guide to the Federal Home Loan Bank System
FHLB System Publication Corporation
655 15th Street, N.W., Suite 510
Washington, D.C. 20005
Telephone: 202/272-4800
FHLB System Office of Education
580 Decker Drive, Suite A-1-101
Irving, Texas 75062
Telephone: 214/258-0464
Neighborhood Reinvestment Corporation
1325 G Street, N.W., Suite 800
Washington, D.C. 20005
Telephone: 202/376-2400
Federal Home Loan Mortgage Corporation
1776 G Street, N.W.
Washington, D.C. 20013
Telephone: 202/789-4700
FEDERAL HOME LOAN BANKS
Federal Home Loan Bank of Boston
One Financial Center, 20th Floor
Boston, Massachusetts 02111
Mail: P.O. Box 9106 GMF
Boston, Massachusetts 02205-9106
Telephone: 617 /542-0150
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
Federal Home Loan Bank of New York
One World Trade Center, Floor 103
New York, New York 10048
Telephone: 212/912-4600
New Jersey
New York
Puerto Rico
Virgin Islands
Federal Home Loan Bank of Pittsburgh
One Riverfront Center
20 Stanwix Street
Pittsburgh, Pennsylvania 15222-4893
Telephone: 412/288-3400
Delaware
Pennsylvania
West Virginia
74
Appendix A
Federal Home loan Bank of Atlanta
1475 Peachtree Street, N.E.
Atlanta, Georgia 30309
Mail: P.O. Box 105565
Peachtree Center Station
Atlanta, Georgia 30348
Telephone: 404/888-8000
Alabama
District of Columbia
Florida
Georgia
Maryland
North Carolina
South Carolina
Virginia
Federal Home loan Bank of Cincinnati
2000 Atrium II
221 East Fourth Street
Cincinnati, Ohio 45202
Mail: P.O. Box 598
Cincinnati, Ohio 45201
Telephone: 513/852-7500
Kentucky
Ohio
Tennessee
Federal Home loan Bank of Indianapolis
1350 Merchants Plaza, South Tower
115 West Washington Street
Indianapolis, Indiana 46204
Mail: P.O. Box 60
Indianapolis, Indiana 46206-0060
Telephone: 317 /631-0130
Indiana
Michigan
Federal Home loan Bank of Chicago
111 East Wacker Drive, Suite 800
Chicago, Illinois 60601
Telephone: 312/565-5700
Illinois
Wisconsin
Federal Home loan Bank of Des Moines
907 Walnut Street
Des Moines, Iowa 50309
Telephone: 515/243-4211
Iowa
Minnesota
Missouri
North Dakota
South Dakota
Federal Home loan Bank of Dallas
500 E. John Carpenter Freeway
Irving, Texas 75062
Mail: P.O. Box 619026
Dallas/Ft. Worth, Texas 75261-9026
Telephone: 214/659-8500
Arkansas
Louisiana
Mississippi
New Mexico
Texas
75
A Guide to the Federal Home Loan Bank System
Federal Home Loan Bank of Topeka
No. 3 Townsite Plaza
120 East 6th Street
Topeka, Kansas 66603
Mail: P.O. Box 176
Topeka,Kansas66601
Telephone: 913/233-0508
Colorado
Kansas
Nebraska
Oklahoma
Federal Home Loan Bank of San Francisco
600 California Street
San Francisco, California 94108
Mail: P.O. Box 7948
San Francisco, California 94120
Telephone: 415/393-1000
Arizona
California
Nevada
Federal Home Loan Bank of Seattle
1501 4th Avenue
Seattle, Washington 98101-1693
Telephone: 206/340-2300
Alaska
Hawaii
Idaho
Montana
Oregon
Utah
Washington
Wyoming
Guam
Pacific Islands
AppendixB
Legislative Milestones
1932 Federal Home
Loan Bank Act
Established the Federal Home Loan Bank System-the Bank Board and district banks-to
serve as a reserve credit system for member
savings and loan associations, savings banks,
and life insurance companies.
1933 Home Owners'
Loan Act
Permitted granting of federal charters to savings
and loan associations; established the Home Owners' Loan Corporation, allowing lending institutions to exchange delinquent mortgages for Home
Owners' Loan Corporation bonds.
76
Appendix B
1934 National
Housing Ad
Established the Federal Savings and Loan Insurance Corporation to insure savings accounts and
to prevent default of insured institutions.
1964 Housing Ad
Permitted federally chartered associations to offer unsecured loans for educational expenses, the
first time federally chartered thrift institutions
had been authorized to lend money for purposes
other than real estate financing. Expanded the
area in which an institution could lend from a
radius of 50 miles to 100 miles from the institution's main office. Permitted associations to purchase securities issued by federal agencies, states,
and municipalities.
1966 Interest Rate
Adjustment Ad
Allowed the Federal Home Loan Bank Board to
establish ceilings on interest rates paid by member institutions on various types of savings
accounts.
1966 Financial
Institutions
Supervisory Ad
Required immediate compliance by thrift institutions with cease and desist orders issued by the
Bank Board to correct unsafe or unsound practices of the institution. The act also authorized
the Bank Board to remove officers and directors
of associations which engage in such practices, or
which violate law or federal regulation.
1968 Consumer Credit
Protection Ad
(Truth in lending)
(Regulation Z)
Required lenders to disclose to borrowers all
terms of credit arrangements, including the cost
of financing over the life of a loan.
1968 Housing Ad
Amended the charter of the Federal National
Mortgage Association (FNMA) to tum the former
government agency into a private organization
to purchase mortgages in the secondary market.
The act transferred FNMA's housing subsidy
function to the newly formed, government-owned
Government National Mortgage Association.
77
A Guide to the Federal Home Loan Bank System
1968 Housing and
Urban Development
Act
Gave federally chartered associations the authority to invest in mobile home and home equipment loans. The law also permitted federal
associations to issue a wide variety of savings
plans, notes, bonds, and debentures.
1970 Emergency
Home Finance Act
Created the Federal Home Loan Mortgage Corporation to increase the supply of funds for
housing. The corporation established and fostered a secondary market for conventional mortgages, allowing new mortgages to be made with
funds from the sale of existing mortgages. The
act also permitted federally chartered savings
and loan associations to make loans anywhere in
their home states.
1974 Equal Credit
Opportunity Act
(Regulation B)
Prohibited discrimination in credit transactions
on the basis of sex, marital status, race, color,
religion, national origin, receipt of public assistance benefits, or the borrower's good faith
exercise of rights under the Consumer Credit
Protection Act.
1974 Real Estate
Settlement
Procedures Act
As amended in 1976, the act required lenders to
inform loan customers in advance of the total
estimated charges to be assessed in granting
mortgages.
1975 Home Mortgage
Disclosure Act
Required most depository institutions to disclose
to the public the number and dollar amount of
mortgage loans they originate or buy in each
census tract.
1977 Community
Reinvestment Act
Required financial institutions to meet the credit
needs of all segments of their communities, including low- and moderate-income neighborhoods.
1978 Financial
Institutions
Regulatory and
Interest Rate
Control Act
Gave the Federal Savings and Loan Insurance
Corporation (FSLIC) an important new tool in
dealing with insolvent thrift institutions. The act
authorized the FSLIC to contribute financial assistance in arranging the merger or acquisition of
a failed institution by a strong institution.
78
Appendix B
1978 Housing and
Community
Development Act
Created the Neighborhood Reinvestment Corporation which institutionalized the development
of Neighborhood Housing Services programs
begun by the Urban Reinvestment Task Force to
revitalize decaying neighborhoods.
1980 Depository
Institutions
Deregulation
and Monetary
Control Act
Created the Depository Institutions Deregulation
Committee made up of the heads of the federal
financial regulatory agencies. The committee was
charged with phasing out ceilings on all interest
rates offered by financial institutions, by 1986.
1982GamStGermain
Depository
Institutions Act
Gave the Federal Savings and Loan Insurance
Corporation new power to deal with financially
troubled institutions, including the authority to
overrule state authorities in seizing insolvent,
state-chartered, FSLIC-insured institutions, and
if necessary, to merge them with out-of-state
institutions. Authorized an emergency federal
assistance program to help qualifying FSLICinsured institutions survive a period of severe
economic pressure. Removed all differences between savings and loan associations and savings
banks in the kinds of business activities in which
they may engage. Permitted thrift institutions to
offer checking accounts, business, agriculture,
and consumer loans, and a money market deposit account with a floating market rate of
interest to attract savings. Ended the interest rate
differential under which thrift institutions had
been authorized since 1966 to pay a slightly
higher interest rate than commercial banks.
79
A Guide to the Federal Home Loan Bank System
AppendixC
Members of the Federal Home Loan Bank Board
Name
MEMBERS OF THE
FEDERAL HOME LOAN
BANK BOARD
Federal Home Loan
Bank Board,
July 22, 1932, to
February 24, 1941
(five members;
six-year terms)
FEDERAL HOME LOAN
BANK ADMINISTRATION
1. John M. Gries (R)
2. William E. Best (R)
3. Franklin W. Fort (R)
Chairman 8/32-3/33
4. Nathan Adams (D)
5. Morton Bodfish (D)
6. William F. Stevenson (D)
Chairman 3/33-11/33
7. T.D. Webb (D)
8. Carroll B. Merriam (R)
9. Russell Hawkins (R)
10. John H. Fahey (D)
Chairman 11/33-2/42
11. Walter H. Newton (R)
12. Fred W. Catlett (R)
13. Henry E. Hoagland (R)
14. William H. Husband (R)
15. Frank W. Hancock, Jr. (D)
16. John H. Fahey (D)
Commissioner
Tenure on the Board
8/32-3/33
8/32-3/33
8/32-3/33
8/32-11/32
8/32-3/33
3/33-7 /38
3/33-2/42
4/33-6/33
6/33-1/34
6/33-2/42
6/33-7/34
4/34-2/42
9/34-10/37
11/37-2/42
1/39-2/42
2/42-7/47
February 24, 1942,
to July 26, 1947
(one commissioner)
MEMBERS OF THE
FEDERAL HOME LOAN
BANK BOARD
Federal Home Loan
Bank Board
July 26, 1947, to
August 11, 1955
(three members,
four-year terms)
80
17. John H. Fahey (D)
Chairman 7/47-12/47
18. J. Alston Adams (R)
19. Nathaniel Dyke, Jr. (D)
20. William K. Divers (D)
Chairman 12/47-8/53
21. Oscar K. LaRoque (D)
22. Kenneth G. Heisler (D)
23. Walter W. McAllister (R)
Chairman 8/53-9/56
24. Ira A. Dixon (R)
25. William J. Hallahan (D)
7 /47-12/47
8/47-6/53
8/47-12/47
12/47-12/54
4/48-3/51
8/51-6/53
8/53-9/56
9/54-6/62
8/55-8/60
AppendixC
FEDERAL HOME LOAN
BANK BOARD
Independent AgencyAugust 11, 1955, to
present (three members; four-year
terms)
26. Albert J. Robertson (R)
Chairman 9/56-1/61
9/56-1/61
27. Joseph J. Williams, Jr. (D)
28. Joseph P. McMurray (D)
Chairman 5/61-1/65
29. John de Laittre (R)
30. John E. Horne (D)
Chairman 1/65-12/68
31. Michael Greenebaum (D)
32. Robert L. Rand (R)
Acting Chairman 11/68-3/69
33. Preston Martin (R)
Chairman 3/69-12/72
34. Thomas Hal Clarke (D)
35. Carl 0. Kamp, Jr. (R)
Acting Chairman 12/72-6/73
36. Thomas R. Bomar (R)
Chairman 6/73-6/75
37. Garth Marston (R)
Acting Chairman 6/75-12/76
Chairman 12/76-8/77
38. Grady Perry, Jr. (D)
39. Robert H. McKinney (D)
Chairman 8/77-6/79
40. Anita Miller (D)
Acting Chairman 7 /79-9/79
41. Andrew A. DiPrete (R)
42. Jay Janis (D)
Chairman 9/79-12/80
43. John H. Dalton (D)
Chairman 12/80-4/81
44. Richard T. Pratt (R)
Chairman 4/81-4/83
45. James Jay Jackson (D)
46. Edwin J. Gray (R)
Chairman 5/834 7. Donald I. Hovde (R)
48. Mary A. Grigsby (D)
49. Lee H. Henkel, Jr. (R)
50. Lawrence J. White (D)
9/60-6/63
5/61-1/65
9/62-6/66
8/63-12/68
4/65-6/65
9/66-3/69
3/69-12/72
7/69-6/73
5/69-8/73
6/73-6/75
3/74-10/78
5/73-6/77
8/77-6/79
7 /78-11/79
6/79-7 /82
9/79-12/80
2/80-7/81
4/81-4/83
3/82-8/83
3/836/83-10/86
2/84-8/86
11/86-4/87
11/86-
81
A Guide to the Federal Home Loan Bank System
AppendixD
Abbreviations and Acronyms
ADC
ARM
CD
CFR
CFTC
CMO
CPI
DIDC
EFTS
FADA
FASB
FDIC
FHA
FHLB
FHLBB
FHLB System
FHLMC
FmHA
FNMA
FSLAC
FSLIC
GAAP
GNMA
HOLC
ICC
MACRO
MCC
MMC
MMDA
NCUA
NHS
NRC
NOW
NWC
occ
PC
PITI
82
acquisition, development, and construction (loan)
adjustable-rate mortgage
certificate of deposit
Code of Federal Regulations
Commodity Future5 Trading Commission
collateralized mortgage obligation
Consumer Price Index
Depository Institutions Deregulation Committee
electronic funds transfer system
Federal Asset Disposition Association
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Federal Housing Administration
federal home loan bank
Federal Home Loan Bank Board
Federal Home Loan Bank System
Federal Home Loan Mortgage Corporation
Farmers Home Administration
Federal National Mortgage Association
Federal Savings and Loan Advisory Committee
Federal Savings and Loan Insurance Corporation
generally accepted accounting principles
Government National Mortgage Association
Home Owners' Loan Corporation
income capital certificate
management, asset quality, capital adequacy, risk
management, and operating results
mutual capital certificate
money market certificate
money market deposit account
National Credit Union Administration
Neighborhood Housing Services
Neighborhood Reinvestment Corporation
negotiable order of withdrawal
net worth certificate
Office of the Comptroller of the Currency
participation certificate
principal, interest, taxes, and insurance
Appendix D
PMI
PSA
RAP
REIT
REMIC
REO
USC
private mortgage insurance
principal supervisory agent
regulatory accounting principles
real estate investment trust
real estate mortgage investment conduit
real estate owned
United States Code
83
@FedFRASER