Federal Home Loan banks rebuff Treasury, won't give 20% to housing

Bloomberg News

Top executives of the Federal Home Loan banks have refused a request by the Treasury Department to set aside 20% of their profits for affordable housing, saying that any amount above the current 10% set aside required by law must be approved by Congress.

The chairs of the boards of the 11 Federal Home Loan banks sent a letter Thursday to Deputy Treasury Secretary Wally Adeyemo rebuffing his request earlier this month to spend more on the system's affordable housing program. 

"We believe that simply raising the AHP and voluntary contributions to 20% of our pre-assessment net income will not address the underlying complexities of the housing crisis," the bank chairs said in the letter. "This increased funding level, which requires annual approval by each FHLBank's board of directors, is 50% more than what is required by statute. Consideration of a higher set aside should be undertaken by Congress."

The response is the latest skirmish in a larger battle between the Home Loan Bank System, which is under scrutiny after three regional banks failed last spring and another self-liquidated, and the Biden administration, which is trying to fund more affordable housing. Vice President Kamala Harris also has big ambitions to supercharge the construction of more housing.

The chairs of the Home Loan banks said they oppose any efforts to divert profits from its members, claiming that doing so would weaken the system's capital position. Last year, the Home Loan banks agreed to each voluntarily contribute 15% of their net income to the system's affordable housing program. That contribution is expected to reach $1 billion this year, making it one of the largest funders of affordable housing in the country.

The letters will provide more fodder for critics that claim the little-known system, created in 1932 to support mortgage lending after the Great Depression, receives billions in subsidies and generates outsize profits for its members while providing far less support for its mission of affordable housing.

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The banks' profits skyrocketed last year as more banks tapped the system for loans during the regional bank crisis. The Home Loan banks earned $6.7 billion at year-end, a 111% jump from a year earlier. The system also paid out a record $3.4 billion in dividends to its members, more than double the $1.4 billion paid in 2022. 

In early August, Adeyemo and Federal Housing Finance Agency Director Sandra Thompson met with the 11 Home Loan bank presidents and requested that the system deploy significantly more resources to expand the housing supply, according to a summary of the meeting. Adeyemo called for the Home Loan banks to use a portion of their earnings to help lower the cost of housing. 

In the three-page letter, the chairs refused to do so. 

"We are opposed to any approach that could weaken our capital position, as this would ultimately diminish our ability to fulfill our statutory mandate of providing liquidity to the financial system and supporting housing finance and community development," the letter stated. 

Though the Federal Home Loan banks are government-sponsored enterprises, they were structured by statute as private cooperatives, funded with private capital from 6,500 financial institutions including banks, credit unions and insurance companies. 

Critics have nonetheless claimed that members of the Home Loan banks receive billions in low-cost funding and that the system provides too little in return for the massive government subsidy. Last year, the Congressional Budget Office estimated that the government subsidy is $7.3 billion — with $6.9 billion coming from the "implied guarantee" on the bonds sold to investors.  

The Home Loan banks are exempt from federal, state and local taxes, and from registration requirements with the Securities and Exchange Commission, which reduces the system's operating costs.  

The presidents of the Home Loan banks said the structure "must be preserved" to ensure the continued stability and reliability of the system.

"Our retained earnings and capital reserves are not only the foundation for our safe and sound operations; they also insulate U.S. taxpayers from risk," the chairs said in the letter. "But most importantly, they serve as the bedrock for supporting our member financial institutions, whose activity with the FHLBanks is the primary engine for the FHLBanks' affordable housing and community development mission."

In a second letter sent to Adeyemo, the Home Loan banks' presidents wrote that FHFA should instead work to remove "existing barriers" that they said hinder the banks' abilities to implement and grow affordable housing strategies, including broadening access to Community Development Financial Institutions and reducing the administrative and regulatory burden of the housing program. 

"The liquidity provided by each of the FHLBanks to its members stands as the cornerstone supporting the largest source of private capital for affordable housing and community development initiatives in the country," the presidents said. "It is important to preserve the value proposition of the FHLBanks and we seek to avoid changes to the FHLBank System that would reduce net income and result in less funding for affordable housing and community development activities."

The FHFA, the system's regulator, was already conducting a 100-year review of the system when the deposit run on Silicon Valley Bank sparked a liquidity crisis last March that spread across the entire banking system. Last week, a report from the Office of Inspector General revealed that the FHFA had issued informal enforcement actions against the Federal Home Loan Banks of San Francisco and New York for violating regulations and failing to stop lending to banks with rapidly declining financial and liquidity conditions.