The Federal Home Loan banks can — and must — invest more in housing

fizkes - stock.adobe.com

Change is on the horizon for the Federal Home Loan Bank System, a government-sponsored enterprise, or GSE, that offers subsidized loans to its member banks and insurance companies. The Federal Housing Finance Agency, or FHFA, is leading the system's first reform efforts in decades and recently asked the public for input on the mission of the Home Loan Bank System. I lead the Coalition for Federal Home Loan Bank Reform, a group of 14 national advocacy organizations. We believe that the current system has become too focused on maximizing profits. Much-needed Federal Home Loan bank reform can help the system retake its place as a powerful GSE that spurs housing supply, supports affordability and drives investments in underserved communities nationwide.

The Home Loan banks are a system of 11 regional banks that serve 6,500 members, including commercial banks, insurance companies, credit unions, community banks and a small number of community development financial institutions, or CDFIs. As "banks for bankers," the Home Loan banks offer below-market-rate loans, known as "advances," to it members, in exchange for collateral such as mortgages and commercial and residential mortgage-backed securities. Back in 1932, this system spurred mortgage lenders to make mortgages funded by these advances.

Since then, the origination and funding of mortgages has totally changed, but the Home Loan Bank System remains stuck in its 92-year-old business model. A 2023 Bloomberg investigation found that 42% of the banks' members had not originated a single mortgage over the previous five years. The rise of securitization also radically changed the liquidity needs that inspired the original Home Loan bank model. Around 65% of mortgage debt in the United States is securitized into mortgage-backed securities today. A diminishing share of mortgages are held in portfolio.

As a GSE, the Home Loan Bank System enjoys significant public subsidies: around $7.3 billion in 2024 according to the Congressional Budget Office. Most of this subsidy comes from the way that system's GSE status lowers borrowing costs. GSE status confers an "implied federal guarantee" on Federal Home Loan Banks' debt: the perception that the federal government will never let them fail. These government subsidies do not show up as congressional appropriations but do rely on implied taxpayer guarantees, including the high costs of public bailout were the Home Loan banks to fail.

Right now, the public gets very little in return for $7.3 billion in public subsidies. In 2023, statutory and voluntary Affordable Housing Program, or AHP, funding combined to $390 million in spending toward affordable housing, while the system spent more than eight times as much that year on paying out $3.4 billion in dividends to its members. During our severe housing crisis, the Federal Home Loan banks remain content to do the bare minimum.

The Coalition proposes several measures to forge a robust, housing-focused Federal Home Loan Bank System. The FHFA should clarify the mission of banks as providing liquidity for fair and affordable housing and community development rather than merely subsidizing liquidity for financial institutions. This mission should exclude activities like disbursing dividends or investing in the highly liquid mortgage-backed securities market, which do not directly support housing.

Affordable housing

FHFA seeks input on Home Loan banks' affordable housing program

The Federal Housing Finance Agency wants feedback on how the Federal Home Loan banks can improve their affordable housing programs, including efficiencies in the application process.

By Kate Berry

June 20

The FHFA must also refine what it considers mission-supportive, placing greater emphasis on investments that aid lower-income families, rural areas, Native American communities and communities of color, and consistently assess how well the Home Loan banks meet these criteria. Since 2008, they have amassed significant profits, much of which has been funneled into dividends and retained earnings — the system currently has $23 billion above FHFA's required capital standards. This shows that the Home Loan banks had plenty of capacity to fund more affordable housing initiatives if they had wished to do so.

The Coalition suggests using this surplus capital for mission-aligned purposes, such as a credit-enhancement program to ease CDFIs' access to affordable advances by offsetting the risks associated with their unique collateral types and small scales. Additionally, this capital could support a loan fund at each regional bank to facilitate equitable lending, such as small-dollar mortgages and special purpose credit programs.

Access to Home Loan bank advances for larger members should be conditional upon their contribution to the banks' housing mission, with a new requirement that these members maintain at least 10% of their assets in residential housing annually. FHFA could utilize Community Reinvestment Act, or CRA, ratings for commercial banks and set expectations for insurance companies to allocate a portion of their investments to social equity initiatives. Smaller members like CDFIs and community banks, already aligned with these goals, should be rewarded rather than punished.

We also need Congress to act. Congress should align Home Loan bank executive compensation and board governance with mission advancement rather than profit maximization. Most urgently, Congress needs to increase the mandatory contribution to the Affordable Housing Program from 10% to at least 30% of net annual income. Such an increase would have directed an additional $1.4 billion to housing in 2024.

Renters, homeowners and those who are without housing cannot wait to resolve the pressure of rising housing costs and limited supply. We simply cannot afford a trillion-dollar GSE that is sitting on its hands.