A government sponsored enterprise wants to start buying mortgage backed securities (MBS), and its not Fannie Mae or Freddie Mac.
The Federal Home Loan Bank of Seattle announced yesterday that it filed an application with its regulator, the Federal Housing Finance Board, for the approval to buy MBS from its cooperative bank members and resell them to its member financial institutions, those of other Federal Home Loan Banks (FHLBs) and investors outside the system.
The move would place the Seattle FHLB in greater competition with Fannie and Freddie -- which collectively manage around $3.7 trillion in MBS and have been facing declining purchases as mortgage bankers clear out what appears to be some of the last pools of loans from the greatest refinance wave in history.
"The Seattle FHLB and other Home Loan Banks were urged to compete in the secondary mortgage market by the members of our system -- the nation's home lenders who own our cooperative," the Seattle FHLBs CEO and president Norman Rice said in a written statement. "These home lenders can better serve consumers -- the nation's homebuyers -- when there are choices and competition in the secondary mortgage market."
Currently, under its mortgage purchasing program, the government-sponsored enterprise can only purchase mortgage loans, not securities, and hold them in a portfolio.
If approved, an extension of the program for the buying of securities -- MortgageChoice -- will allow the Seattle FHLB to offer a secondary market alternative for mortgages. The extension is designed to reduce market risk through the purchase of securities instead of individual mortgages, which means the bank will own "a much more liquid and transparent asset that can be readily sold from its balance sheet, when appropriate," the Seattle FHLB said.
The financial institution added that it plans to purchase only the highest-rated securities -- AAA or AA -- and that, "unlike the securities of other housing GSEs," these will comply with all Securities and Exchange Commission registration and disclosure requirements. Such compliance will allow rating agencies, investors and regulators to accurately assess the risks associated with the securities created, which will not be guaranteed by the Seattle FHLB, according to the announcement.
The Seattle FHLB said compliance and other factors involving MortgageChoice securities would limit the risks to taxpayers, and that consumers would benefit as profits obtained from the program would increase grant funds for the construction and rehabilitation of houses and apartments for low-and very-low income households.
Apart from being cooperatively owned, the Seattle FHLB pointed out that another important difference between the FHLBs and publicly traded and investor-owned Fannie and Freddie is that the FHLBs contribute 10% of their profits to affordable housing grants. The federally chartered bank network is reportedly the largest source of such grants in the nation, and in 2003 contributed $200 million.