The Federal Home Loan banks have a vastly different view of their mission compared to their regulator, the Federal Housing Finance Agency, setting up a potential clash as the system faces its first major regulatory review in 90 years. The review proposed last year by FHFA Director Sandra Thompson will determine whether the $1.1 trillion-asset Home Loan Bank system is providing the public service it was created to provide. 

The 11 Home Loan banks are bank cooperatives that provide low-cost funding to 6,500 members including banks, insurance companies and credit unions. Critics suggest the system and its members receive outsized benefits compared to the public mandate that each bank set aside 10% of their profits for affordable housing and community development. 

Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, a trade group for the system, said the banks “welcome” the FHFA’s review. But he also warned that changes to the system’s membership or to its low-cost loans, known as “advances,” could reduce the amount the banks set aside for affordable housing. Donovan also emphasized that liquidity provided to community banks, in-and-of-itself, supports its affordable housing mission.   

“Our activity helps support the 30-year, fixed-rate mortgage, and helps support community banking, and that’s something we want to emphasize,” said Donovan. “We help make more credit available and we help make it available at a lower cost, and I’m just not sure that’s getting enough attention.” 

The Home Loan banks’ core business is booming. The system lends money to members in the form of secured loans, and issues bonds that carry an implied government guarantee. Last year advances jumped 133% to $819.1 billion in 2022 — up from $351.3 billion in 2021, a 15-year low. The increase was driven by members’ demands for liquidity due to declining deposit balances, loan growth and the effects of higher interest rates, said the Home Loan banks Office of Finance. The amounts include advances made to credit unions and insurance companies.

“The one thing that has not gotten enough attention or appreciation during the review process is the important role our liquidity mission plays in supporting the affordable housing mission,” Donovan said. 

Last month, Thompson offered fresh insights into her thinking about the FHFA’s review that is refocusing the system on its housing mission. Thompson has praised the Home Loan banks for providing liquidity to community banks but also has questioned why large banks and insurance companies tap the system for “balance-sheet purposes.” She has said the housing mission needs to take center stage. The FHFA is expected to issue a report this summer with suggestions for regulatory and legislative changes. 

Speaking at a symposium last month, Thompson emphasized the words “home,” and “loan,” in the system’s title. 

“Thinking about what they were designed for and are they fulfilling their mission — it’s called the Federal Home Loan Bank for a reason,” Thompson said at a symposium in February.

As part of the review, Thompson has held town hall meetings and roundtable discussions across the country that have been packed with community bankers and nonprofits praising the system, though few large banks or insurers have shown up. 

Critics frequently cite the controversy surrounding Silvergate Capital, a crypto-friendly bank that received $4.3 billion from the Federal Home Loan Bank of San Francisco in the fourth quarter of 2022 as its crypto-centric deposit base evaporated. Experts have spent weeks questioning why Silvergate was eligible to receive the advances, given that they were not used to promote housing finance and the bank had recently sold off its mortgage warehouse business. 

“We thought the advance business was to support housing finance, so what does Silvergate have to do with housing finance?” said Mark Calabria, the former FHFA director who is a senior advisor at the Cato Institute. “It certainly raises questions about how focused the system is on housing finance.”

On Friday, the San Francisco Home Loan Bank said that Silvergate, in La Jolla, Calif., had paid back the $4.3 billion in advances that it had borrowed to stave off a deposit run.

Bruce Morrison, a former chairman of the Federal Housing Finance Board, the predecessor agency to the FHFA, and a former congressman from Connecticut, said an important take-away from Silvergate is that the California bank was eligible to tap the system in the first place. 

“What’s wrong with a system where that kind of institution is getting money that was slated for housing and community development activities? That’s the problem,” Morrison said. “We want institutions to be publicly chartered if — and only if — their business is in the public interest, more than just having them as private businesses.”

Within this backdrop, the FHFA is considering a number of changes including the prospect of more closely tying advances to housing. Donovan emphasized the system’s view that advances themselves fulfill the housing mission since the collateral pledged by members is mostly housing-related. Advances, he said, are similar to when a homeowner takes out a home equity line of credit; the money does not have to be spent on housing.  

“Consumers often get a loan called a home equity line of credit and the words ‘home’ and ‘equity’ and ‘line of credit’ are in the title of that product but what a borrower uses that money for may have nothing to do with their home,” Donovan said. “It starts with the collateral, that’s really where the connection is to home loans. Our members are really bringing home loans or mortgage-backed securities to the table as collateral so that our members can address their liquidity needs. Advances are part of our mission to provide liquidity to our members.” 

Among the changes the FHFA is considering is for members to pass a “thrift” asset test to maintain a certain percentage of their assets in residential housing. Past FHFA directors have tried to make such changes. Former FHFA Director Mel Watt had proposed an asset test in 2014 that ultimately was dropped due to opposition, experts said. There also have been eligibility requirements mandated that members originate a certain amount of home loans but they have included significant exemptions for depositories.

Calabria said it is important to understand the history of the Home Loan Bank System. He suggested that FHFA conduct a system-wide review every five years.

“There have been no real changes to the FHLBank system since the savings and loan crisis,” said Calabria, a former chief economist to Vice President Mike Pence. “There are certainly a lot of institutions on the commercial bank side that were once housing finance lenders and they aren’t now. Should they still be in the system?”

On another front, the FHFA may consider ways to more closely align advances to housing. One of the FHFA’s biggest levers would be to change the definition of what qualifies as a long-term advance versus short-term. Currently, long term advances are of five years or more and must be used for housing. Short-term advances may be used for any business purpose. 

Created in 1932 to provide liquidity for savings and loan institutions during the Depression, the Home Loan Bank System now occupies a very different role in housing. Some critics claim the system is largely “irrelevant” in housing finance compared to Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Housing Administration. Moreover, the mortgage market has changed dramatically since the financial crisis, with the majority of home loans now originated by nonbanks who have unsuccessfully lobbied to be let into the system.

The Home Loan banks also have long billed themselves as among the largest providers of affordable housing, though affordable housing has been in crisis for decades. Last year, the banks provided $355 million for affordable housing and community development as part of their mandate, up from $201 million in 2021. Donovan acknowledged that there remains “a big gap,” in the supply of affordable housing and noted that there “may be more ways that we can help.” 

Thompson noted last month that the system supports “just a sliver of the capital stack,” for affordable housing projects. 

Cornelius Hurley, an adjunct professor at Boston University School of Law and a former director of the Federal Home Loan Bank of Boston, said the $4.3 billion in advances to Silvergate has shown the stark contrast to the amount the system spends on affordable housing. 

“The aftershock is the realization of all the community groups that they have been groveling for crumbs when the system is lending billions of dollars to a crypto bank,” Hurley said. 

Going forward, criticism is likely to mount as each of the 11 regional Home Loan banks file year-end financial reports that show a big increase in advances. Profits, dividends paid to member-banks and bonuses to the banks’ C-suite executives are expected to rise in tandem.

Morrison said the Home Loan banks have largely avoided scrutiny for decades by sticking to two standard talking points: congressional support for community banks and their affordable housing program. 

“Inertia is in their favor,” said Morrison. “When somebody criticizes them, they say ‘community banks,’ and ‘affordable housing program,’ and that’s their answer. It takes a huge amount of energy from the regulator, and a lot of fighting with community banks on the Hill to make any change.”

Donovan compared the review process to a trip to the doctor.

“This is kind of like going to your annual physical and instead of you having a conversation with your doctor, everyone you’ve ever met and people you don’t even know, are talking to your doctor about you,” he said. “The Hippocratic Oath is first: ‘do no harm.’ I hope FHFA heeds that wisdom, because some of the ideas put forward would serve to disrupt the liquidity business and would have an impact downstream.”

“For this process to have credibility, it needs to hear from all sides — including stakeholders in the system,” Donovan said, referring to its members. 

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