FHLB's Ryan Donovan on an extraordinary year and what's next

July 2, 2024 5:15 PM

The Federal Home Loan Banks went under the microscope last year and the scrutiny persists with its regulator seeking input on its affordable housing program and role in the mortgage market.

The system's second-ever impact report released last week may assist in those evaluations as it consolidates some of the numbers and program descriptions related to its advances, affordable housing, and other activity in the past year.

What follows are some comments on the report from Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, with an eye toward what it might mean for 2024.

The questions and answers that follow have been edited and condensed.

What’s the key takeaway from this impact report?

We want to tell the story of how we are impacting the people that we serve. You can see that through how we describe the liquidity that we've provided for lenders and servicers. The levels of liquidity were historic in 2023, and that helps drive what will be an unprecedented level of support for affordable housing and community development. This year, approximately a billion dollars is what we expect the system will contribute. We were already the largest privately capitalized supporter of affordable housing in the country and now we're doing even more. So what the report ultimately represents is us telling our story of how we do that.

How anomalous was this past year in terms of advances?

The Home Loan bank balance sheets are designed to be elastic. So as our members' demand for liquidity increases, we make sure that we can meet that demand, and 2023 was extraordinary in that regard. I think if you look back on the history of the system, when there has been great need, the Home Loan banks have been able to respond, and we saw that not just in March of last year, but in the early days of COVID, the Great Financial Crisis and at other times. So as the GAO and others have said, we operated exactly as we were designed to operate.

Can you talk about system costs?

There's a lot of confusion regarding the so-called subsidy. First of all, there is no explicit guarantee of the Home Loan bank system. When we issue debt, we specifically say that it is not guaranteed by the United States. The investors in our debt do take a slightly lower return on their investment, perhaps because of the way they perceive this implied guarantee, so I suppose to the extent there is a subsidy, it's a subsidy that's ultimately paid by the investors in our debt, not the U.S. taxpayers. Then we put that to use in communities and provide tremendous public benefit through both our liquidity and affordable housing missions. There have been studies showing we reduce interest rates and the cost of mortgages. Our activity goes to support the perpetuation of the 30-year fixed rate mortgage. We're kind of the circulatory system for the financial services sector and that's beneficial to everyone. I think we've been disappointed that when folks look at the subsidy, they tend to ignore the fact that it's paid by the investors.

What’s the outlook like for affordable housing goals?

Last year, the system came together and each of the banks decided that they would make a commitment to contributing 15% of their earnings to affordable housing programs, or some sort of discretionary programs that go to support affordable housing and community development. That was reflective of a couple of things.

During the FHFA review, we did a great deal of listening to what our stakeholders had to say and I think if you took a theme from that review, it was that they want more from the system. We wanted to respond while the FHFA was in the process of implementing its recommendations. We knew it was going to take some time, and there were things that we could begin doing. The percentage we chose was in the Biden administration's Build Back Better Act and a number of stakeholders were talking about ir.

As a result of the extraordinary year we had on the liquidity side, this year we expect to contribute about $1 billion dollars to affordable housing and community development.

Does the report’s membership data show a change in the mix?

We've seen growth over the last several years in the CDFI number. It's grown substantially from 10 years ago, and there's a lot of effort going into trying to make the system and the value proposition more attractive for them. Credit unions continue to be a growing sector of the membership as well.

You'll see there are a number of insurance companies, which have been eligible to be members of the Federal Home Loan Bank since the beginning. During the review in the past year, we heard some criticism about that from folks, but I would challenge folks to ask what happens if they weren't members. You have got to have homeowners insurance to get a mortgage, right? So insurance is an important part of housing finance. Our insurance company members use the system to help ensure that they've got the liquidity to pay off claims.

What are the prospects for nonbank mortgage membership like?

Membership in the Home Loan Bank System is really the purview of Congress. Throughout history, Congress has adjusted what types of entities are eligible to be members of the Home Loan Bank System. I think one of the things that has largely been the case when Congress has considered entities for membership is the concept of some sort of prudential regulation, either at the federal or the state level. That seems to be an important consideration. Nonbank lenders do have indirect access to the Home Loan Bank system through the banks they use for warehouse lending. So they do have the ability to get some of the system's benefits.

How active have the mortgage purchase programs been?

The Federal Home Loan Bank systems' mortgage purchase purchase activity increased about 9% in 2023. Nine of the 11 banks operate some sort of mortgage purchase program, many of them are affiliated with the Mortgage Partnership Finance program that Chicago runs. This is just one more way for us to work with members and make sure that we're fulfilling their liquidity needs.

What about special purpose credit programs?

This is an area where the Home Loan banks were already doing some great work. As we move forward, there could be opportunities to do more. A new Boston program launched last year called Lift Up Homeownership, and it's designed to really support first-time homebuyers of color that earn up to 120% of the area median income. It provides grants of up to $50,000 and they were just getting it started in 2023, but I think it's already having an impact. Pittsburgh has a program. It builds on its Banking on Business program, which has been around for more than 20 years. They created the Banking on Business Inclusion and Equity fund. What this does is provide loans of up to $200,000 to minority- and women-owned small businesses. They contributed or committed $5.2 million to support 40 small businesses in their district. What that did was it helped to create or maintain more than 300 jobs. We support housing and community development. Folks have to have jobs to afford homes, and they've got to have cars to get jobs. So when banks are engaged in programs like the Pittsburgh program, it's helping those folks access homeownership.

Any final thoughts on what this report means for the future?

To wrap up, I would just say we want to make sure that policymakers, our members, and other stakeholders know the work that we're doing. We wanted to tell our story about the impact that we're having on the financial sector, in terms of helping to make homeownership more affordable and developing communities around the country. I would also say that, as with all efforts like this, it's a work in progress. In the last two years, the 11 banks have established nearly three dozen new programs to try to address the needs of their districts. There's more work going on with that. The other thing that I point out is that even though a lot of this work was ongoing before the review, as we listened to the review, we did not wait for FHFA to write its report before we started to take action. All of the work on the affordable housing side and the community development side is supported by our member activity on the liquidity side. So as we look forward, it is going to be critical for policymakers, whether it's at FHFA, Treasury, the Fed or Congress, not to impair our members' ability to access the Home Loan bank system. Doing so could impact the system's ability to continue to deliver substantial amounts of support for affordable housing and community development. We're proud of the work that is represented in this report. The Home Loan banks continue it.