With Savings Low and Mortgages at Record Levels, CUs Increase FHLB Usage

WASHINGTON — As liquidity has tightened over the last couple of years with savings at record lows and loans at record highs, credit unions are increasingly looking to their Federal Home Loan Banks to fund their mortgage lending.

Credit unions have increased their business with the banks from $9.6 million in advances at mid-year 2004 to $16.3 million as of June 30, 2006. “Over that time period, we've seen pretty strong mortgage demand,” CUNA Senior Economist Steve Rick commented. Combined with the slowest savings growth, credit unions need to look elsewhere to fund the loans.

“The benefits to the credit unions is, one, it keeps cost of funds relatively low…and second, to minimize interest rate risk,” he said.

Pricing was key in Charter Oak Federal Credit Union's decision to borrow $15 million from the FHLB Boston. “We've been a member at least for 15 years though not a very active member until very recently. We've had a need for funds. We certainly would rather [use the corporate system] but, at least the ones we deal with, have been significantly higher,” Charter Oak Chief Financial Officer Brian Orenstein said. The corporates Charter Oak works with have been 30 to 50 basis points higher than the FHLBs, which adds up when you're talking about $15 million, he explained.

But “competitive” pricing is relative, Arkansas Federal Credit Union CEO Larry Biernacki explained. Some are willing to pay a few extra basis points to keep the funds within the credit union movement. He added that he has even seen some corporates beat the FHLBs. “They don't have the same dog in the hunt,” Biernacki emphasized. “The Federal Home Loan Banks do mortgage funding, period.”

Biernacki knows lending having run the lending department at San Antonio Federal Credit Union–which was about 130% loaned out when he left–prior to joining Arkansas a little over a year ago; he is also a reformed savings association executive. His credit union is a member of the FHLB of Dallas. The advantage he explained of the FHLBs is getting the money in advance of making the mortgages, which credit unions can match to their own mortgages, cutting down on interest rate risk.

“The big risk is if rates fall dramatically,” Biernacki said. Then, the credit union can be stuck with a lot of long-term money it is borrowing at a higher than profitable rate. So, he said, “You're looking for trends and to continue to meet the need for your members.” Arkansas FCU has about $10 million in advance from the FHLB of Dallas to fund a few months of his credit union's mortgages.

“One day, we probably will [move away from the FHLB]. We'd certainly love to replace these borrowings with member shares,” Orenstein commented. However, he added that he does not see that happening in the near-term.

Charter Oak holds about $1 million in stock in the bank at a yield of around 5.5% now, according to Orenstein.

“We certainly utilize our corporates for short-term [lending],” 66 Federal Credit Union CEO Kelly Diven said. “We also have some secured loans but as far as mortgages, the Federal Home Loan Banks seem to have the expertise.” According to the Federal Home Loan Bank Topeka, 66 FCU has been a member since 1997.

Diven explained that the $402 million credit union's total advances from the FHLB are about $15 million right now and the credit union holds $1.4 million in shares, which is just a bit above the minimum required. He also said that their “programs are easy to adopt.”

Orenstein said some in the credit union movement might not approve of the FHLBs because of the “bank” in their name. “We don't feel that way,” he said. “It's not a competitor of ours.” Members Only

The Federal Home Loan Bank Act of 1932 established the Federal Home Loan Bank System as a government sponsored enterprise to support mortgage lending and related community investment following the Great Depression, according to the Federal Housing Finance Board's Web site (www.fhfb.gov). It is comprised of 12 Federal Home Loan Banks regulated by the FHFB, and boasts more than 8,000 member institutions. Each bank is a separate, government-chartered, member-owned corporation. FHLB members include thrift institutions, commercial banks, credit unions, and insurance companies. A financial institution joins the FHLB that serves the state where the institution is headquartered. The statutory requirements to belong to a FHLB are the following:

o be duly organized under the laws of any state of the United States;

o be subject to inspection and regulation under the banking laws, or similar state or federal laws;

o make long-term home mortgage loans;

o have at least 10 percent of its total assets in residential mortgage loans, if it is a federally insured depository institution (community financial institutions which are exempt from this requirement);

o have a financial condition that allows FHLB advances (loans) to be made safely; and

o have character of management and a home financing policy consistent with sound and economical home financing.

Each member of the FHLB is required to maintain a minimum stock investment established by each bank, and the sum of the stock investment by all members must be sufficient for the FHLB to meet its own minimum capital requirement. –scooke@cutimes.com