FHLB System Emerges as New White Knight for CU Mortgage Finance
CU Times Senior Correspondent
MERRIFIELD, Va. -- Credit unions, particularly those bent on expanding their mortgage business while seeking rate protection and liquidity, have a budding romance these days with the Federal Home Loan Bank System.
Many of the 12 regional banks in the network have emerged as favored white knights, as one CU executive put it, in their mission of helping fund CUs' long-term portfolios.
While corporates remain the prime go-to liquidity vehicle for nonmortgage business, the Home Loan Banks are viewed now as experienced, reliable and consistent funding players with accommodating and friendly staffs.
"We found our two cultures as nonprofit cooperatives to be quite similar," observed Alan D. MacEachin, Navy Federal vice president of asset-liability management and treasury operations, which began membership in the Federal Home Loan Bank of Atlanta in 1999 but only began using the bank on a regular basis two years ago.
Like other CU executives across the U.S., MacEachin finds FHLB employees "very professional and understanding of the credit union structure."
In addition, he said Navy Federal has found that the bank's price structure is particularly appealing "since it is the cheapest source of long-term financing." That's important to the $35 billion Navy Federal because at it size it is too big to meet funding needs through corporates alone.
Navy Federal executed its first matched-borrowing of projected cash flows to mortgages in August 2006 using a blend of what Navy Federal calls its expander loans, allowing for the optional expansion of principal at pre-set rates at specified future dates. This, said MacEachin, allows the CU to hedge the risk of its mortgage pools.
Later, as the portfolio has grown in size and diversification, Navy Federal, MacEachin said, began to finance originations with laddered bullet loans, those with fixed maturity dates with interest-only payments until maturity.
"Our analysis indicated that we could mix various maturity bullet loans and obtain sufficient interest rate risk protection without incurring the added expense associated with the expander loans."
Meanwhile, hedging the risk through the regional FHLB has been the vehicle of choice for countless other CUs that find themselves courted by the banks eager to grow their membership beyond savings and loans, savings banks and commercial banks.
Still, CUs have a minority position in many of the regional banks.
"We are seeing a steady increase in the numbers of credit unions joining our bank," said Steve Traynor, senior vice president and financial services and community investment for the FHLB of San Francisco.
In recent months the San Francisco bank, which counts 97 CUs among its 409 members, has taken on what many CU executives see as special steps to promote itself among CUs by portraying them in a favorable light.
FHLB officials, however, insist they are not doing anything extraordinary except as part of their ongoing effort to solicit new members. However, they also are showing a willingness to help fund CU seminars and events, noting they have been one of the official sponsors and exhibitors at California and Nevada Credit Union Leagues meetings.
The $1.1 billion Arizona State Credit Union was particularly pleased in April to get a featured write up in the FHLB's 2007 annual report, which contained comments by David Doss, president/CEO of the Phoenix CU, outlining membership advantages as a strategic partner.
"As we grow our loan portfolio and our loan-to-deposit ratio increases, accessing bank advances enables us to add efficiency and profitability to our organization," explained Doss.
Apart from using the agency's financing vehicles, the FHLB has also proved useful in product development and obtaining two separate grants in communities where it has branches, according to Doss. They include a $600,000 affordable housing grant in Flagstaff and a $25,000 training grant in Tucson.
Doss added that his CU leveraged $16 million in mortgage loans last year, and the arrangement helped keep costs down for borrowers. Depending on the particular regional FHLB used by a CU, spreads can run anywhere from 10 to 40 basis points, he said.
The Arizona executive tried but failed more than a year ago to get on the San Francisco bank board, a recurring theme among credit union executives. "I expressed an interest in the job," said Doss noting that to his dismay the winner was a local banker.
Currently, Tom Webb is the sole CU representative on a regional bank board. He is vice president and chief financial officer of the $308 million IDB-ILC FCU of Washington and has been an elected member of the Federal Home Loan Bank of Atlanta for 18 months.
"I feel privileged to represent credit unions on the Federal Home Loan Bank of Atlanta, which has given our credit union a chance to leverage mortgage business which we otherwise might not have been able to do," said Webb.
He said the bank offers borrowing advance products and clearing services to meet the credit union's needs, adding that the Atlanta bank "seems to understand what we do." The year-to-year borrowing for IDB-ILC, an 8,000 member CU with a membership linked to the InterAmerican Development Bank, has averaged about $28 million but reached as high as $34 million, he said.
Apart from individual CUs, corporates have also been FHLB borrowers in recent months.
"The rates are attractive at 20 to 25 basis points, which makes borrowing helpful to us for our ongoing needs," said Dietmar Huesch, vice president of treasury funding for WesCorp in California.
As for CUs being singled out or discriminated by the elected FHLB hierarchy, officials insist all members are treated alike "and no barriers are placed whatsoever from a business standpoint," said John von Seggern, president of the Council of Federal Home Loan Banks, a Washington trade group.
For one, the Federal Home Loan Bank of Boston said it periodically features testimonials "as to why and how credit unions do business with the bank." Its 2007 annual report highlighted People's CU of Rhode Island, Middletown, quoting Craig E. Leonard, executive vice president of People's, citing the benefits of balance-sheet management.
The Boston bank, wrote Leonard, makes up "for retail deposits, drives our asset growth and keeps us viable for the long term."
With funding competitively priced, "we sometimes let high-yield deposits go out the door knowing we can replace these funds at a lower price cost."
Another FHLB of Atlanta member, the $2.8 billion Delta Community CU of Atlanta, said it too has become active in the last nine months in short-term borrowings to optimize returns. Delta has been a member since 2001 and finds that "the interest rate spread is there, so we want to take advantage of the maximum," concluded Jay Gratwick, chief financial officer.
Echoing Gratwick, John D. Wright, CFO of the $3.2 billion Desert Schools FCU of Phoenix, noted that at the end of 2007, the Arizona CU took on a $60 million advance to hedge interest rate risk on fixed mortgages.
"We've been extremely satisfied it has all worked out," said Wright. He stressed that a particular coup this month was the naming of Desert Schools as the recipient of a $1 million affordable housing grant from FHLB of San Francisco.
The funds, he said, will be directed to UMOM, a Phoenix agency providing emergency housing assistance. "It is very satisfying to our credit union to get this grant since it is another example of how we're able to devote needed funds to a worthwhile cause," he said.