Federal Home Loan Banks:
Too Soon to Tell the Potential Impact of Excess Stock Rule on the Affordable Housing Program
GAO-07-878R: Published: Jun 22, 2007. Publicly Released: Jun 22, 2007.
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Affordable housing organizations and Federal Home Loan Bank (FHLBank) members have raised concerns that a Federal Housing Finance Board (FHFB) rule limiting excess stock could adversely impact FHLBank earnings. In particular, concerns have been raised regarding the FHLBanks' Affordable Housing Program (AHP), which subsidizes the cost of affordable housing with funds from the 12 FHLBanks, all of whom are required to contribute a minimum of 10 percent of their prior year's net earnings to the program, subject to a minimum annual combined contribution of $100 million. Congress asked us to examine the impact of FHFB's rule making on AHP. Specifically, this report describes (1) the results of FHFB's rule making and the provisions of the final rule on excess stock, and (2) the potential impact of the final rule on AHP.
The FHFB adopted a final rule in December 2006 limiting the ability of FHLBanks to create member excess stock under certain circumstances. The key features of the proposed rule were a limit on excess stock at each bank to one percent of its total assets, an absolute ban on the payment of stock dividends and sales of excess stock to members, and a requirement that banks with outstanding excess stock greater than one percent of assets develop a plan to reduce their excess stock to one percent. The final rule addresses FHFB concerns about how excess stock could affect the FHLBanks System's mission. The FHFB also addressed safety and soundness concerns in its rule making. Since FHLBanks have generally redeemed excess stock upon the request of a member, FHFB officials do not believe that member excess stock is a stable source of capitalization, particularly when it is used to capitalize long-term assets, and because FHLBanks could experience large-scale repurchase (stock redemption) requests in a short period of time. The final rule may have an impact on the FHLBanks' AHP, but FHLBank and trade group officials stated it is too early to tell. FHLBank officials stated that it is too early to make an accurate assessment whether FHLBank capital growth may decrease, by how much, and to what extent this could affect earnings and contributions to AHP. Trade group officials stated there has not been a noticeable impact on AHP subsidies for projects, but the situation could change based on what happens to the banks over time.