As banks rack up record levels of deposits, the Federal Home Loan banks' core business of providing liquidity to member institutions is drying up, leading some critics to question the institutions' long-term viability.
The lifeblood of the Home Loan banks — advances to banks, credit unions and insurance companies — plummeted 20% last year to $350 billion, its lowest level in 15 years. The Home Loan banks say the decline is part of the normal ebb and flow of the market.
But the dramatic drop in advances over many years has renewed calls by critics and a handful of insiders for the creation of an independent advisory committee to scrutinize the 11 Home Loan banks' purpose and relevance.
Questions have been raised about whether the banks have strayed from their mission of being a low-cost funding source to spur home lending, primarily through community banks. Some critics say the banks' CEO pay is absurdly high, they cater to larger members, and should be consolidated and modernized.
On Thursday, the Home Loan banks' regulator, acting Federal Housing Finance Agency Director Sandra Thompson, threw her support behind the idea of creating an advisory committee, but stopped short of committing to create one.
“I think an advisory committee, that's a great, good idea, it may be something we might give some consideration to as we move forward,” Thompson said, speaking at a "fireside chat" with Dennis Shea, executive director of the Center for Housing Policy at the Bipartisan Policy Center. “We do try to the extent we can when we have a major policy, to try to get as much input as we can, whether it's through regulation and public comments or even a" request for information.
Thompson candidly acknowledged that the FHFA’s near-term focus is squarely on Fannie Mae and Freddie Mac, now in their 14th year of conservatorship, rather than on the Home Loan banks, which were were created in 1932 to provide liquidity and spur homeownership during the Depression.
“The Home Loan banks are very important institutions and they really warrant modern-day scrutiny,” said Karen Petrou, co-founder and managing partner of Federal Financial Analytics. “They’ve always flown under the radar because Fannie and Freddie are huge and take up a lot of bandwidth.”
When the pandemic hit in March 2020, member institutions tapped the Home Loan banks for liquidity in droves and advances spiked to $807 billion. But when federal stimulus programs kicked in, financial institutions were themselves flooded with deposits and advances tanked. Now, with rising interest rates, the potential for greater demand is increasingly remote.
“Banks have more deposits than they know what to do with," said John von Seggern, president of the Council of Federal Home Loan Banks, a trade group. "We didn’t start losing advances until COVID happened and the government started pumping money like crazy into the market."
By contrast, during the financial crisis, funding through the Home Loan banks hit a high of $1 trillion because institutions would not lend to each other. The Home Loan banks filled the gap.
“In 2008, if we hadn’t been there to provide liquidity to our members, we would have had failures like crazy,” von Seggern said. “Liquidity is what we provide and liquidity changes.”
But some critics claim the banks are primarily used by large institutions and have strayed from their purpose. Roughly 38% of the bank's advances are held by banks with more than $50 billion of assets.
Last year, the Home Loan banks' largest borrower was the New York insurance giant MetLife, with $760 billion of assets, followed by the $59 billion-asset New York Community Bancorp in Hicksville, New York. Other top borrowers include JPMorgan Chase, with $3.8 trillion of assets; the New York pension giant TIAA, with $346 billion of assets; and Midland Financial, the holding company for the $32.1 billion-asset MidFirst Bank in Oklahoma City, Oklahoma.
The Home Loan banks' relevance is also being tested by its own membership. Of nearly 6,600 members, those tapping advances fell 13% last year to 3,019 institutions. Credit unions and insurance companies make up nearly 25% of members with advances outstanding.
“It’s a very exclusive club,” said Cornelius Hurley, an adjunct professor at Boston University School of Law and a former independent director of the Federal Home Loan Bank of Boston. Hurley first
Before the financial crisis, the Home Loan banks were routinely criticized for skyrocketing executive compensation that had no connection to performance. Home Loan bank presidents are still among the most highly paid, quasi-government employees.
Last year, W. Wesley McMullan, the outgoing president and CEO of the Federal Home Loan Bank of Atlanta, earned $4.9 million in total pay, down from $5.8 million in 2020 and $6.2 million in 2019. A 33-year-veteran of the Home Loan bank system, McMullan retired last May.
Cindy L. Konich, president and CEO of the Indianapolis Home Loan bank, earned $2 million in total pay last year, down from $6.6 million in 2020 and $7.5 million in 2019. The base salary for Konich, a 38-year veteran, fell 4% last year to $959,946, according to the bank's annual report.
Jose Gonzalez, president and CEO of the New York bank, earned a base salary of $996,000 last year and total pay of $2.7 million. In 2020, his total pay was $3.6 million, up from $4.8 million in 2019.
Bank presidents' lower pay in the last two years comes as three Home Loan bank presidents — in Atlanta, Boston and San Francisco — had retirements.
Oversight of the banks' performance and executive compensation changed in 1999 with the Gramm-Leach-Bliley Act, which removed the requirement that a regulator sign off on bank pay.
Compensation for each bank is set by individual bank boards based on performance goals, said Kania Lottie, senior vice president and head of human resources at the Indianapolis bank. Pay is "reasonable and comparable” to institutions of a similar size and function, she said in an email.
The banks are cooperatives, owned by their members, and each bank pays dividends that have been lucrative to financial institutions, especially during the low-rate environment. But some suggest that structure creates odd incentives that warrants further oversight.
“The Home Loan Bank System is a terrific business model that has outlived its purpose,” Hurley said.
Others question the need for the system to have such a sprawling geographical footprint, which may have made more sense when the Home Loan banks were established 90 years ago but is largely redundant today.
“Why do we have 11 banks with payroll and overhead providing financing to institutions that get financing digitally?” said Gerry Mulligan, a veteran banker and former director at the Boston bank.
Still, changes to the banks' mission and membership require congressional approval, a heavy lift in an era when few issues garner substantial bipartisan support. Among the topics an advisory committee might explore is whether the banks should do more for affordable housing and potentially open their membership to nonbank mortgage lenders that dominate home lending.
“They are critically important and underutilized as tools for housing because their membership is restricted,” said Dave Stevens, CEO of Mountain Lake Consulting and a former commissioner of the Federal Housing Administration and former head of the Mortgage Bankers Association.
Lawmakers also have called for the banks to boost investments in affordable housing and, potentially, other areas such as small business loans. Sen. Catherine Cortez Masto, D-Nev., introduced a bill last year that would double the banks' investments in affordable housing to 20% of their net income, up from the current 10% mandate.
Mulligan said the Home Loan banks' reason for existence became outdated in the 1970s when mortgages were first packaged and sold into mortgage-backed securities. The liquidity created by MBS has long eroded the original purpose of the banks.
“In 2022, should the U.S. government be concerned about subsidizing market-rate housing?” Mulligan said.
Critics expect pushback from the banks themselves on the formation of an advisory committee. Though Thompson was noncommittal, she noted that stakeholders have not been shy about the need for more scrutiny.
“Transparency is pretty important, it’s very important,” Thompson said. “Public input and stakeholder input is extremely important because every decision we make impacts lots of different stakeholders. Before we make policies I really like to know who's involved, how's it going to be impacted? And then we can make a more fulsome decision. And that's one of the nice things about working with so many stakeholders. They're not afraid to tell you their opinions.”
