The Federal Home Loan Bank (FHLB) system, which was initially set up during the Great Depression to ensure that financial institutions had capital for mortgage lending, has transformed into a safety net for banks taking on different risks. The system’s goal and the significant government assistance that private institutions get, however, are raising questions. Despite having little involvement in routine mortgage lending, troubled regional banks like Silvergate Capital Corp., Silicon Valley Bank, Signature Bank, and First Republic Bank have relied on FHLBs for financial support. These banks continue to obtain funding from FHLBs while lowering their lending to homebuyers, joining major companies like Wells Fargo, JPMorgan Chase, and Citigroup in this practice.
With assets topping $1.5 trillion, the FHLB system has grown tremendously, but its contribution to new mortgage finance has decreased. Over 30 current and former FHLB executives, overseers, borrowers, and market participants were questioned in order to shed light on a lending environment where haste trumps due diligence and where FHLBs and the banks they service make large profits. FHLB executives receive large perks as well, including generous bonus payments and remuneration packages. The FHLB of San Francisco’s CEO, Teresa Bazemore, was paid $2.4 million in pay in 2022, a large portion of it in incentives. Such procedures, according to critics, are dubious because executives are basically getting compensated for orchestrating business bailouts.
Even while the government gives FHLBs a lot of support, the support does not show up as a direct budget line item. Instead, FHLBs have preferential treatment that enables them to raise money cheaply. Due to the fact that their bonds are exempt from state and local income taxes, investors find them to be appealing since they believe the government will intervene if required using taxpayer money to avert defaults. The FHLB system has maintained excellent credit ratings thanks in part to the presumption of the government’s support. Government funding is estimated to be worth somewhere between $5 billion and $9 billion, according to both supporters and detractors. When banks receive this support, their financing costs are reduced, and FHLB earnings rise, but only a small portion of those revenues are directed toward initiatives that support housing affordability.
The FHLB system has come under fire for deviating from its basic purpose and failing to address housing affordability enough. Despite growing to serve thousands of banks, it has not been successful in promoting housing affordability. FHLBs are obligated to contribute 10% of their profits to grant programs for affordable housing, but they rarely do so. Some FHLBs are willingly increasing their contribution to 15% of profits, and a proposed congressional resolution would increase it to 20%. Housing advocates contend that the FHLB system’s financial model should place more emphasis on increasing affordability.
The Federal Housing Finance Agency, which is in charge of the FHLB system, launched a thorough examination to take reform options into account. The director of the organization has shown displeasure with the current situation and stressed the significance of FHLBs in maintaining the banking sector during times of market stress. There are requests for increased accountability and a reevaluation of the goals and architecture of the FHLB system, and recommendations for reform are anticipated later this year.
Key Points of this Article
- Originally designed to promote mortgage lending for homebuyers, the Federal Home Loan Bank (FHLB) system has transformed into a safety net for banks taking on other risks.
- Despite having little engagement in conventional mortgage lending, troubled regional banks, notably those concentrating on cryptocurrency enterprises and venture capitalists, have relied on FHLBs for financial support.
- While limiting their lending to homebuyers, major banks like Wells Fargo, JPMorgan Chase, and Citigroup continue to get funding from FHLBs.
- The FHLB system’s assets have increased to over $1.5 trillion, prompting concerns about both its goal and the substantial government assistance it receives.
- According to interviews, loans are provided rapidly and with little due diligence, resulting in significant profits for FHLBs and the banks they represent while executives are paid well.
- Although it isn’t specified officially in the US budget, government support for FHLBs takes the form of special consideration, which enables them to raise money at a low cost and keep their credit ratings high.
- Government support is estimated to be worth between $5 billion and $9 billion, with supporters putting the figure closer to $5 billion.
- Only a small percentage of FHLB profits are allocated to initiatives that promote housing affordability.
- The need for change and a reevaluation of the goals and organization of the FHLB system are mounting, and suggestions are anticipated later this year.
- Housing advocates contend that the FHLB system’s economic model should place a greater emphasis on increasing affordability.
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