March 18, 2005
At the Bank
Remarks of Alfred A. DelliBovi, President and CEO
Federal Home Loan Bank of New York
New Jersey Bankers Association
2005 Annual Convention
New Orleans, Louisiana
Thank you very much, Jim, for your kind introduction. I want to thank you for the invitation to be a part of the 2005 Annual Convention. And let me say it is a pleasure to be here with all of you today. The warmth and hospitality of the City of New Orleans create a wonderful environment to renew old friendships and make new ones. The commercial bankers of New Jersey are vital partners of the Federal Home Loan Bank, and we appreciate the opportunity to work with you. We are, well, how else can I say it, "Perfect together."
Also it is a pleasure to work with Jim and the outstanding team at the New Jersey Bankers Association, not only at convention time, but throughout the year as well. They do a great job for our industry. I would also like to commend the staff of the New Jersey Bankers led by Stuart Cameron. Your voice is clearly heard in Trenton as well as in Washington, D.C.
And I would like to recognize a former director of the Home Loan Bank, Michael Horn, partner with the law firm of McCarter & English, a former Commissioner of Banking, Treasurer of the State -- at a time when the budgets were printed in black ink -- and a true friend of Community Banking. Mike, it is good to see you.
It is a real pleasure to join all of you here in historic and beautiful New Orleans. The Crescent City was founded by the French in 1718 and became part of United States as a result of the Louisiana Purchase in 1803. It is the site of the famous Battle of New Orleans, fought on January 8, 1815. It was a decisive battle of the War of 1812. On that winter’s morning, the British suffered over 2,000 casualties; whereas, the Americans, under General Andrew Jackson, lost only 71 men. Why such lopsided casualties? Most historians agree the British defeat was a result of attacking during a heavy fog compounded by confused generalship.
This morning I would like to address a different battle. One that is occurring now. One that involves major economic forces. And one in which fog and confusion could have equally disastrous consequences. But this time not for British soldiers. The coming disaster that worries me may befall the average American who wants to own a home or start or expand a business. The battle to which I refer surrounds the Government Sponsored Enterprises regulatory reform legislation that the policymakers in D.C. are debating and getting ready to act upon.
The skirmishes surrounding this matter began with the Freddie Mac problems in 2003. Then we saw the developments at Fannie Mae during 2004. And as you might recall, in response last year, the Senate Banking Committee passed a bill that created a new, independent regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The 108th Congress ended without any further action on this measure.
Here let me pause to point out that last year, the Home Loan Banks were very much a secondary issue in the legislative debate. Many were wondering if there was a need to include the Bank System at all. But in the end, the Bank System was included. And the provisions contained in the Senate bill treated our Bank System fairly.
This year the Congressional debate on GSEs has already begun. In the Senate, Senators Dole, Hagel, and Sununu have introduced S.190, the Federal Housing Enterprise Regulatory Reform Act of 2005. Undoubtedly, the House of Representatives will soon be considering their own measures.
Today, as in 2004, we will continue to support the objective to fix the problems that have arisen in Fannie Mae and Freddie Mac. The FHLBanks believe it is critical that such legislation preserve the mission of the FHLBanks, provide for a strong, independent regulator, preserve the funding for the FHLBank System, and preserve the unique regional cooperative nature of the FHLBank System. The enactment of a bill by Congress and the Administration meeting these objectives would be a very positive development and improve the regulatory environment.
However, some in D.C. are trying to take this legislation down a different path and fog the issue. They would confuse the issues. They are trying to divert the legislative attention away from fixing the regulatory problem, seeking to change the charters of the GSEs. For Home Loan Bank members, this is a dangerous path that has the potential to destroy the Home Loan Bank System we know today. Some have suggested that the Home Loan Banks be given the authority to securitize mortgages so that the Bank System can compete head-to-head with Fannie Mae and Freddie Mac; others have seconded this suggestion of securitization in order to confuse the main thrust of the legislation and to create a legislative fog that will hinder if not stop the GSE reform.
Securitization would involve opening up the charters of the GSEs. A wrong path at the wrong time. Why? Securitization has the potential to change the very nature of the Home Loan Bank System. It would change our focus of serving community banks through conservative and time-tested “advance lending.” Instead, we would be asked to cater to the wants of the too-big-to-fail originators and the investors on Wall Street.
And the increased operations risk of securitizing for the Home Loan Banks would be enormous. In fact, the infrastructure needed to implement securitization raises a host of unanswered questions. For instance, would each of 12 Home Loan Banks issue its own mortgage-backed securities? OR would there be a central organization issuing securities? Will a holding company need to be created? Is this the first step on the road to consolidation of twelve independent Home Loan Banks into the third Fan and Fred? Do the Home Loan Banks even have the knowledge, skills, and experience to securitize mortgages?
Certainly recent stories about issues relating to accounting for mortgages and securitization have demonstrated that there are big risks involved when embarking in a major new direction without a bulletproof plan for execution. These are very risky businesses. Don't take my word. Ask Leland Brendsel, or Frank Raines.
These are serious questions and no one has even begun to take the time or make the effort to find the answers.
Few question that the Home Loan Banks have an important niche in the housing market. A niche that is a direct benefit to the community banks and the communities in which they operate. It is a franchise that has been built over decades. So, why should the successful operating model of the Home Loan Banks be threatened or changed to fulfill a theoretical dream some have of increased competition for Fannie and Freddie?
I recognize that some people may find this model boring. But if people are looking for excitement, I say don't go to the Home Loan Banks. Come to New Orleans!
I have yet to be shown a compelling case to abandon the tried and proven advance/collateral model of the Home Loan Banks.
Our 8,100 members have $40 billion in capital invested in the 12 Home Loan Banks. At the very least, our members and their trade groups should have the ability to analyze such suggestions and provide considered and substantial comment before any radical surgery is performed.
In some ways this issue boils down right now to a simple question: should the Home Loan Banks be used as a hammer to bash Fan and Fred? Without question, that is not the mission of the Federal Home Loan Banks.
The mission of the Home Loan Banks is to advance housing opportunities and local community development by maximizing the capacity of our community-based members lenders to serve their markets.
At the Federal Home Loan Bank of New York, management and the Board of Directors have chosen to focus the Bank on the business of providing a range of low-cost, low-risk advance products to our members. At the same time, we offer a limited and focused alternative to the secondary mortgage market. We recognize that a number of members have found the Bank’s Mortgage Partnership Finance program to be an effective liquidity tool for their organizations. This is especially true for MPF Participating Financial Institutions that do not produce the large volumes of mortgages required to qualify for the best pricing from Fan and Fred.
Today, MPF assets held by the Bank amount to $1.2 billion, less than 2% of the Bank’s $83 billion balance sheet. Over 75% of the Bank’s assets are advances. We think that maintaining this balance sheet structure is consistent with the Bank’s low-risk business model. Unrestrained growth in MPF assets may not be.
To ensure the Bank will continue to have the capacity to serve our PFIs while prudently managing growth, we have implemented caps on future MPF deliveries. Effective March 15, 2005, the Bank limits deliveries under future Master Commitments for each PFI to $100 million annually. Existing commitments for larger amounts will be honored but will not be renewed. The vast majority of PFIs will be unaffected by this cap (March 18, 2005 MPF Press Release, March 8, 2005 Letter to PFIs).
We understand the MPF program has become an important tool for many of our members. By taking this action, we are building a firm foundation for continued availability of MPF in this District.
Now, getting back to the debate in Washington, other actors in that town are using the GSE regulatory reform legislation as a vehicle to attack or diminish Home Loan Bank ability to make advances. Some have thrown on the table the idea of limiting our members’ use of advances by such devices as a Qualified Lender Test or requiring you, our member lenders, to prove that advances were used specifically for housing purposes.
All of our members are either credit unions or regulated financial institutions subject to the Community Reinvestment Act. So there is no need to create duplicative regulatory processes to determine if their community lending is “mission” related.
At the Federal Home Loan Bank of New York, we have focused on being a conservative “advances” Home Loan Bank. We provide the credit products that our members have been using since 1933 to help meet the mortgage and community lending needs of their local markets. We work diligently to identify funding opportunities that permit the Home Loan Bank and our community members to fund mortgages for homes and businesses. As a result, approximately 75% of the assets of the Federal Home Loan Bank of New York are in the form of advances to our members. This public/private partnership has helped to make our District’s Main Streets hum with vitality. It is a partnership that should not be damaged.
There is much at stake. Just look at the future housing market. By 2020 it has been estimated that the U.S. population will grow to 340 million people. This means that 1.1 million new households will be formed each year. These families will need new housing. These families will need jobs to pay for all of this.
Let me delve into future demand just a little deeper. The baby boomers -- folks born between 1946 and 1964 -- make up the market for trade-up, up-scale, and vacation homes (it is estimated that they control 70% of the national worth and 50% of the discretionary income). The next generation will become another significant source for homeownership as they begin looking for starter homes after 2010, and they will be key candidates in the trade-up market after 2020.
Because of the growth in population and peak earning years of baby boomers, the homeownership rate is expected to surpass 70% by 2010. So the community banks and the Home Loan Bank System will have their work cut out for them in the years ahead.
The current total value of residential structures is very impressive. It is over $12 trillion. This is a dynamic number. The housing sector directly and indirectly accounts for about 15 to 20 percent of the nation's Gross Domestic Product each year. Achieving and maintaining the "American Dream" has a positive, rippling effect on neighborhood stability, creating wealth, and improving overall economic growth. and creating prosperity. Studies indicate that households spend about 30 to 40 percent of their disposable income on housing-related expenses. Those expenditures help to keep our economy going and help support other sectors of the economy.
We play a vital role in the nation's housing finance by providing unique value to our member community lenders. The value the FHLBanks provide our members is a blend of the modest dividends we pay on members’ capital stock investment, the value of access to stand-by liquidity from the FHLBanks, the availability of short- and long-term funds at attractive rates, and access to other products that make a community lending institution better able to profitably serve the credit needs of its community.
These are the reasons that a majority of public policymakers in Washington created the Federal Home Loan Bank System in the first place. It is a System of liquidity for Main Street lenders that has worked well for more than seventy years.
So, as you reach out to your Senators and Regulators to discuss the GSE regulatory reform legislation, please emphasize three clear points: 1. fix the GSE regulatory structure; 2. don’t damage what is not broken; and 3. don’t be sidetracked by secondary, 11th hour policy proposals.
Another area of discussion in Washington is community reinvestment. While regulators have proposed changes to CRA, fine-tuning the distinction between large and small banks, one thing is certain: community development activities will be an important part of the regulatory landscape. As one of 12 Home Loan Banks chartered by the federal government, we are also committed to community reinvestment. Like our members, we have a mission of promoting affordable housing and community development in our geographic area. I see an opportunity to help each other further our common housing and community development goals. The Home Loan Bank has a wide range of programs to help. One of the more popular is the Community Investment Program, or CIP. The Home Loan Bank offers CIP funds at very-below-market rates as an incentive for member banks to facilitate transactions that promote home financing, housing activity, or financing of commercial and economic development activities that benefit low- and moderate-income families, or activities that are located in low- and moderate-income neighborhoods.
While the CIP advances obviously benefit the specific projects they fund, they also help our member banks by providing a favorably priced source of funding, enhancing CRA performance, increasing profitability, and improving community visibility and public relations. Subsidized CIP advances, both in bullet and amortizing form, are available at below-market rates when the funds are used for the purpose of community development. During the 2004 calendar year, $24.7 million of Community Lending Program advances were granted to member lenders and $9.0 million to New Jersey banks.
Our CIP program is extremely flexible: it encompasses housing as well as commercial development, and subsidized advances can be used for acquisition, construction, rehabilitation, bridge loans, permanent financing, or business loans.
CIP’s housing program includes both owner-occupied and rental units. It is targeted toward individuals with incomes of 115 percent or less of the area median income. CIP’s commercial and economic development program finances facilities that benefit low- and moderate-income families, 51% of which have incomes that do not exceed 80% of the area median income, by providing either services or job creation for low income individuals, or projects which are located in low income neighborhoods, where at least 51% of families have incomes at 80% or below the median.
Successful projects under this program have included grocery stores, daycare centers, health care facilities, manufacturing plants, small business loans, and retail outlets.
A number of our members in New Jersey have taken advantage of these valuable programs. In Trenton, New Jersey, the Yardville National Bank has a $1 million CIP loan to capitalize a CRA Loan Program featuring 30-year fixed, 5-year ARMs, and 3-year ARMs. The CRA Loan program offers mortgage rates that are 100 bps below Yardville’s posted rates for low-income households and 50 bps below their posted rates for households with incomes up to the median. The program is available in the Trenton area and provides mortgages up to $100,000 with a 5 percent down payment and borrower pre-purchase counseling required for LTV’s over 90 percent. The application requested CIP funds to capitalize a specific home mortgage loan program that targeted households with incomes at 80 percent to 100 percent of the median.
And in Laurence Harbor, New Jersey, which is in Middlesex County, Amboy National Bank tapped a $560,000 CIP Advance to provide a 15-year first mortgage for a small commercial building. This application is the first CIP application resulting from a joint program between the Bank and the New Jersey Economic Development Association. NJEDA, through its Corporation for Business Assistance, acted as a facilitator in this project and arranged for a loan from the SBA 504 Program for 40 percent of the TDC of this project. NJEDA also serviced the SBA loan. The project itself involved the purchase and renovation of an existing commercial property in Laurance Harbor. The NJEDA provided documentation that 51% of the 15 existing employees have incomes of 80 percent or less of the area median income. In addition, the SBA 504 program required that one job be created for every $35,000 of 504 program funds loaned. Therefore, the $466,000 SBA loan required that 13.3 new jobs be created.
The Bank also has two additional CIP related programs: the Urban Development Advance and the Rural Development Advance. These programs provide financing of economic development projects targeted toward higher income populations that previously did not qualify under the traditional CIP program. The Rural Development Advance serves populations of 25,000 or less in areas with incomes at 115 percent or less of area median income, while Urban Development Advance is targeted toward populations of greater than 25,000 with incomes at 100 percent or less of area median income.
Under RDA there is a terrific example project in Cape May. Sun National Bank has received an $8.2 million RDA to provide the permanent financing for Congress Hall, the largest historic hotel located in Cape May, New Jersey. The rehabilitation included comprehensive activities, such as retaining the majority of the first-floor retail and dining facilities, restoring the core or central lobby area, creating a conference area, and reopening the guestrooms. The guestrooms were closed in 1994 due to antiquated plumbing and electrical systems. The project called for a complete structural stabilization of the building, the installation of new plumbing, electrical, HVAC, and fire suppression systems, and the restoration of the exterior of the building. The rehabilitation resulted in the restoration of the hotel and its annex, including 103 hotel rooms, a conference area, two restaurants, and 7700 square feet of retail. From an employment perspective, the project created 163 permanent jobs. In the short term, the hotel created up to 350 construction jobs.
We also offer a CIP letter of credit program, where any payment under the letter of credit will be considered a CIP advance. The LOC program has many uses, including credit enhancement of bond issues, performance bonds, collateralization of deposits, and collateralization of tax-exempt bonds. Due to a recent change in New Jersey legislation, many of our members have been taking advantage of our municipal letter of credit to collateralize municipal deposits, thereby freeing up the securities portfolio for other uses and improving the overall liquidity of their institutions.
The application process for these CIP programs is straightforward, and we have a dedicated community investment staff who are happy to work through any questions or issues you might encounter. If you feel one of your projects might qualify for a CIP program, by all means speak to your Calling Officer. Don’t pass up the opportunity for below-market funding by assuming that your project doesn’t qualify. Our CIP program is very flexible, and with a little guidance and creativity, many loans have qualified for CIP that at first glance were not traditional community investment programs.
Our CIP programs are worth a close look, especially in this current regulatory environment, with its increased scrutiny of compliance and community investment issues. Working with the Home Loan Bank as your partner, you can obtain below-market funding to finance your lending activities, while simultaneously strengthening your CRA program. You’ll certainly have a better story to tell when exam time comes around. I encourage you, as a valued shareholder in our Bank, to take advantage of these innovative programs. Let me introduce two of our Vice Presidents who are enjoying your meeting and the Crescent City's hospitality: Maureen Kalena and Adam Goldstein. They are here to help answer your questions about any of our products and each would be pleased to explain how our Community Investment Products can work for you.
That brings me to my final message this morning. The legislative stakes in Congress are high. It is important that policy makers in D.C. fix what is broken and not be led down different paths by groups who would take advantage of the situation at the cost of community banks or by other groups who want to stall the bill. The Home Loan Bank System is strong. The Home Loan Bank system is a proven partner. The Home Loan Bank System is one that will enable you to ensure that Main Street remains open and competitive.
Thanks again and I hope the rest of the convention is a success.
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Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report may contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of the date hereof. These statements may use forward-looking terms, such as "projected," "expects," "may," or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, regulatory and accounting rule adjustments or requirements, changes in interest rates, changes in projected business volumes, changes in prepayment speeds on mortgage assets, the cost of our funding, changes in our membership profile, the withdrawal of one or more large members, competitive pressures, shifts in demand for our products, and general economic conditions. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.