Don’t Fix What Ain’t Broken at Federal Home Loan Banks

Federal Housing Finance Agency constant review Federal Home Loan Banks has already led to some very real consequences for community banks that rely on these institutions for their primary purpose of supporting housing finance and community investment.

As FHFA begins to implement recommendations stemming from its year-long study of the home loan bank system and federal banking regulators put pressure on community banks to refuse loans to home loan banks, severe measures against this vital intermediary Local lending threatens the housing finance system at a time of high prices and limited supply.

Home loan banks are an important source of financing for their member-owners, including most of the country’s community banks. Community banks use the mortgages they have in their portfolio to fully back advances that provide liquidity, allowing them to originate more mortgages and further invest in their communities.

This is how home loan banks were created when they were created in 1932, and this system continues to promote access to the housing market in communities across the country. In addition to promoting local lending, home loan banks are required by law to invest at least 10% of their income into the lending system. Affordable Housing Programwhich is one of the nation’s largest sources of private sector grants for housing and community development.

The result is a proud record of supporting the housing finance system. A University of Wisconsin study found that the home loan bank system increases mortgage origination by $130 billion and saves borrowers $13 billion in mortgage interest payments per year. And home finance banks assisted 65,000 low- and moderate-income households last year and supported more than 400 targeted economic development projects through the Affordable Housing Program and the Community Investment and Community Investment Cash Advance programs. according to FFFA.

Not all financial institutions that are part of Home Loan Bank have direct access to advances, but they know that these funds exist as a backup source of liquidity. Throughout the financial crisis, home finance banks continued to provide loans to their members without interruption, while other segments of the capital markets ceased to function. This strong support system plays a vital role in the nation’s housing finance system.

It’s all done without Any direct federal appropriation or government guarantee of securities issued by home loan banks that are purchased by private investors using private funds because of the relative safety of the debt.

Unfortunately for communities that depend on the Federal Home Loan Bank System, these successful foundations are at risk of being undermined by regulatory actions that could make access to home loans more difficult.

Even before the FHFA published its recent advisory bulletin Setting out new expectations for how home loan banks should conduct credit checks on their member banks, community bankers have witnessed increasing scrutiny from regulators regarding advances. For example, this summer the Federal Home Loan Bank of New York sent a message to its member banks that it would impose additional reporting requirements on qualitative and quantitative information to comply with the FHFA’s more restrictive approach to lending, which is an unnecessary burden on the advance system. fully secured by mortgage housing loans. No participant should be denied a fully secured advance because of its business model or strategy, especially since all participants are owners of the home loan bank system.

Meanwhile, local bankers report that they are being chastised by banking experts for including access to Home Loan bank advances in liquidity stress testing scenarios. Instead, prudential regulators are directing banks to the Federal Reserve’s discount window, creating technical and operational challenges and delays for many community banks.

Ultimately, the combined regulatory pressures from the FHFA on home loan banks and from prudential regulators on member-owners could seriously impede access to mortgage credit at the worst possible time.

To avoid discouraging mortgage lending, FHFA must ensure that its review does not create additional requirements that limit advances to members in good standing with suitable collateral. Any new arbitrary standards for member-owners threaten to cut local banks off from the system, limiting local investment.

While FHFA is reviewing the mission of home loan banks, their charters mission “providing liquidity to its members to support housing and community development finance throughout economic cycles” is obvious and does not need significant modification or clarification. Congress defined the mission in 1932, changed it in subsequent legislation, and is the only body authorized to change it today.

Instead, regulators should work together to maximize access to the system. For example, FHFA should coordinate capital requirements for home loan member bank advances with prudential regulators to avoid disruption and potential liquidity problems for well-capitalized community banks.

The Federal Home Loan Bank system has worked well for more than 90 years, providing local banks with liquidity to finance mortgage lending and community development projects. Given the current challenges in the housing market, this system must remain a strong, stable and reliable source of financing based on a regional and cooperative structure that best meets the diverse needs of its members and the local markets they serve.