By Nate Scherer, American Consumer Institute
In recent years, the Federal Home Loan Bank (FHLB) has received a torrent of criticism – but the critics fundamentally misunderstand the system they want to change. The criticism is based on bad information and misunderstandings of the FHLB’s critical role in providing liquidity to support housing and community development.
Comprised of 11 regional member-owned banks, the FHLB is tasked with providing liquidity to financial institutions of all shapes and sizes to support housing and community finance, a job that it has performed effectively over its 92-year history.
As a new report from the American Consumer Institute explains, a series of infectious myths underpin the critical narrative surrounding the FHLB. However, critics miss the point when they claim that the FHLB has strayed from its original mission to support housing needs by providing more services to more types of financial institutions instead of directing its efforts to housing finance. The FHLB continues to honor its original mission and has only taken on an expanded role at the direction of Congress.
As the Federal Housing Finance Agency (FHFA), the FHLB’s chief regulator, recently noted in its report FHLBank System at 100, financial markets and FHLBanks have “undergone significant changes over nine decades.” But this is due to “underlying shifts in technology and structured products, land use and development, demographics, legal and regulatory frameworks, and consumer preferences.”
With periodic amendments to the founding Federal Home Loan Bank Act, Congress has repeatedly acknowledged that the FHLB must be free to change and adapt to evolving markets. In 1989, for example, Congress expanded FHLB membership to include institutions like commercial banks and credit unions on the condition that they support affordable housing and community development programs.
Though the Bank Act does not explicitly spell out the FHLB’s mission, it is articulated in the system’s charter and has been elaborated upon by Congress on several occasions. In the Housing and Economic Recovery Act of 2008, Congress stated that one of the primary components of the FHLB mission is to support “affordable housing and community development.”
This mission of the FHLB has not changed, despite claims to the contrary. By most accounts, the FHLB has increased, not decreased, the level of housing assistance it provides. The FHLB now supports various housing and community development programs such as the Affordable Housing Program (AHP), Community Investment Programs, and Community Investment Cash Advance programs.
Since 1990, the AHP has received over $7.6 billion from FHLBanks, supporting more than one million households. The program is funded entirely by FHLBank earnings and is “one of the largest sources of private sector grants for housing and community development in the country.” FHLBanks have also recently volunteered to increase their annual AHP contributions from 10 percent of net profits to 15 percent. According to the Council of Federal Home Loan Banks, the FHLBank System will contribute 1 billion to affordable housing this year alone.
Research suggests that the FHLB continues to play an important role in the housing market by providing borrowers with quick access to funding to meet their liquidity needs. A University of Wisconsin study estimated that the FHLB reduces American interest payments on mortgages by roughly $13 billion each year and “boosts annual mortgage lending in the U.S. by $130 billion, passing those savings along to borrowers.”
As the FHFA acknowledges, “By many metrics, the FHLBanks have achieved this objective, as the liquidity they provide has facilitated affordable homeownership and rental housing throughout the country.”
The critics are wrong. The FHLB has not neglected the housing component of its mission, and it has provided ample support for housing finance, exactly as Congress intended. In fact, the recent increase in the percent of annual AHP contributions provides ample evidence that they are meeting and exceeding their mission for advancing housing and community development – and doing so at no cost to the U.S. taxpayer.
Nate Scherer is with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us at www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.