Mitigating FHLB Lending Risk Through Collections
How do Federal Home Loan financial institutions mitigate the credit risk of advances? Through a complicated methodology that evaluate member and non-member borrowers, based on financial, regulatory and other qualitative information, including examination reports. Vigorous bank collection software simplifies the process and assures compliance.
Created by the Federal Home Loan Bank Act of 1932 in response to the depressive economic conditions of that era the FHLB system now primarily focuses on increasing the amount of loanable funds available for affordable housing and community development projects.
It continues to have a material impact on housing and development financing, offering funds to member institutions at rates that are usually lower than commercially competitive prices. The FHLBanks make loans, called “advances,” almost exclusively to their members on the security of mortgages and other collateral pledged by the borrowing member.
Each FHLBank manages its credit exposure to advances through an integrated approach that provides for the ongoing review of the financial condition of its borrowers coupled with conservative collateral and lending policies and procedures.
The leveraging of powerful and compliant up-to-date collection software, such as CARM-Pro, limits the risk of a loss while balancing the borrowers’ needs.
Advancing the Loan Cause
Advances are the biggest category of assets of the FHLBanks on a combined basis, representing 61.6% and 62.5% of total assets at March 31, 2015 and December 31, 2014. Advances are secured by mortgages held in borrower portfolios and other eligible collateral pledged by borrowers.
FHLBank advances can serve as a funding source for a variety of mortgages. Advances support important and diverse housing markets, including those focused on very low, low- and moderate-income households. FHLBank offers a wide range of fixed- and variable-rate advances with different interest rates, payment characteristics, optionality, and with maturities ranging from one day to 30 years.
For those borrowers that choose to sell or securitize their mortgages, FHLBank advances can provide interim funding. Each FHLBank develops its program of advances to meet the particular needs of its borrowers, consistent with the safe and sound operation of the FHLBank.
There are some 60-plus data items that need to be captured for FHLB reporting, tough when using a spreadsheet, much easier with robust collection software assures you are in compliance and pulls the data into easy to read reports.
The FHLBanks limit their risk of loss on advances by securing borrowings with sufficient acceptable collateral; monitoring the creditworthiness and financial condition of borrowers; performing collateral reviews and valuation procedures; and having the ability to demand additional collateral, or substitute collateral, during the life of an advance.
Each FHLBank manages its credit exposure to advances through an integrated approach that provides for the ongoing review of the financial condition of its borrowers. Coupled with conservative collateral and lending policies and procedures it limits its loss risk while balancing borrowers' needs for a reliable funding source.
Collateral arrangements will vary with borrower credit quality, borrowing capacity, and collateral availability as well as the FHLBank’s overall credit exposure to the borrower. Each FHLBank establishes each borrower’s borrowing capacity by determining the amount it will lend against each collateral type. At March 31, 2015, as in prior years, the rights to collateral (either loans or securities) held by the FHLBanks on a borrower-by-borrower basis had an estimated value that was equal to or exceeded the outstanding extensions of credit.