Federal Housing Finance Agency Director Sandra Thompson is calling for an end to “the status quo” at the Federal Home Loan Bank System and for more funding for underserved, rural and tribal communities. 

For the first time since launching a review last year of the 11 Home Loan banks, Thompson described the path forward for the system, which has largely flown under the radar for decades with little scrutiny from regulators. The FHFA’s review — the first in nearly 100 years — will delve into whether the system is fulfilling its dual mission of providing liquidity to banks that support housing finance while also funding affordable housing and community development. 

“The status quo is not acceptable,” Thompson said at a symposium Friday at the Brookings Institution. “We are dealing with a huge housing supply issue. It’s my job to position the system to be ready for what’s to come. The mortgage landscape has changed. There’s more that they can do on the mission side in a safe and sound manner.”

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“It’s called the Federal Home Loan bank for a reason,” FHFA Director Sandra Thompson says in warning that lenders should primarily be using system advances to promote housing and community development.

Bloomberg News

Thompson was asked to respond to concerns about the moral hazard of the Home Loan banks lending billions to crypto banks. Some critics have questioned why Silvergate Bank, a small bank in La Jolla, Calif., was able to stave off a run on the bank last year by getting $4.3 billion in advances from the Federal Home Loan Bank of San Francisco.  

“We certainly don’t want to be the last stop between viability and receivership — that’s just not the role,” Thompson said. 

The issue of a bank failure has become a point of contention with regulators, particularly regarding crypto banks. In the event of a possible bank failure, the Home Loan banks hold a “super lien” position ahead of other creditors and the Federal Deposit Insurance Corp. If an orderly liquidation results in a loss to the Deposit Insurance Fund, premiums charged to banks typically increase.

The risk of losses to the Deposit Insurance Fund is “very real” Thompson said. Because of the existence of the super lien, a troubled bank could tap the Home Loan Bank System for advances and the system would be repaid while the FDIC’s insurance fund could suffer a loss. “It’s critical that we have better dialogue with the FDIC on these issues.”

One theme to emerge from Thompson and nearly a dozen experts is the apparent disconnect between the system’s mission and short-term advances made to member banks. The Home Loan banks are required by statute to set aside 10% of their profits for affordable housing and community development. Yet many experts said banks that tap a Home Loan bank for short-term funding often have little relationship to housing finance, as was the case with Silvergate. Many banks do not use advances to further any housing mission. Thompson seemed to agree, up to a point.

“Sometimes larger institutions have used the advances for balance-sheet purposes, specifically to be in compliance with their liquidity coverage ratio,” Thompson said, referring to the amount of highly liquid assets that can be used to cover short-term liabilities. “Thinking about what they were designed for and are they fulfilling their mission — it’s called the Federal Home Loan bank for a reason.”

A review of the Home Loan banks began last year, Thompson said, after she read an open letter in American Banker by two insiders advocating for reforms. The letter was written by Cornelius Hurley, an adjunct professor at Boston University School of Law and a former director of the Federal Home Loan Bank of Boston, and William Isaac, a former FDIC chairman. Hurley has been among the system’s harshest critics. In a “fireside chat” with Thompson on Friday, he asked whether regulators consider taxpayers to be stakeholders of the system. Thompson said “absolutely” because the debt issued by the Home Loan banks comes with “an implied” government guarantee. 

Despite Thompson’s comments, the Home Loan banks’ continue to state prominently on their website: “Each FHLBank is operated independently and receives no taxpayer assistance.”

Asked to comment, the Home Loan banks said that they receive no government or taxpayer support. 

“Any perceived implicit guarantee is a reaction of the market, not the government,” a Home Loan bank spokesperson said. “Therefore, it’s inaccurate to insinuate that the government stands behind the FHLBank System’s debts. Instead, there are other protections that send signals to the market that our debt is a good investment.”

Some consumer groups and affordable housing advocates take a different view. Rev. Luis Cortes, the founder and CEO of Esperanza, a Philadelphia nonprofit, said that the Home Loan banks’ $6 billion in annual retained earnings should be used as “a vehicle” to solve the affordable housing crisis. 

“We are getting gamed by the membership,” Cortes said on a panel on Friday. “We should look at this as a business proposition. We are providing liquidity and financing, and we are looking for a better return for the community in the area of affordable housing.”

Thompson said the system does serve a much-needed purpose by providing liquidity to community banks. But she said more could be done to address the needs of “underserved, rural and tribal communities.” 

“What are the products and services that could be offered in a meaningful way?” she asked. 

The policy discussion has shifted from a narrow focus on expanding membership of the system to a much broader consideration of its mission in housing, analysts said.

“We could envision the review leading to new requirements to support affordable housing,” Isaac Boltansky, managing director and director of policy research at BTIG, wrote in a research note on Monday.

The FHFA is holding roundtable discussions on the system this week in Las Vegas, Los Angeles and Boise, Idaho, with other listening sessions expected in Hawaii, Guam and the U.S. Virgin Islands. FHFA is expected to issue a report with recommendations to Congress and on what FHFA plan to do to reform the system. FHFA could issue guidance, rulemakings or supervisory matters to the system.  

The review will be “holistic,” Thomson said, “to better understand if the banks are fulfilling their mission.”

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