TheMReport — News and strategies for the evolving mortgage marketplace.
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24 | TH E M R EP O RT FEATURE "Part of that is looking at the list of diverse dealers that are out there, engaging them, interviewing them, meeting with them, building relationships with them," Ericson said. "Ultimately, we are looking at those relationships and looking at opportunities in which we can transact through the asset side of our balance sheet by working with diverse dealers. What that allows us to do, is increase the competitive landscape of investment acquisition opportunities that are out there in the marketplace." According to Rene Cornejo, SVP Treasurer and Balance Sheet Management at FHLBank Chicago, his team works with the FHLBanks Office of Finance to modify issuance programs to make them friendlier to different kinds of dealers. "We work in concert as an FHLBank System in our effort to include more diverse dealers," he said. "My team participates both in our Capital Markets Working Group and the FHLBank System OMWI Committee so we interface on the funding side with the System's Committee." "On the debt side, the committee's primary focus began in 2017 and continued in 2018 to review all the debt issuance programs that the FHLBank System had and to ensure that diverse firms could participate. "Some hurdeles were removed such as minimum capital, or regular participation, and rules were modified that adjusted our requirements in order to ensure that these firms could participate," Cornejo explained. The other aspect was an enhanced marketing outreach effort. "We have participated in that effort by going to visit dealers or have them visit us so we can explain exactly the kinds of products we are interested in using with them. This must be a win-win for both, so for them to be able to know what we're interested in is very important because that allows them to focus on those areas," he said. This practice, according to Cornejo has allowed the FHLBank Chicago to increase participation year-over-year in its issuance programs. Looking at the bigger picture, Thomas explained that FHLBank Chicago is really helping these small firms develop their overall business—many times a new business—in the mortgage space. Building relationships with diverse dealers has also been a cornerstone of FHLBank Chicago's success with their D&I initiatives. "In 2018, we spent time reaching out to various dealers, interviewing them, understanding what their business model was, and how their niche service areas could be complimented with our needs. We spent a lot of time working with and understanding their product offerings and how they fit with us," Ericson said. "That's the first thing that I think is important for people to understand the offerings that are out there." "We're giving them a fair shot to compete either on price or in service head-to-head with Wall Street, and we're not looking at them in any different way. We give them the same opportunities as we give any firm, to show us product or sell us a bond. I think that's unique," Thomas said. In the process, the bank has discovered that there's no shortage of talent with these smaller shops. What they may lack is opportunity. According to Thomas, even though the firms are small, "the people are those that usually worked at the bigger Wall Street firms in the past and now have chosen to work at a smaller firm. But the quality of talent isn't diminished." The FHLBank Chicago has now started talking to them about what those firms, as a diverse shop, are doing to support or contribute to their communities. Giving an example, Thomas says that one disabled veteran-owned firm they work with has made a concerted effort to hire other disabled veterans. He has also observed that some of the other diverse broker dealers are very active in charitable donations and programs in their communities. "We have managed to achieve year-over-year increases in participation on the funding side in 2017 and 2018 as a result of shining light on this, or focusing on this segment of the dealer market," Cornejo said. "We plan to continue to make strides in that area. We started from a low base percent and have increased every year since we have been focusing on this." The FHLBank Chicago is very clear that even though it strongly encourages diverse broker dealers, its first duty is towards its members. "Even though you might be a diverse firm, we're not doing a trade with you if that's not the most economical or best execution for us. They have to compete head-to-head with Wall Street. All we're doing is giving them access," Thomas said. "We're trying to make sure we're transacting business with all segments of the population that can do that business for us. We don't just target diverse brokers to be spending money with just one segment," Thurman said. "At the end of the day we've got to make sure we're getting the best transactions done at the right price for the marketplace and done efficiently." "There are some diverse dealers that may have a niche in a particular asset class where we can benefit. For our members, they borrow from us to the extent that we can get good deals either on the asset side or the funding side, it always benefits them in terms of their costs of borrowing or the profitability of the bank," Cornejo said. "Our members operate in a number of communities but we also have community investment programs that impact a number of different people as well, and so for us it's just part of our business strategy. It makes good business sense for us to think about this and helps us make sure we're making the impact we choose to make." —Cedric D. Thurman, SVP, Chief Diversity Officer, Federal Home Loan Bank of Chicago