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By Steve McHugh
Mortgage loans are the bedrock of community institutions'
portfolios. The Federal Home Loan Bank of Boston (the Bank)
makes advances to members relying on a blanket lien on one-
to four-family mortgages. Available for use with limited reporting
requirements, the blanket lien is far-and-away the most convenient
type of collateral for members borrowing from the Bank. There
is even an affectionate term for these loans: one-to-fours.
But many institutions' view of mortgage loans has been changing.
Concerned about interest-rate risk, they make commitments
to sell some of the loans even before the notes have been
signed. Others are searching for assets with higher yields
or more definite maturities.
At the same time, more and more community institutions are
increasing their business lending. How is the Bank adapting
to this fundamental shift? One way is through collateral policy.
The biggest collateral change is a gem from the Gramm-Leach-Bliley
Act of 1999. Federal Home Loan Banks now accept small business
loans as collateral for member borrowings. Members must be
FDIC-insured Community Financial Institutions (CFI) with less
than $587 million in assets. Loans must be secured commercial
and industrial loans with a minimum balance of $25,000, performing,
and outstanding for at least a year. Loan participations are
not eligible. Detailed loan information must be supplied to
the Bank. The collateral borrowing value is 50 percent of
the small business loan amount — lower than what it is
for 1-4's.
Of all theFederal Home Loan Banks (FHLBanks), the Federal
Home Loan Bank of Dallas has the most experience with small
business loan collateral. The FHLBank of Dallas has $1.7 billion
in loans to members secured by these assets. Just as important,
Dallas members, using CFI collateral, have $15 billion more
in borrowing capacity. This gives the members the confidence
to expand their borrowings because they know they still have
collateral in reserve for "just-in-time" liquidity.
The Bank has the staff and resources in place to accept small
business loan collateral. CFI members interested in pledging
these assets can find more information in the Bank's Products
Policy or contact their relationship manager for the details.
We look forward to hearing from you.
Steve McHugh is vice president/relationship manager for
eastern Massachusetts at the Federal Home Loan Bank of Boston.
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