A recent BankThink piece argued that the Federal Home Loan banks provide “insufficient tangible benefit.”
Drawing that conclusion ignores the importance of reliable and easily accessible liquidity to the health of financial institutions, the mission Congress has given the Home Loan banks to provide liquidity to their members in all economic cycles, and the impact liquid banks, credit unions, insurance companies and community development financial institutions (Home Loan bank members) have on their customers, members and communities.
Home Loan bank members rely heavily on the liquidity provided by their bank. It is access to liquidity that enables them to make more loans, which in turn drive homeownership and community development, strengthening local economies. Without it, depository institutions would operate with lower loan-to-deposit ratios, constricting the availability of credit and making the cost of credit higher. The consequences would be felt by consumers: If banks reduced loan volume just 5% to account for a change in access to Home Loan bank liquidity, borrowers would have access to $50 billion less credit each year from community lenders. Potential homebuyers would face higher interest rates — a less affordable market — making it more difficult for them to buy a home.
Home Loan bank activity also enhances the viability of the 30-year fixed-rate mortgage. The agency mortgage-backed securities (MBS) market enables consumers to access this product and Home Loan bank eligible institutions hold approximately 40% of MBS — providing funding for consumers’ mortgages and enhancing the availability and accessibility of homeownership opportunities. Home Loan banks give their members confidence to hold MBS in the long term because they can use the MBS as collateral and secure liquidity through advances. An illiquid MBS market could lead to the extinction of the 30-year mortgage, a hallmark of mortgage financing only available to homebuyers in America.
Home Loan banks enable so much of what consumers value in housing finance, and, through their members, Home Loan banks have a real, demonstrable impact on borrowers and communities. According to a recent University of Wisconsin study, an additional $130 billion in mortgage lending is conducted each year, and consumers pay $17 billion less in interest payments, because of Home Loan bank activity — a very tangible benefit to consumers.
Home Loan bank activity also serves as a shock absorber during times of financial stress. During the Great Recession, Home Loan banks were the largest source of crisis-related liquidity for the financial system until the Federal Reserve intervened months after the crisis began. And during the early stages of the COVID-19 pandemic, the Federal Home Loan Bank System increased advances by 25% in the last few weeks of March 2020, before Federal Reserve and legislative intervention, as members looked for a stable source of liquidity at the onset of an unprecedented crisis. In today’s higher interest rate environment, Home Loan banks are again answering their members’ needs and making much needed liquidity available. The value Home Loan banks provided to the financial system during these exigent circumstances cannot be understated and should not be forgotten.
The BankThink headline warns that FHFA is coming for the Home Loan banks. If that’s true, the impact will be felt not only by Home Loan bank members, but also by the people and communities they serve.
Many of the ideas proffered during the review process — limiting member credit lines based on their business activity, ongoing housing asset tests, restrictions on large bank access, and requirements to use advances exclusively for housing finance activity — would reduce Home Loan banks’ ability to maintain our level of support for affordable housing, much less expand our impact. Restricting access to, and use of, liquidity would limit member activity, reduce the availability of affordable mortgage finance, and hurt consumers. The consequences would be real and would be felt on Main Streets across the country.
FHFA Director Sandra Thompson has said repeatedly that the status quo is not acceptable. We agree that the need for more affordable housing is real, and we are eager to engage the agency about how Home Loan banks can make a robust impact through the affordable housing component of our mission. The system is already one of the largest contributors to affordable housing, and we want to continue to be part of the solution. However, the importance of our liquidity mission to fulfilling our affordable housing and community development mission — and the consequences of disrupting the liquidity mission — must not be misunderstood.
Disrupting access to liquidity could shrink the Home Loan Bank System, the Affordable Housing Program, the Community Investment Program, and the Community Investment Cash Advance Program, lessening the impact Home Loan banks and their members can have when addressing housing and community development needs of cities, towns, rural and underserved areas across the country. Worse, it could radically alter the nature of banking and housing finance in America.