Home Loan banks are essential to creating more affordable housing

Two months after the Federal Housing Finance Agency began its “Federal Home Loan Banks at 100: Focus on the Future” review, we have heard from approximately 100 stakeholders at one three-day listening session and initial four roundtable meetings.

Nearly all participants have expressed strong support for the Home Loan Bank System, and its impact on housing finance, community development and affordable housing. Many have offered constructive suggestions aimed at further bolstering the strong foundation the system has built over its first 90 years.

We have joined these voices offering recommendations to drive efficiency in the Affordable Housing Program and we have committed to putting forward additional recommendations as the process moves forward. These contributions are exactly what the FHFA needs to hear as it works to ensure the Home Loan Bank System remains in a position to fulfill its dual mission into its second century.

Unfortunately, some of what the agency has been told is not supported by fact and, as stewards of the system, we must ensure that the record is accurate on the core issues.

The original purpose of the Home Loan Bank System is to provide a stable and reliable source of liquidity to the nation’s financial institutions. This mission remains relevant today, and Congress has continued to recognize the vital nature of this aspect of the Home Loan banks’ purpose. In fact, the Federal Housing Finance Regulatory Reform Act of 2008 notes the Home Loan banks’ “mission of providing liquidity to members” as one of the key differences between the system and Fannie Mae and Freddie Mac.

The liquidity provided by the Home Loan banks supports financial institutions across the nation — helping to foster a diverse and vibrant ecosystem of local lenders that does not exist in any other country and reduces risk in the financial system. This support also helps financial institutions in times of crisis. As former FHFA Director James Lockhart noted, Federal Home Loan banks were the “unsung heroes of the global financial crisis.”

The banks achieve their mission through a cooperative structure in which their members — banks, credit unions, insurance companies and community development financial institutions — access liquidity in the form of advances collateralized by a mortgage or other assets eligible under the statute; the advances support housing finance activity and allow the member banks to fulfill the needs of their customers and communities. As a result, Home Loan bank advances are strongly connected to housing finance.  

While liquidity is the system’s original mission, Congress has also directed the Home Loan banks to focus on housing affordability, mandating that 10% of each bank’s net profits be contributed to an Affordable Housing Program (AHP).

In addition to the mandatory 10% of profits, most Home Loan banks also make voluntary contributions to their AHPs and other programs in addition to the statutory floor. Since 1990, this has resulted in more than $7 billion in support for AHP and other programs.

But that’s not the extent of our impact. Home Loan banks’ liquidity activity also strongly supports affordable housing and helps make homeownership more attainable. A 2020 study conducted by the University of Wisconsin showed that the banks’ impact on the mortgage market increases mortgage lending by $130 billion and saves borrowers $17 billion in interest payments every year.

Small member banks have repeatedly highlighted the importance of Home Loan banks to their local lending, citing how it helps them make loans to low- and moderate-income borrowers, supports communities with more business and mortgage loans and provides everyday Americans with essential mortgage credit products.

So, the Home Loan banks’ impact on affordable housing isn’t just the amount contributed to AHP; it’s also the comprehensive impact the banks’ presence has in the financial market, making homeownership more attainable and affordable — and that is measured in the tens of billions of dollars each year.   

As part of the process, it has been asserted that Home Loan bank advances discourage banks and credit unions from paying more for deposits. This, however, ignores the fact that depository institutions are in the business of relationship banking, their relationship with their depositors is sacrosanct, and they carefully consider deposit pricing.

The assertion is also disconnected from the fact that bank deposits are significantly larger than Home Loan bank advances. As of June 2022, bank deposits were $18 trillion, compared with around $700 billion in outstanding Home Loan bank advances and letters of credit. Banks simply are not discouraging deposits in favor of advances.

In an economic environment in which the Federal Reserve is removing liquidity from the financial system, the importance of Home Loan bank advances as a source of liquidity is profound. Home Loan banks provide their members confidence that readily reliable liquidity is available on demand to meet the needs of their customers and communities. Without reliable access to advances, many members would be forced to raise the borrowing rates on loans or reduce loan offerings to maintain necessary levels of balance sheet liquidity.

The FHFA’s review process has entered a critical phase in which stakeholder input remains vital.

We believe the system is fundamentally sound, fulfills its statutory liquidity and affordable housing missions and remains relevant to the housing finance system.

Even still, we have been inspired by the well-intentioned and well-informed proposals and ideas put forward by key system stakeholders, and we are confident that even brighter days are ahead for the Federal Home Loan banks, their members and the communities they serve.

For this to become reality, the FHFA must keep its focus on the facts and ensure what they take into consideration is complete and accurate.