FHFA's study of Federal Home Loan Banks welcome

The Federal Home Loan Bank System was created in 1932 during the Great Depression to provide depositories with low-cost funds, referred to as advances, to be used for originating mortgages. The reasoning for their creation: banks and thrifts would then be more likely to make loans; as a result, individuals would find it easier to borrow money to buy homes, stimulating the residential real estate market.

There are currently 11 regional FHLBanks throughout the country, with each serving a particular region consisting of several states. These cooperatives are owned by their members, local financial institutions which buy stock in the Banks. The institutions must engage in real estate lending as a condition of membership.

The Federal Housing Finance Agency, the FHLBanks current regulator, announced on Aug. 31 that it will undertake a comprehensive review of the system. FHFA Director Sandra Thompson stated that "FHFA's regulated entities function as a reliable source of liquidity and funding for housing finance and community investment. As the Federal Home Loan Banks approach their centennial, FHFA will conduct a comprehensive review to ensure they remain positioned to meet the needs of today and tomorrow."

FHFA listed six key areas for consideration, including general mission and purpose in a changing marketplace; bank organization, operational efficiency, and effectiveness; the banks' role in promoting affordable, sustainable, equitable, and resilient housing and community investment; and member products, services, and collateral requirements.

Federal Home Loan Bank advances have varied over time as a countercyclical source of funds for lending institutions, rising steadily from $79 billion in 1991 to $927 billion in 2008 during the financial crisis. Those then tailed off but rose again to more than $700 billion for 2016 to 2018 period. However, advances have fallen sharply since then, to $351 billion by 2021, less than half the amount for 2008.

One factor behind FHFA's study was likely an Aug. 29 letter to Director Thompson from Sen. Catherine Cortez Masto, D.-Nev., in which she said the "the Federal Home Loan Bank System needs a refresh." Cortez Masto is one of the most knowledgeable members of Congress regarding the Federal Home Loan Bank System, and, with four cosponsors, she has introduced S. 1684, the Federal Home Loan Banks' Mission Implementation Act.  On the House side, Congressman Ritchie Torres, D-Texas introduced a corresponding bill, H.R. 3323.

In her letter, topics Senator Cortez Masto urged FHFA to consider include:

· Whether the proceeds of FHLBank advances to their members are being used to promote housing and community development.

· How the FHLBanks can help address racial income inequality, infrastructure needs, and challenges holding back small rural communities.

· How affordable housing developers and financiers, local and state governments, climate resilience investors, small businesses and other economic players would benefit from a revitalized and relevant FHLBank System.

· Whether the current operating structure is efficient and optimal. The FHFA should consider if potential new FHLBank mergers should consider improved mission achievement as a factor in approving mergers.

The Federal Home Loan Banks themselves have been of mixed minds about FHFA's study. On May 13, the Council of Federal Home Loan Banks put out a press release saying that "we shouldn't mess with success." But by August the Council stated that they "look forward to robust discussion through FHFA's 'comprehensive review' of the FHLBank system."

The FHFA will kick off its review of the Federal Home Loan Bank System with a forum on Thursday, Sept. 29. Interested parties are invited to present their views at this event.