In recent months, there has been increased dialogue among policymakers and market participants about the Federal Home Loan Bank System — and for good reason.
The Home Loan banks play a critical role in supporting housing finance and community development throughout the country. They do so by providing low-cost funding to their member financial institutions (that is generally collateralized by housing or real estate assets), purchasing single-family mortgages and providing grant funding to support affordable housing development. The funding provided by the Home Loan banks enables community banks, for example, to focus on local mortgage lending, often in rural areas and to low- and moderate-income borrowers.
These efforts have important implications for the availability and accessibility of housing and the safety and soundness of our financial system. The mortgage and financial markets, however, look much different than they did when the Home Loan Bank System was created in 1932, which is why the Federal Housing Finance Agency — the regulator of the Home Loan banks — launched a comprehensive review of the system in August.
This review has touched on several foundational issues and questions related to the Home Loan Bank System, including the types of institutions that should be eligible for membership, the level of support the banks provide for affordable housing activities, investment in communities and potential operational efficiencies.
The FHFA also plays a crucial role as regulator and supervisor of the Home Loan banks. In this role, the FHFA engages in on-site examinations and ongoing monitoring of each of the eleven regional banks (as well as the system's Office of Finance, which centrally issues debt for the Home Loan banks) to ensure that the banks are conducting appropriate risk management and due diligence in their business activities and in fulfilling their mission. This represents the core of the FHFA's responsibilities with respect to the Home Loan banks.
These responsibilities have received greater attention from stakeholders as of late due to issues that show precisely why appropriate regulation and supervision is needed — namely, Home Loan bank member capital requirements and non-mortgage-related activity.
FHFA regulation requires that Home Loan bank members maintain a positive tangible capital position, or otherwise obtain approval from their primary federal regulator, to continue to borrow from the system. While there are concerns from some members that the FHFA tangible capital requirement is more conservative than their primary federal regulators' capital requirements, the Home Loan banks are not themselves a regulator with full access to the institution's books and records. To ensure the Home Loan banks are not providing inappropriate financing, careful coordination with federal and state supervisory agencies will always be necessary.
More recently, reports of certain Home Loan bank members' exposures to crypto deposits and related activities have drawn attention. The FHFA expects the Home Loan banks to thoroughly underwrite loans — known as advances — to include an ongoing assessment of the financial condition and business activities of their members and, if needed, to adjust their lending facilities appropriately.
When a member is experiencing financial distress, the Home Loan banks are also expected to work closely with the member's primary regulator to ensure their lending remains appropriate. As the complexity of our financial system continues to evolve, it will remain important that the Home Loan Bank System is able to monitor, react and adapt to changes in real time.
With respect to the broader review of the Home Loan Bank System, one question that appears central to many of the issues raised by stakeholders is: Who should benefit from the services offered by the Home Loan banks?
Ultimately, the answer is important because it drives the priorities and all downstream decisions of the FHFA as regulator of each Home Loan bank and the system as a whole. Because Congress created the Home Loan banks to serve a public mission, they do not exist purely to maximize their own standing and profits. They are instead structured to support their members' activities in housing finance and community development. The system is in place — first and foremost — to benefit homeowners, renters and their communities.
Through their members, the Home Loan banks support homeowners and renters every day, but the Home Loan banks can and should do more to create incentives for members to better serve their communities in a safe and sustainable manner. This is particularly true for members in rural, underserved, financially vulnerable and tribal communities.
The FHFA has heard loud and clear through its recent outreach that the Home Loan Bank System is well positioned to do more to address the tremendous housing needs throughout the country.
And even as work is done to identify what more can be achieved by the Home Loan banks, the FHFA's efforts to ensure the safety and soundness of the system will remain as vigilant as ever. The FHFA will continue to expect the Home Loan banks to maintain appropriate standards for members and engage in lending in a prudent manner.
As the review of the system continues, one thing is abundantly clear: The end result of our comprehensive effort will be recommendations that balance the need to continue to support community lenders by protecting the safety and soundness of the system with the need to extend its reach and fully achieve its mission. It will not be a call to simply accept the status quo.
