With the Trump administration reexamining housing-finance policy, policymakers should ensure the nation's for-profit Federal Home Loan banks can continue to be
Preserving the current structure of these 11 cooperative institutions — which enable locally based community banks to efficiently support housing finance and community investment — will help ensure this system continues to drive mortgage lending, affordable housing and community development as they have for more than 90 years.
The Home Loan banks use market-based incentives to serve as an important source of financing to their member-owners, including most of the nation's community banks. Community banks use mortgages they hold in portfolio to fully collateralize advances that provide liquidity, which allows them to make more mortgage loans and further invest in their communities.
The Home Loan banks are a cooperative, but they are not nonprofit entities. These banks operate to make a profit and to retain those earnings to build capital and to pay dividends to their shareholders — the financial institutions that own their stock. The banks
This is how the Home Loan banks were designed to work when they were established in 1932, and the system continues to promote access to the housing market in local communities.
In a recent American Banker op-ed (
With the Home Loan banks supporting local lenders with funding for housing and community development projects, being close to those financial institutions and understanding their local markets are key elements of the system.
Like community bank lenders that use their knowledge of local economic conditions to promote sound and effective lending, the current regional structure of 11 cooperatives helps the Home Loan banks be responsive to the needs of those communities. Preserving the existing structure is essential to ensuring funding for markets across the nation.
The subcommittee to be chaired by Sen. Katie Britt, R.- Ala. will oversee servicing and HUD at a time when Republicans are resurfacing legislative proposals they now have more power to advance.
While the benefits to member-owners of consolidating the banks are doubtful, also in question is whether the FHFA could do so unilaterally.
The FHFA director has the authority to merge a Home Loan bank with another if it is in financial jeopardy, but it is not clear that this same authority exists to "improve the efficiency" of the system. These banks are shareholder owned, and the FHFA is a safety and soundness regulator — not a conservator.
The merger of the Des Moines and Seattle Home Loan banks in 2015 was due to the Seattle bank's weak financial condition from the bank's concentration of private label mortgage-backed securities and the loss of its largest member institution, Washington Mutual. The merger, while encouraged by FHFA, was not forced by FHFA but driven by the two Home Loan banks involved — similar to any other bank merger. The members of those respective banks had to approve that merger, and then the FHFA as the regulator had to bless it as well.
Ultimately, policymakers should build on the successes of the Home Loan banks in advancing housing-finance policies. The system has worked extremely well for more than 90 years, never incurring a loss or federal bailout. It expands and provides liquidity to its member institutions in times of economic stress, then contracts as the economy recovers.
For instance, throughout the Wall Street financial crisis of 2008, the Home Loan banks continued to provide advances to their members without disruption, while other segments of the capital markets ceased to function.
This strong support system serves a vital role in the nation's housing finance system, without government funds. Rather than force the consolidation of this system — which is not likely to improve it and may harm access to home loans across the nation — policymakers should focus on reducing the regulatory burden that makes mortgage lending difficult for community banks.
