The
As the FHFA begins to implement the recommendations that came out of its yearlong study of the Home Loan Bank System and federal banking regulators pressure community banks away from Home Loan bank advances, the
The Home Loan banks are 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.
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 across the nation. In addition to fueling local lending, the Home Loan banks are required by law to apply at least 10% of their earnings to the system's
The result is a proud record of supporting the housing finance system. A
Not all Home Loan bank member financial institutions directly access advances, but they know those funds are there as a backup source of liquidity. Throughout the financial crisis, 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.
All of this is done
Unfortunately for the local communities that depend on the Federal Home Loan Bank System, these successful fundamentals are at risk of being undermined by a regulatory crackdown that could impede access to home loans.
Positive feedback from participants in existing programs led to the decision to expand them in order to assist more lenders.
Even before the FHFA issued a recent
Meanwhile, community bankers are reporting that they are being penalized by bank examiners for including access to Home Loan bank advances in their liquidity stress testing scenarios. Instead, prudential regulators are directing banks to the Federal Reserve's discount window, which is presenting technical and operational challenges and delays for many community banks.
Ultimately, the combined regulatory pressure from the FHFA on the Home Loan banks and from the prudential regulators on the system's member-owners could severely hamper access to mortgage credit at the worst possible time.
To avoid hindering mortgage lending, the FHFA should ensure its review does not create additional requirements that restrict advances to members in good standing and with eligible collateral. Any new arbitrary standards for member-owners threaten to cut off community banks from the system, which would restrict local investment.
While the FHFA is reviewing the Home Loan banks' mission, their statutory
Instead, regulators should work together to maximize access to the system. For instance, the FHFA should align the capital requirements for Home Loan bank member advances with the prudential regulators to avoid disruption and possible liquidity problems for otherwise well-capitalized community banks.
The Federal Home Loan Bank System has worked well for over 90 years, providing community banks with liquidity to fund mortgage lending and community development projects. Given current challenges in the housing market, this system must remain a strong, stable, reliable source of funding based on a regional and cooperative structure that best addresses the diverse needs of its members and the local markets they serve.