What role does the Office of Finance play in the FHLBank System?
The Office of Finance (OF) is the System's centralized debt issuance facility. Its role is to buy the raw material - money - to support all FHLBank activities. In addition to issuing and servicing all of the debt, the OF also prepares the combined financial statements, selects/evaluates underwriters, and develops/maintains the infrastructure needed to meet System goals.
What is the FHLBank System, and what is its purpose?
The FHLBank System is a government-sponsored enterprise (GSE) chartered by Congress in 1932. Its purpose is to support residential mortgage lending and community investment at the local level. This is accomplished by providing primary mortgage liquidity (direct loans) to member financial institutions. Currently, there are approximately 7,200 members located throughout every region of the country. Each member (typically a bank, thrift, credit union, or insurance company) is a shareholder in one or more of the regional FHLBanks, which are privately capitalized, separate corporate entities managed within a conservative framework established by the Federal Housing Finance Agency. Collectively, the FHLBanks have been described as the largest provider of mortgage credit in the U.S. In essence, they are the bankers' banks.
Why do the FHLBanks issue debt?
The FHLBanks issue debt in order to raise funds for their members. These funds are used for home mortgages, multi-family and rental housing, agricultural loans, and for seed money to foster community development. Funds are raised in three ways: by issuing debt, by accepting deposits from member institutions, and by selling capital stock to members.
What kinds of debt are issued?
The FHLBanks issue discount notes in maturities ranging from one day to one year. Bond maturities as long as 30 years may be offered, with the majority of issues between one and five years. Issue size can range from a minimum of $15 million to several billion, and individual bonds may be increased prior to settlement or reopened after settlement to meet additional demand. Because the FHLBanks operate a conservative balance sheet, and are active users of swaps to reduce interest rate risk, there is considerable flexibility with the structures and terms of issues brought to market. Bullets and fixed-rate callables predominate, but the System can effectively issue floaters, step-ups/downs, zeros, and others. Minimum denominations range from $10,000 to $500,000 or more, depending on complexity and associated risk.
How are these securities sold?
FHLBank debt is sold to investors through a network of approximately 70 different underwriters. The majority of this debt is negotiated, with the remainder sold through scheduled auctions. A current list of authorized underwriters is maintained on the Office of Finance website. However, FHLBank debt is widely available, and can be obtained through nearly any securities firm via the secondary market.
Is FHLBank debt guaranteed by the U.S. Government?
No - however, FHLBank debt is rated by Moody's (Aaa) and Standard & Poor's (AA+).
Do the FHLBanks have a debt issuance calendar?
To successfully fulfill its commitment to the U.S. housing market, the FHLBank System must have flexibility to operate and manage its core business: serving the funding needs of member financial institutions. However, fixed-income markets also value predictability and transparency. The FHLBanks maintain a Global issuance calendar with scheduled monthly announcement dates. This calendar is available on the homepage. Also, some FHLBank programs (TAP Issues, American callable bonds, and selected discount notes) are auctioned using a schedule. American callables and TAP Issues are auctioned daily at 10:30am and 11:30am, respectively. Four discount note maturities (4-, 9-, 13-, and 26-week) are auctioned twice weekly, on Tuesdays and Thursdays at 12:10pm.
What is the TAP Issue Program?
Launched in July 1999, TAP Issues are simply generic bullet maturities that are created once a quarter (at market prices) and then reopened over 3-month periods, allowing the FHLBanks to consolidate small medium-term notes into large, liquid issues under a single CUSIP. TAP Issues have standard features, including semi-annual interest payments on 2/15 and 8/15 or 5/15 and 11/15. On-the-run TAP maturities include the 2-, 3-, 5-, 7- and 10-year. TAP Issues are brought to market once daily via a competitive auction process. TAP Issue benefits include incremental growth, which avoids market disruption, daily auctions that provide liquidity through continuous supply, and price transparency with betweeen 15-20 firms generally eligible to bid. TAP issues are included in all major bond indices when they reach $250 million outstanding, and interest on TAP Issues (like all FHLB securities) is exempt from state and local income tax. Selected TAP maturities (1.5- through 5-year) are available on the TradeWeb online marketplace.
Is FHLBank interest exempt from income tax?
All interest on FHLBank bonds and discount notes is exempt from state and local income tax for U.S. investors. Tax matters are discussed in the Information Memorandum found in the Debt Securities section. Please keep in mind that some states do levy certain other taxes on this interest in lieu of actual income tax. We have found that the most reliable source of information pertaining to taxability is the Department of Revenue office in your state, as they will be current on any legislative exceptions.
What is the credit rating of the FHLBank System?
FHLBank debt securities are rated by Moody's (P-1/A-1) and Standard & Poor's (Aaa/AA+). The BIS risk-weighting for FHLBank securities is 20% in most countries. These ratings reflect the System's strong fundamentals and financial position, sound management, status as a Government-Sponsored Enterprise (GSE), and federally authorized role in housing finance. Another factor that provides key creditor support: all debt issues are joint and several obligations of all of the FHLBanks.
It should be noted that the FHLBanks' conservative credit underwriting and collateral management practices have contributed to a record unparalleled in banking; since 1932, the FHLBanks have never experienced a loss on any member loan.
Is it true that the FHLBanks borrow short and lend long?
The FHLBanks' primary function is to provide credit to members. These loans are fairly short in maturity (less than five years), so one effective way to fund these assets is through matching debt issuance. Over the years, this is how the FHLBanks became a well-known issuer on the short end of the curve. The FHLBanks issue some longer-term debt to fund mortgage assets held in portfolio, as would be expected. However, mortgage loans currently equal less than 7% of total FHLBank assets. Most debt issuance will continue to be inside of five years, although the FHLBanks will periodically tap the long end of the curve.
Can I get a low interest loan?
The Federal Home Loan Bank System exists to promote home ownership, and supports residential lending and community investment by providing funds to member financial institutions through the sale of debt securities. While not authorized to lend directly to the public, each of the regional FHLBanks sponsor affordable housing programs. The FHLBanks each serve different geographic regions of the country; a map of the regions, along with links to each of the Banks can be found at www.fhlbanks.com. Each Bank's website has information on special housing programs, as well as contact information. Since the FHLBank System has over 7,300 members, you may already be doing business with a bank that has access to these programs.
How can someone check to see if a bond is being called?
On the Office of Finance website (www.fhlb-of.com), there are two ways that investors can check the status of callable bonds. In the Securities Servicing section, select "Call Schedule" from the left menu. This will create a rolling list of callable bonds, ordered first by call date, and then by Cusip. Using the column headings you can determine if a bond was called in full, called in part, or not called. The only exception is American-style callables - these are only shown if they will be called in full or in part. To look up an individual callable bond, enter the Cusip in the search box on the left menu of the same page.
How can investors obtain an Offering Notice for a specific bond?
Offering notices are posted on the OF website, in pdf file format, on or before the settlement date. By using the search box in the "Details & Documentation" section, these files can be accessed and then viewed, printed, saved locally, and/or emailed. Some details (such as coupon, maturity date, etc.) are released on trade date - the table (called New Issues) containing this date can be viewed in the Securities Issuance section.
Why was my bond called in part?
Many FHLBank bonds can be called in part. If this occurs, the action occurs pro-rata for all bondholders. Subsequently, the original par of the bond remains outstanding, but has a factor applied to it. Each of the regional FHLBanks represents different customers in different areas of the country, so the operations and strategies of one FHLBank can differ from another. Proceeds from a given bond sale can be shared by two or more FHLBanks, so there are instances where one FHLBank may elect to call its portion of an issue, while the other Bank(s) does not.
Detailed explanations of FHLBank capital, lending and collateral policies, the combined financial reports, and other important matters can be viewed on the main page in the OF Special Interest section. Please feel free to contact us directly if you have any questions regarding FHLBank products, programs or services at firstname.lastname@example.org