Congress Worries Federal Home Loan Bank System Is Straying From Mission

Congress is seeking changes at the Federal Home Loan Bank System, with some members arguing the network isn't taking a proactive role in the nation's housing affordability crisis.

At a House Financial Services Committee hearing in Washington, DC, on Tuesday, leaders of the bank system said they've been active the past few years supporting the housing market. But Congress has worried the system isn't doing enough lending to encourage more homeownership.

Congress also scrutinized FHLBank System's role acting as a backstop to the financial system during high-profile bank failures, including those of Silicon Valley Bank and Signature Bank in 2023.

The FHLBank System operates like a bank for member financial institutions. Its 11 government-chartered regional corporations are member-owned cooperatives made up of commercial banks, credit unions, thrifts, insurance companies, and CDFIs. FHLBanks provide these members with liquidity—mainly collateralized by residential mortgage loans and securities—which institutions then use to support real estate and community financing.

FHLBank's institutions are also required to contribute 10% of their profits toward affordable housing activities. But they often voluntarily contribute more. This meant $1.1 billion committed to support affordable housing and community development last year, said Rep. Mike Flood (R-NE), who chairs the subcommittee on housing and insurance.

"I have seen firsthand in my district the important role of the Federal Home Loan Banks," Flood said. "I have found the Federal Home Loan Bank of Topeka’s housing programs to be more efficient and effective in getting capital out to communities than many other federal grant programs."

But congressional Democrats worry the institutions don't have enough guardrails in place to ensure that member institutions are actively lending.

Affordable housing mandate

One bill Democrats support would require the FHLBanks to increase their affordable housing contribution from 10% to 15%. But while the banks often voluntarily give above the 10% cap, leaders fretted that a mandatory requirement to give more could distort their finances.

Barry Lockard, president and CEO of Cornhusker Bank and chairman of the FHLBank Topeka, said the banks want to bring solutions. But he said the proposed requirement needs "careful calibration."

"Just to pull a lever and increase something might have an effect on the safety and the soundness of the bank in the future if it depletes our retained earnings or position within the marketplace," he said.

Another issue: Ensuring banks that join the FHLBank System actually continue to lend. While banks that join are required to devote at least 10% of their assets to residential mortgage loans, there isn't a continuing mandate that they do so. And insurance companies were allowed into the system when it was created in the 1930s, but reforms since then haven't touched them.

So, about 40% of the members of the system don't currently do any mortgage lending at all. Meanwhile the 3% of the banks with more than $10 billion in assets did about three-fourths of the borrowing, said Kathryn Judge, a professor of law at Columbia University.

"It's broken, it's not working," said Rep. Rashida Tlaib (D-MI). "We've got to get back to increasing homeownership and using these programs that were built for that."

Shadow of Silicon Valley Bank

Lawmakers are also critical of the bank system's guardrails after the high-profile collapse of Silicon Valley Bank, First Republic Bank, and Signature Bank in 2023.

That year, the system made $675 billion in advances in one week, including to those entities. The banks involved complied with all federal laws and coordinated with the FHLBanks System, said Ryan Donovan, president and CEO of the Council of FHLBanks.

Rep. Ritchie Torres (D-NY) questioned whether the FHLBanks' intervention during the Silicon Valley Bank crisis created "moral hazard" by "privatizing gains while socializing losses."

"When the Federal Home Loan Bank makes an advance to a failing bank, it secures a priority claim on high-quality assets pledged as collateral," Torres said. "In doing so, it reduces the pool of assets available to the FDIC as a receiver and could potentially increase losses to the Deposit Insurance Fund."

Donovan said the banks closely coordinate with members in distress. They also continue to lend in hopes of working out a resolution.

Jill Naamane, director of the U.S. Government Accountability Office, said the system has changed since the 2023 crisis. GAO found that risk management concerns were raised for years about those banks, but the banks were slow to change and regulators didn't escalate their concerns.

And while the FHLBanks don't receive direct government subsidy, they receive federal and state tax exemptions to the tune of $4 billion to $7 billion. But their annual economic impact ranges from $94 billion to $133 billion.

"Investors do perceive the system is safe and sound, and that Congress has wisely created a structure that perpetuates that safety and soundness," Donovan said.