Review of Federal Home-Loan Banks Is Planned

The FHFA has yet to outline an overriding goal for its review, but it could lead to a push to expand the membership of the system to nonbank mortgage companies and real-estate investment trusts, potentially making the system more housing-focused after decades of what critics characterize as drift. It also opens up the possibility of the system serving purposes in addition to housing.

Founded during the Great Depression, the home-loan banks’ role has evolved. They were an important source of liquidity to commercial banks during the financial crisis of 2008. Since then, they have also become a supplier of cheap funding to some of the largest U.S. banks, in recent years including

Wells Fargo

& Co. and

JPMorgan Chase

& Co.

FHFA’s review will ensure the home-loan banks “remain positioned to meet the needs of today and tomorrow,” FHFA Director Sandra Thompson said.

Jennifer Cowell, executive vice president of the Council of Federal Home Loan Banks, a trade group, said it looked forward to the review. “We welcome this discourse and look forward to exploring how the FHLBanks can continue to fulfill our mission to help communities in the years to come,” she said in a statement.

Nonbank mortgage companies and real-estate investment trusts have come to play big roles in housing finance but generally aren’t among the 6,500 members of the home-loan bank system. Including them could help those firms fill the void left by big commercial banks, which have cut back on mortgage lending to all but the most creditworthy customers.

A move to expand the membership of the home-loan banks would likely require legislation and would intensify debate over whether nonbanks such as REITs should have access to taxpayer-subsidized funding, given that they aren’t subject to similarly stringent regulations.

Bob Broeksmit, head of the Mortgage Bankers Association, which represents nonbank lenders, said his group welcomed the review. “There’s a need for an FHLB system that better reflects today’s housing finance market—not one from the 1930s,” he said in a statement.

In the interim, the Biden administration has yet to set a plan for

Fannie Mae

and

Freddie Mac,

two larger government-chartered housing-finance companies that were taken over by the government in 2008. The Trump administration had pushed to return Fannie and Freddie to private hands but ran out of time before Mr. Trump left office in January 2021. The FHFA oversees both Fannie and Freddie, as well as the home-loan banks.

While Fannie and Freddie buy mortgage loans and package them into securities, the Federal Home Loan Banks play a different role in housing finance: channeling money from global bond markets to thousands of institutions across the U.S.

As of July 31, the system’s borrowings came to about $937 billion, making it one of the world’s biggest debtors and the second-largest in the U.S. behind the Treasury Department. The money flows through 11 regional cooperatives, which feed it to their 6,500 member institutions—commercial lenders, thrifts, credit unions and insurers. Implicit government backing means they can borrow cheaply and pass some of the savings on to members.

Critics characterize the home-loan banks as an institution from an earlier era that today is primarily focused on channeling unjustified government subsidies to large banks. Some have called for the system to be repurposed to have a clearer public-focused mission.

The federal home loan banks “are a bureaucracy in search of a public purpose,” said Cornelius Hurley, an adjunct professor at Boston University’s School of Law who formerly served on the board of the Home Loan Bank of Boston. The FHFA’s review “is the beginning step in finding that public purpose.”

Community bankers say they can count on the home-loan banks for funding if other sources dry up.

Julieann M. Thurlow,

vice chair of the American Bankers Association, earlier this year said it would be a mistake to revamp the system, especially in a period when banks are sitting on stockpiles of customer deposits and have ample sources of funding.

“That is a shortsighted view that would be akin to removing your furnace in the summer,” Ms. Thurlow, who is also president and chief executive of Reading Cooperative Bank in Reading, Mass., writing in the trade publication American Banker. “Trust me, no matter how hot it might get in Boston in July, you’re going to need that furnace come December.”

Daniel Tarullo, the Federal Reserve’s former point man on financial regulation, earlier this year wrote that the home-loan banks’ activities don’t appear closely tied to the aim of improving mortgage finance. The paper, written with two Fed economists, said that the banks might undermine federal regulators, by for instance issuing debt in a way that caters to certain mutual funds, allowing them to avoid Securities and Exchange Commission requirements that more of such funds float in value rather than remain pegged to a $1 share price.

The home-loan banks, the paper said, lacked “a well-articulated contemporary purpose” and could one day amplify or exacerbate systemic stress “without better targeted constraints on their activities.”

Write to Andrew Ackerman at [email protected]

The FHFA has yet to outline an overriding goal for its review, but it could lead to a push to expand the membership of the system to nonbank mortgage companies and real-estate investment trusts, potentially making the system more housing-focused after decades of what critics characterize as drift. It also opens up the possibility of the system serving purposes in addition to housing.

Founded during the Great Depression, the home-loan banks’ role has evolved. They were an important source of liquidity to commercial banks during the financial crisis of 2008. Since then, they have also become a supplier of cheap funding to some of the largest U.S. banks, in recent years including

Wells Fargo

& Co. and

JPMorgan Chase

& Co.

FHFA’s review will ensure the home-loan banks “remain positioned to meet the needs of today and tomorrow,” FHFA Director Sandra Thompson said.

Jennifer Cowell, executive vice president of the Council of Federal Home Loan Banks, a trade group, said it looked forward to the review. “We welcome this discourse and look forward to exploring how the FHLBanks can continue to fulfill our mission to help communities in the years to come,” she said in a statement.

Nonbank mortgage companies and real-estate investment trusts have come to play big roles in housing finance but generally aren’t among the 6,500 members of the home-loan bank system. Including them could help those firms fill the void left by big commercial banks, which have cut back on mortgage lending to all but the most creditworthy customers.

A move to expand the membership of the home-loan banks would likely require legislation and would intensify debate over whether nonbanks such as REITs should have access to taxpayer-subsidized funding, given that they aren’t subject to similarly stringent regulations.

Bob Broeksmit, head of the Mortgage Bankers Association, which represents nonbank lenders, said his group welcomed the review. “There’s a need for an FHLB system that better reflects today’s housing finance market—not one from the 1930s,” he said in a statement.

In the interim, the Biden administration has yet to set a plan for

Fannie Mae

and

Freddie Mac,

two larger government-chartered housing-finance companies that were taken over by the government in 2008. The Trump administration had pushed to return Fannie and Freddie to private hands but ran out of time before Mr. Trump left office in January 2021. The FHFA oversees both Fannie and Freddie, as well as the home-loan banks.

While Fannie and Freddie buy mortgage loans and package them into securities, the Federal Home Loan Banks play a different role in housing finance: channeling money from global bond markets to thousands of institutions across the U.S.

As of July 31, the system’s borrowings came to about $937 billion, making it one of the world’s biggest debtors and the second-largest in the U.S. behind the Treasury Department. The money flows through 11 regional cooperatives, which feed it to their 6,500 member institutions—commercial lenders, thrifts, credit unions and insurers. Implicit government backing means they can borrow cheaply and pass some of the savings on to members.

Critics characterize the home-loan banks as an institution from an earlier era that today is primarily focused on channeling unjustified government subsidies to large banks. Some have called for the system to be repurposed to have a clearer public-focused mission.

The federal home loan banks “are a bureaucracy in search of a public purpose,” said Cornelius Hurley, an adjunct professor at Boston University’s School of Law who formerly served on the board of the Home Loan Bank of Boston. The FHFA’s review “is the beginning step in finding that public purpose.”

Community bankers say they can count on the home-loan banks for funding if other sources dry up.

Julieann M. Thurlow,

vice chair of the American Bankers Association, earlier this year said it would be a mistake to revamp the system, especially in a period when banks are sitting on stockpiles of customer deposits and have ample sources of funding.

“That is a shortsighted view that would be akin to removing your furnace in the summer,” Ms. Thurlow, who is also president and chief executive of Reading Cooperative Bank in Reading, Mass., writing in the trade publication American Banker. “Trust me, no matter how hot it might get in Boston in July, you’re going to need that furnace come December.”

Daniel Tarullo, the Federal Reserve’s former point man on financial regulation, earlier this year wrote that the home-loan banks’ activities don’t appear closely tied to the aim of improving mortgage finance. The paper, written with two Fed economists, said that the banks might undermine federal regulators, by for instance issuing debt in a way that caters to certain mutual funds, allowing them to avoid Securities and Exchange Commission requirements that more of such funds float in value rather than remain pegged to a $1 share price.

The home-loan banks, the paper said, lacked “a well-articulated contemporary purpose” and could one day amplify or exacerbate systemic stress “without better targeted constraints on their activities.”

Write to Andrew Ackerman at [email protected]