FEDERAL HOME LOAN BANK SYSTEM Lending and Collateral Q&A August 13, 2021 Note - Each answer in this document is written as if it were a stand-alone response. Therefore, some information may be repeated. What is an advance and how do advances work? The FHLBanks provide funding to members and housing associates through secured loans known as advances. Each FHLBank makes advances based on the security of mortgage loans and other types of eligible collateral pledged by the borrowing institutions. Advances are the FHLBanks' largest asset category on a combined basis, representing 50.2% and 51.5% of combined total assets at June 30, 2021 and December 31, 2020. Advances are secured by mortgage loans held in borrower portfolios and other eligible collateral pledged by borrowers. Because members may originate loans that are not sold in the secondary mortgage market, FHLBank advances can serve as a funding source for a variety of mortgages, including those focused on very low-, low-, and moderate-income households. In addition, FHLBank advances can provide interim funding for those members that choose to sell or securitize their mortgages. Each FHLBank develops its advance programs to meet the particular needs of its borrowers, consistent with the safe and sound operation of the FHLBank. Each FHLBank offers a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics, and optionality, with maturities ranging from one day to 30 years. Who can borrow from the FHLBanks? The FHLBanks are cooperative institutions, and each FHLBank conducts its advance business almost exclusively with its members and housing associates. Membership in an FHLBank is voluntary and is generally limited to federally-insured depository institutions, insurance companies engaged in housing finance, and community development financial institutions (CDFIs). Members include commercial banks, savings institutions, insurance companies, credit unions, and CDFIs. A CDFI is eligible to become a member of an FHLBank if it has been certified by the U.S. Department of the Treasury. Eligible institutions include community development loan funds, community development venture capital funds, and state-chartered credit unions without federal insurance. FHLBank advances are made to members of all sizes, but can also be a source of funding to smaller lenders that may not have access to all of the funding options available to large financial institutions. The FHLBanks give members access to wholesale funding at competitive prices. How do FHLBanks assess and mitigate the credit risk of advances? 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 collateral and lending policies and procedures designed to limit its risk of loss while balancing its borrowers’ needs for a reliable source of funding. Each FHLBank uses a methodology to evaluate its borrowers, based on financial, regulatory, and other qualitative information, including examination reports. Each FHLBank reviews its borrowers’ financial condition on an ongoing basis using current information and makes changes to its collateral guidelines to mitigate the credit risk on advances. As of June 30, 2021, the management of each FHLBank believed it had adequate policies and procedures in place to manage its credit risk on advances effectively. 1 FEDERAL HOME LOAN BANK SYSTEM Lending and Collateral Q&A In addition to having access to quarterly call reports and other financial data for members, as reported to their primary regulator, the FHLBanks have access to federal supervisory examination information regarding the safety and soundness of operations within member depository institutions. FHLBanks require insurance companies to provide copies of audited financial reports that are filed with state regulators, and may have access to their supervisory examinations or comprehensive statutory financial data, as well as independent ratings. FHLBanks may also require supplemental information as necessary to determine the financial condition of a borrower. Based on the evaluation of financial trends and condition of a borrower, the FHLBank may take additional steps to protect its security interest in collateral pledged and impose borrowing limitations (e.g., term, product type, amount) to reduce credit exposure to a borrower experiencing financial decline. The financial condition of a borrower will generally also have a bearing on the frequency and degree of collateral reviews, the level of required overcollateralization to secure advances, and the level of haircuts assigned to pledged assets. The FHLBanks protect against credit risk on advances by collateralizing all advances. The FHLBank Act requires that FHLBanks obtain and maintain collateral from their borrowers to secure the advances at the time the advances are originated or renewed. The FHLBank Act requires the FHLBanks to accept as eligible collateral for advances only certain United States government or government agency securities, residential mortgage loans and securities backed by such, cash, deposits in the FHLBank, and other real estate related assets. In addition, the FHLBank Act states that notwithstanding any other provision of law, any security interest granted to an FHLBank by any member of any FHLBank, or any affiliate of any member, is entitled to a priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar lien creditor), other than claims and rights that (1) would be entitled to priority under otherwise applicable law, and (2) are held by actual bona fide purchasers for value or by actual secured parties that are secured by actual perfected security interests. Collateral arrangements will vary depending on: (1) borrower credit quality, financial condition, and performance; (2) borrowing capacity; (3) collateral availability; and (4) 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. Borrowers are also required to collateralize the face amount of any letters of credit issued for their benefit by an FHLBank. Each FHLBank can require additional or substitute collateral during the life of an advance to protect its security interest. Substitution generally occurs if the borrower does not have sufficient excess collateral pledged to support outstanding credit exposure. The call for additional collateral can include requesting ineligible collateral to secure advances if an FHLBank believes that it needs the collateral in order to protect itself. However, that ineligible collateral cannot serve as the basis for issuing or renewing an advance for a borrower. At June 30, 2021, each FHLBank had rights to collateral (either loans or securities) on a borrower-by-borrower basis with an estimated value equal to, or greater than, its outstanding extensions of credit. In summary, the FHLBanks believe that adequate policies and procedures are in place to limit their risk of loss on advances by, which may include, but are not limited to the following: • 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. 2 FEDERAL HOME LOAN BANK SYSTEM Lending and Collateral Q&A Since 1932, no FHLBank has incurred any losses on its credit products, including advances, based on the collateral held as security, each FHLBank management's credit extension and collateral policies, and repayment history on credit products. Accordingly, at June 30, 2021, no FHLBank recorded any allowance for credit losses on these credit products, and no FHLBank recorded any liability to reflect an allowance for credit losses for off- balance sheet credit exposures. This position is supported by the independent external auditor’s examination and annual unqualified audit opinion of each FHLBank’s financial position at each calendar year end, including a determination that no loss reserves are necessary. What types of collateral are acceptable for advances? Who determines “acceptable” collateral types and who sets and monitors the haircuts as a function of collateral? What are the requirements and characteristics of assets that may be pledged? The FHLBanks are required by the FHLBank Act and Federal Housing Finance Agency regulation to obtain a security interest in sufficient collateral on advances to protect against losses. Only certain types of asset classes are deemed to be eligible collateral for advances, but each FHLBank has the latitude within the statutory and regulatory guidance to determine what specific types of collateral it will accept and the lending value that it will assign to these specific types of collateral. The approval of a new collateral type typically involves a risk management assessment and recommendation, and may require approval from the Federal Housing Finance Agency as a new business activity. As a general rule, an FHLBank’s Board of Directors or their designees approve the acceptable collateral types within FHLBank Act regulations and the policies established by the Federal Housing Finance Agency. FHLBank management evaluates and monitors borrowers’ collateral to ensure that it complies with
Repo Haircuts and Economic Capital: a Theory of Repo Pricing Wujiang Lou1 1St Draft February 2016; Updated June, 2020
Repo Haircuts and Economic Capital: A Theory of Repo Pricing Wujiang Lou1 1st draft February 2016; Updated June, 2020 Abstract A repurchase agreement lets investors borrow cash to buy securities. Financier only lends to securities’ market value after a haircut and charges interest. Repo pricing is characterized with its puzzling dual pricing measures: repo haircut and repo spread. This article develops a repo haircut model by designing haircuts to achieve high credit criteria, and identifies economic capital for repo’s default risk as the main driver of repo pricing. A simple repo spread formula is obtained that relates spread to haircuts negative linearly. An investor wishing to minimize all-in funding cost can settle at an optimal combination of haircut and repo rate. The model empirically reproduces repo haircut hikes concerning asset backed securities during the financial crisis. It explains tri-party and bilateral repo haircut differences, quantifies shortening tenor’s risk reduction effect, and sets a limit on excess liquidity intermediating dealers can extract between money market funds and hedge funds. Keywords: repo haircut model, repo pricing, repo spread, repo formula, repo pricing puzzle. JEL Classification: G23, G24, G33 A repurchase agreement (repo) is an everyday securities financing tool that lets investors borrow cash to fund the purchase or carry of securities by using the securities as collateral. In its typical transaction form, the borrower of cash or seller sells a security to the lender at an initial purchase price and agrees to purchase it back at a predetermined repurchase price on a future date. On the repo maturity date T, the lender (or the buyer) sells the security back to the borrower.
Mortgage-backed Securities & Collateralized Mortgage Obligations: Prudent CRA INVESTMENT Opportunities by Andrew Kelman,Director, National Business Development M Securities Sales and Trading Group, Freddie Mac Mortgage-backed securities (MBS) have Here is how MBSs work. Lenders because of their stronger guarantees, become a popular vehicle for finan- originate mortgages and provide better liquidity and more favorable cial institutions looking for investment groups of similar mortgage loans to capital treatment. Accordingly, this opportunities in their communities. organizations like Freddie Mac and article will focus on agency MBSs. CRA officers and bank investment of- Fannie Mae, which then securitize The agency MBS issuer or servicer ficers appreciate the return and safety them. Originators use the cash they collects monthly payments from that MBSs provide and they are widely receive to provide additional mort- homeowners and “passes through” the available compared to other qualified gages in their communities. The re- principal and interest to investors. investments. sulting MBSs carry a guarantee of Thus, these pools are known as mort- Mortgage securities play a crucial timely payment of principal and inter- gage pass-throughs or participation role in housing finance in the U.S., est to the investor and are further certificates (PCs). Most MBSs are making financing available to home backed by the mortgaged properties backed by 30-year fixed-rate mort- buyers at lower costs and ensuring that themselves. Ginnie Mae securities are gages, but they can also be backed by funds are available throughout the backed by the full faith and credit of shorter-term fixed-rate mortgages or country. The MBS market is enormous the U.S.
Important Notice The Depository Trust Company B #: 14411-20 Date: December 14, 2020 To: All Participants Category: Settlement From: DTC Risk Management Attention: Settlement Manager/Managing Director/Cashier Subject: Changes to DTC Collateral Haircuts Beginning February 5, 2021, for Settlement Date February 8, 2021, DTC will implement the following changes to modify the collateral value for certain securities, which may affect the value of positions applied to the Collateral Monitor: 1. Securities held as Net Additions in Participant accounts that are issued by any of the issuer banks listed in Table 1 in Appendix A to this Important Notice will be given a 100% haircut and assigned no collateral value. This change is being made to align with provisions of the joint DTC and NSCC committed 364-day line-of-credit facility with a consortium of banks (“LOC Agreement”), as described in greater detail in Appendix A below. 2. United States Agencies and GSE securities that are not rated or that are rated below Aa2/AA will receive a 100% haircut (Appendix B includes the current list of eligible collateral). 3. Zero-coupon United States treasury securities with maturities up to two years will receive a haircut of 2% compared to the current haircut of 5%. This change will provide Participants with additional collateral value for these securities at DTC (Appendix C includes the current list of eligible collateral). 4. Securities with no active market prices will receive a 100% haircut. This will apply to new securities during the initial issuance stage and to active securities where DTC has not received a vendor price the prior day (Appendix C includes the current list of eligible collateral).
8-6 Legal Considerations - Real Estate Contracts - Financing Basic Appraisal Principles Other Sources of Funds Pension Funds and Insurance Companies Pension funds and insurance companies have recently had such growth that they have been looking for new outlets for their investments. They manage huge sums of money, and traditionally have invested in ultra-conservative instruments, such as government bonds. However, the booming economy of the 1990s, and corresponding budget surpluses for the federal government, left a shortage of treasury securities for these companies to buy. They had to find other secure investments, such as mortgages, to invest their assets. The higher yields available with Mortgage Backed Securities were also a plus. The typical mortgage- backed security will carry an interest rate of 1.00% or more above a government security. Pension funds and insurance companies will also provide direct funding for larger commercial and development loans, but will rarely loan for individual home mortgages. Pension funds are regulated by the Employee Retirement Income Security Act (1974). Secondary Mortgage Market The secondary mortgage market buys and sells mortgages created in the primary mortgage market (the link to Wall Street). A valid mortgage is always assignable by the mortgagee, allowing assignment or sale of the rights in the mortgage to another. The mortgage company can sell the loan, the servicing, or both. If just the loan is sold without the servicing, the original lender will continue to collect payments, and the borrower will never know the loan was sold. If the lender sells the servicing, the company collecting the payments will change, but the terms of the loan will stay the same.
COLLATERAL ASSIGNMENT OF LEASES AND RENTS THIS COLLATERAL ASSIGNMENT OF LEASES AND RENTS (this “Assignment”) is entered into as of _________, 2021, by and between Yingling Aircraft, Inc., a Kansas corporation (“Assignor”); and INTRUST Bank, N.A., a national banking association (“Lender”). Recitals A. Wichita Airport Authority, Wichita, Kansas (“Lessor”) and LeaseCorp Financial, Inc., a Kansas corporation, entered into that certain Master Lease Agreement dated June 12, 2012, which was assigned by LeaseCorp Financial, Inc. to LeaseCorp Aviation, LLC, which was then assigned by LeaseCorp Aviation, LLC to Yingling Aircraft, Inc., as may be amended, all of which are incorporated herein by reference (together, “Master Lease 1”), covering certain aircraft hangar operation facilities located at the Dwight D. Eisenhower National Airport, Wichita, Kansas, further described as Tract 1 on Exhibit “A” attached hereto and incorporated by reference, and any and all improvements now or hereafter located thereon (such land and improvements being herein referred to collectively as “Tract 1”). B. Wichita Airport Authority, Wichita, Kansas (“Lessor”) and LeaseCorp Aviation, LLC, a Kansas limited liability company, entered into that certain Master Lease Agreement dated October 14, 2014 and Supplemental Agreement No. 1 dated March 1, 2016, as may be amended, all of which are incorporated herein by reference (together, “Master Lease 2”), covering certain aircraft hangar operation facilities located at the Dwight D. Eisenhower National Airport, Wichita, Kansas, further described as Tract 2 on Exhibit “A” attached hereto and incorporated by reference, and any and all improvements now or hereafter located thereon (such land and improvements being herein referred to collectively as “Tract 2”).
RG96-033 Addition of a New Class of Nasdaq-100 Index® Options Due To
Regulatory Circular RG96-33 Date: April 4, 1996 To: Members and Member Organizations From: Office of the Chairman Re: Addition of a New Class of Nasdaq-100 Index® Options Due to a Change in the Method of Calculating Exercise-Settlement Value Summary: The Chicago Mercantile Exchange (“CME”) anticipates receiving approval from the Commodity Futures Trading Commission to list Nasdaq-100 Index futures and futures options contracts and plans to commence trading in these instruments on Wednesday, April 10, 1996. Nasdaq-100 Index futures contracts at the CME have been designed with a different expiration- settlement value methodology than the calculation used to determine the settlement value currently employed in conjunction with Nasdaq-100 Index Options (ticker symbol NDX and overflow symbol NDZ) at the Chicago Board Options Exchange (“CBOE”). To facilitate hedging and arbitrage strategies by market participants in Nasdaq-100 Index derivatives, the CBOE has filed with the Securities and Exchange Commission an amendment to its rules to allow for a new class of Nasdaq-100 Index Options with an exercise-settlement value calculation methodology which conforms with the one to be employed by the CME. Approval of this rule change is anticipated prior to April 10, 1996. This circular explains the effects of the change on CBOE policies and procedures, and the manner in which existing and new Nasdaq-100 Index Options series will be identified for trading. Ticker Symbol Changes and Nasdaq-100 Index Options Class Addition: To implement this rule change it is necessary to create a new class of Nasdaq-100 Index Options which will be listed in parallel with the existing class.
A Potential Pitfall for the Unsuspecting Purchaser of Repossessed Collateral
A Potential Pitfall for the Unsuspecting Purchaser of Repossessed Collateral: The Overlooked Interaction Between Sections 9- 504(4) and 2-312(2) of the Uniform Commercial Code ROBYN L. MEADOWS* TABLE OF CONTENTS Introduction . .................................... 168 I. The Problem . ............................... 169 II. Rights of Purchaser of Repossessed Collateral in the Absence of Default ........................ 172 A. Purchaser's Rights Under Article Nine .......... 173 B. Other Law Governing the Purchaser's Rights ..... 181 III. Debtor's Remedies Against Purchaser ............. 190 IV. Purchaser's Rights Against Selling Secured Party ..... 195 A. The Warranty of Title Under Article 2 .......... 195 B. The Right of Restitution .................... 201 V. The Inadequacy of the Purchaser's Common Law Remedy . ................................... 204 VI. Proposed Amendment to Section 9-504(4) .......... 209 A. Method for Allocating Risks Between Debtor and Purchaser ............................... 210 B. Statutory Solution ......................... 216 * Associate Professor of Law, Widener University School of Law, Harrisburg, Pennsylvania. J.D., University of Louisville; LL.M., Temple University. The author wishes to thank John Wiadis, Carolyn Dessin, andJuliet Moringiello for their insights and comments on earlier drafts of this Article and Ronald Phillips and James Annas for their valuable research assistance. THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 44:167 INTRODUCTION Under the provisions of the Uniform Commercial Code (the Code),
Home Equity Loans - FREQUENTLY ASKED QUESTIONS WHAT IS A HOME EQUITY LOAN? Home equity loans fall under the provisions of Section 50(a)(6), Article XVI, of the Texas Constitution. A home equity loan can be for any legal purpose which uses the equity (the difference between the home’s value and any outstanding debts against the home) in a member’s home for collateral. For home equity lending, Texas law restricts the total amount of all loans secured by the homestead to a maximum of 80% of the home’s value. Texas home equity loans can be a closed end loan with substantially equal payments over a fixed period of time, or an open end Home Equity Line of Credit (HELOC). WHAT PROPERTIES CAN BE CONSIDERED? The property used for collateral must be a single-family, owner-occupied homestead property, located within the Austin Metropolitan Statistical Area (Travis, Williamson, Hays, Bastrop and Caldwell counties). Qualifying properties are defined as either urban or rural. Urban properties consist of not more than 10 acres of land with any improvements contained thereon, within the limits of a municipality or it’s extraterritorial jurisdiction, or a platted subdivision; AND served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality: electric, natural gas, sewer, storm sewer, or water. Rural property shall consist of not more than 200 acres for a family (100 acres for a single, adult person not otherwise entitled to a homestead), with the improvements thereon.
3/21 (RN No. 21-13) 174 4210. Margin Requirements (Continued) (f) Other Provisions (Continued) (8) Special Initial and Maintenance Margin Requirements (Continued) member at which a customer seeks to open an account or to resume day trading knows or has a reasonable basis to believe that the customer will engage in pattern day trading, then the special requirements under paragraph (f)(8)(B)(iv) of this Rule will apply. /01 Multiple Purchases and Sales If a customer enters an order to purchase a security and sells the same security within the same day, but for reasons beyond the customer’s control e.g., price, the purchase was executed in smaller blocks, it will be considered as one day trade. However, the member must be able to demonstrate that it was the customer’s intent to execute one day trade. This will also apply to when a customer enters a sale order and buys the same security within the same day. In addition, the trades would have to have been executed in sequential order. One purchase and several subsequent sale transactions of the same security, where the sales were executed in sequential order within the same day, shall constitute one day trade. One sale and several subsequent purchases of the same security, where the purchases were executed in sequential order within the same day, shall also constitute one day trade. /02 Multiple Purchases and Sales – Alternative Method Rather than counting day trades based on the number of transactions a customer executes to establish or increase a position that is liquidated on the same day (as set out in Interpretation /01 above) a firm may instead count day trades based on the number of times during the day that the day trading customer changes its trading direction (i.e., changes from buying a particular security to selling it, or FKDQJHVIURPVHOOLQJDSDUWLFXODUVHFXULW\WREX\LQJLW ௗ Example A: 09:30 Buy 250 ABC 09:31 Buy 250 ABC 13:00 Sell 500 ABC The customer has executed one day trade.