And Then There Were Eleven

It was the biggest bank in Seattle that no one had heard of.

And now its no more.

The Federal Home Loan Bank of Seattle operated no branches or ATMs, and it didnt sponsor ads or marketing campaigns. It didnt even have its name on a downtown Seattle office tower, as so many do.

But its size and reach was extensive $35 billion in assets and an operating territory stretching across eight western states and out to the United States territories of Guam, American Samoa and the Northern Mariana Islands. While its customer base was small in number about 319 members, none of them individual consumers its impact in the consumer market was significant.

Thats because the Seattle bank was a wholesale lender to its members, providing advances to them to make home loans to their customers. As one of a dozen federal home loan banks in the country, the Seattle bank was able to use its governmental backing to borrow at below-market rates, passing those on to members.

Now there are 11 banks in the federal home loan bank system, because as of June 1, the Federal Home Loan Bank of Seattle became the western office of the Federal Home Loan Bank of Des Moines, Iowa, completing a voluntary merger officially proposed a year ago. The Seattle bank will lose about 100 jobs, shrinking to a staff of 40.

The two institutions connections, which led to the merger, go beyond having contiguous territories. The chief executive of the combined banks, Dick Swanson, was the former CEO of Seattle-based Continental Savings, later renamed HomeStreet Bank, before taking the job as head of the Des Moines bank. Mike Wilson, who is now president of the combined banks, worked with Swanson for six years in Des Moines before taking over as CEO of the Seattle bank. The cultural fit was so clear, Swanson says.

(Theres one other local connection: Swansons grandparents started a flower-growing business in Minnesota, then moved it to Seattles Ballard neighborhood, where Swansons grew into one of the regions better-known garden centers. Dick Swanson grew up on the property atop Crown Hill, but his family sold the business in the 1970s.)

The federal home loan banks were a Depression-era creation designed to spur home construction and ownership by serving what was known for years as the thrift industry principally savings and loans. For decades, the home loan bank system also served as the industrys regulator, a function taken away in the wake of the S&L crisis in the late 1980s and given to newly created Office of Thrift Supervision.

The same legislation that stripped the regulatory portion of the home loan banks did allow them to expand the field of membership, adding commercial banks. (Credit unions were added later. Insurance companies have long been members, an important factor for the Des Moines bank, with so many insurers based in the Midwest.) The expanded field of membership has been critical since, as Swanson notes, There are very few thrift charters left in the United States.

What hasnt changed, he adds, is the need for a wholesale funder of mortgages. A huge bank like Wells Fargo (which happens to be a home loan bank member) can gain access to capital markets on its own. [But] most of our members dont have the ability to go to the private capital market and issue debt or borrow through the commercial paper or repo markets at a pricing they can get from their cooperative, Swanson explains. All members have to do is pick up the phone. Its an immediate source of funding they know they can get. On a typical day, were doing several billion dollars in business.

Having that access is critically important to a credit union like Tukwila-based BECU. While a sizable lender in the local market, it isnt big enough to go to the debt markets on its own. We generate pretty much all the funds we have to loan from deposits or shares from our members, says BECU President Benson Porter, who has served on several home loan bank boards, including Des Moines currently. What the federal home loan bank allows for community lenders like ourselves is the ability to have a critical source of liquidity when there are periods of stress or times when the institution cant generate enough deposits on its own because it has a lot more lending demand than it has deposit demand at any particular point in the cycle.

Its a key partner and backstop for community lenders.
Swanson notes providing loans called advances to its members is a model that really works well. Because of an implied guarantee from the federal government, We can borrow at close to U.S. government rates, he says. … We have demonstrated a very resilient self-capitalizing structure that has enabled us to weather very difficult periods including the great recession were still coming out of.

But the system doesnt always work smoothly, as the Seattle banks own bumpy experience during the 2000s attests. In 2004, federal regulators overseeing the system told the Seattle bank to correct certain shortcomings in the banks governance, risk management and financial performance. Norm Rice, the former Seattle mayor who was then president of the bank, departed the following year.

Then came the financial crisis, the collapse of the housing market and the recession, all of which hit the Seattle bank. The failure of Washington Mutual (by far the largest member and largest source of business for the Seattle bank, Swanson says) and others in its operating territory took away a chunk of business. Regulators imposed more restrictions on the bank, including limitations on stock repurchases from and dividends to members.

The Seattle bank was quite challenged, Swanson recalls. There really wasnt enough business in their region, at least in the short term, that they could predictably cover the cost of operating a stand-alone federal home loan bank. Regulatory burdens added in the wake of multiple financial crises have increased those costs.

That made a merger compelling, at least from the Seattle banks perspective. Swanson gives Wilson credit for improving the Seattle bank to the point where it could merge into the Des Moines bank.

Ironically, the financial crisis that hit the Seattle bank so hard may have helped solidify the future of the home loan bank system. With the two mortgage financing giants Fannie Mae and Freddie Mac facing their own troubles and conjecture about their future, the underlying role and need for someone to provide home loan funding is even greater, Porter explains.
None of the community lenders generate enough to get attention of capital markets, he says. We need to go through an aggregator.

Having a government-sponsored enterprise like the federal home loan bank gives those smaller lenders an equal footing with major banks and advantageous pricing. The banks also devote a portion of earnings to finance affordable housing, another need not likely to disappear.

The role theyve had, Porter adds, is the role theyre going to have.