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Sandra Thompson, the current director of the Federal Housing Finance Agency, will be noted for boldly undertaking the only comprehensive review of the Federal Home Loan Bank System in almost a century. Her yearslong effort produced a 115-page report detailing a system that is
Ms. Thompson's agency proposed some modest reforms to the system.
That would be the end of the story but for the arrival on the scene of Elon Musk with his "Department of Government Efficiency," or DOGE.
Ms. Thompson and her staff fell short in reforming the antiquated system. However, their yearslong effort has left DOGE with a body of evidence that proves beyond any reasonable doubt the irrelevance of the system. And unlike the agency, DOGE has the political mission and the clout to get things done.
DOGE, if you are listening, here is a $1.3 trillion bureaucracy that defines "low hanging fruit."
Banks fund themselves by borrowing cheaply from the system as an alternative to gathering deposits. It is unreasonable to require taxpayers to subsidize a government enterprise whose primary function is to deprive consumers of a fair rate of return on their savings. Eliminating the taxpayer-subsidized system will require banks to attract more deposits by paying market rates to their customers.
Those banks that are unable or unwilling to offer higher rates to their depositors will be required to seek alternative sources of funding. Certain banks may be required to combine with other institutions to fund themselves. In either case, the transparency of market discipline, not a government subsidy, will determine funding costs.
This is as it should be.
Unwinding the system would have zero impact on housing. Only the 11 CEOs making $3 million each and their minions would scream. And, most significantly, the United States' credit standing would be enhanced by removing $1.3 trillion in contingent liabilities from its books. Moreover, a clear and present
For over 90 years, the Home Loan banks have been dutifully farming the taxpayers' subsidy (estimated by the Congressional Budget Office recently at almost $11 billion per year) and contributing very little to addressing the nation's housing crisis. It has, by choice, operated in the shadows.
On three occasions it emerged from the shadows, and not in a good way.
First, it brought us the savings and loan crisis of the 1980s through its gross incompetence. Second, it
The system owes its existence to a long string of ineffective regulators and to a Congress willing to turn a blind eye to it. Have you ever read about a congressional oversight hearing of the $1.3 trillion Federal Home Loan Bank System? Me neither.
Sen. Elizabeth Warren, D-Mass., a powerful member of the Senate Banking Committee's progressive wing, said that the Federal Home Loan banks have "failed to deliver on their housing and community development mission."
In DOGE, the system may have met its master.
Let us assume that DOGE takes a pass on this obvious target. There is still some unfinished business from the reform effort.
As a sop to its regulator, the system pledged to voluntarily increase its contributions to affordable housing from 10% of its net income to 15%. That would still be a tiny fraction of the system's
With a more friendly regulator in sight, what happens to the system's affordable housing pledge? Was it a real commitment or just a tactic to keep the regulator at bay? Consider that the system has, so far, failed to live up to its pledge. That might be a good indicator of just how serious the system is about affordable housing.
It should be noted too that while the system was advancing its defensive 15% pledge,
Now, is the CEOs' pledge, like the system's pledge, only as good as the results of the next election?
The value of pledges depends on the honor of the people making them and the willingness of the receiving party to demand payment. Time will tell whether the parties here will make good on their pledges.
If they do, the reform effort will at least have had some positive impact. If they do not, the opportunity to fund shelter for millions of our countrymen and women will have been squandered. It is time for the system to step up.
Finally, before the system pops corks over the recent election, its leaders should remind themselves that the Home Loan banks are and always have been a sideshow in the GSE world. Fannie and Freddie are the main event. Unlike the system, Fannie and Freddie really do influence the housing marketplace.
The system is squatting on almost $30 billion in retained earnings. The system and its members think that money is theirs. However, every dollar of it is traceable to taxpayer support of the system. A strong legal and equitable case can be made that the taxpayers, in the public interest, have first claim on those funds.
As the next administration grapples with ways to remove Fannie and Freddie from their 16 years of government conservatorship, that enormous pool of stranded GSE resources will be hard to resist. And in the political realm, the system's overpaid lobbyists are pikers compared to the forces behind the other GSEs.
The system was successful in its efforts to dodge reform. It may come to rue that success when it falls under the cold gaze of DOGE or Sandra Thompson's successor bent on reform of all GSEs.
