The Federal Home Loan Bank (FHLBank) system was founded in the depths of the Great Depression in 1932, as a government-sponsored enterprise (GSE) with a public mission to help address the greatest housing crisis of the twentieth century. Today, we find ourselves in a new housing crisis: buying a house has reached its highest cost in decades and lower income families cannot find affordable rental units. Racial inequalities in housing remain widespread and have only deepened for many Americans during and since the pandemic. In a report published last week “FHLBank System at 100,” the Federal Housing Finance Agency (FHFA) laid out a careful set of recommendations and next steps to reform the FHLBank system. In this blog, I help summarize this issue and highlight how proposed reforms could help hundreds of thousands of Americans get housed.

What are FHLBanks?

Today, the FHLBank system comprises a system of 11 regional banks that together manage over $1.2 trillion in debt obligations of just over 6,500 members, who include commercial banks, credit unions, and insurance companies. The FHLBanks function as a kind of “bank for banks,” as they give members access to cheap liquidity sources (in the form of discounted loans called “advances”). Their government-sponsored status allows FHLBanks to borrow at near-Treasury rates in the capital markets and pass on that discount to their members. While FHLBank leadership likes to compare their banking system to private sector financial institutions, the FHLBank system is very different in that it is a government-sponsored enterprise (GSE). As such, it receives sizable direct and indirect public subsidies in exchange for fulfilling a public function. The estimated value of this subsidy ranges between $4.7 billion and $6.4 billion dollars a year, as cited in the FHFA report: the bulk of this public subsidy comes from the value of the implicit government guarantee in capital markets, while the FHLBanks also enjoy exemptions from local, State, and federal taxes.

The Evolving Role of FHLBanks in Housing

Despite being founded on a public mission to support housing and receiving sizable public subsidies, the FHLB system has strayed from this founding mission over time. FHLBanks have moved away from helping Americans get housed, to providing liquidity to members without conditions. The FHLBank members and the FHLBanks are enjoying strong profits with little risk, since their advances are covered by collateral and a super senior lien on their members’ assets. But the system is doing relatively little to alleviate our tight housing markets today.

How did this happen? Its membership has significantly evolved. While early members were predominantly savings and loan associations (thrifts) and insurance companies active in the mortgage market, 1989 reform of the FHLBank system opened up membership to commercial banks and credit unions that financed mortgages. But at the same time, housing finance including its main players and sources of mortgage liquidity have significantly evolved – even just over the last decade. Today Fannie Mae, Freddie Mac, and Ginnie Mae dominate the mortgage securitization market and in doing so help inject significant liquidity in the mortgage market. Meanwhile, commercial banks – who are the main users of discounted advances within the FHLB system,  using 58 percent of all advances in 2022 – have largely moved away from the mortgage business over the last decade. As a result, liquidity use by FHLBank members, while supporting members’ profitability, has become disconnected from a focus on addressing unmet housing credit needs.

Key Housing Recommendations in the FHFA Report

The FHFA report offers key recommendations to help the FHLBank system live up to its founding public mission of supporting affordable housing and community development. These reforms would help this system meet the evolved needs and challenges of today’s housing markets. The four most promising reform recommendations to support affordable housing include:

• Issuing a regulation to clearly define the FHLBanks’ mission and mission-consistent activity. This includes linking FHLBank liquidity and housing.
• Helping expand the usefulness and accessibility of FHLBank advances and other services (such as secondary market access) for small community banks, credit unions, and CDFI’s. This includes critically reviewing the highest costs of advances for small CDFI’s, addressing membership barriers, and making sure services are accessible to these smaller institutions. Mission-driven advances and secondary market access can support affordable housing construction and non-traditional mortgage products (such as small-dollar mortgages and Special Purpose Credit Programs).
• A recommendation to Congress to double the required minimum funding for Affordable Housing Programs (AHP). Currently FHLBanks are required to devote at least 10 percent of their annual net earnings to AHP, which often support low-income housing construction. Ten percent is only a drop in the bucket relative to America’s housing needs, though, and relative to the public subsidies and advantages that FHLBanks receive as a GSE. Of note is also that in 2021, only 10 percent went to AHP, while over fifty percent of annual earnings were paid out to member institutions as dividends.
• Ensuring on an ongoing basis that FHLBank members adequately support housing and community development activities (rather than only assessing whether they meet a 10 percent threshold when they become members).

The Consumer Federation of America supports reforms that seek to reconnect FHLBanks back to their founding mission and use their powerful tools to help alleviate housing supply shortages, mortgage unaffordability, and persistent racial inequalities in housing across the country.  CFA Senior Fellow Barry Zigas participated in the first Roundtable convened by FHFA in November, 2022, and some of his recommendations, as well as those of many others who participated in FHFA’s extensive public hearings and outreach, are reflected in this new report.  As a member of the new Coalition for Federal Home Loan Bank Reform, we will publish more blogs that help illuminate potentials for reform from a consumer point of view.