The Federal Home Loan Bank System must do more to address the affordable housing crisis and should consider allowing nonbank mortgage lenders to become members, housing experts said Thursday at a listening session hosted by the Federal Housing Finance Agency.
FHFA Director Sandra Thompson has initiated a comprehensive review of the system — the first in the Home Loan banks’ 100-year history. But she cautioned that the FHFA remains in listening mode and plans to host regional roundtable discussions this fall to hear from stakeholders. Interest in the review has been so high that the FHFA extended its listening sessions to three days, up from two.
“It’s been a very long time since we’ve had a thorough look at the mission of the Home Loan banks,” Thompson said in opening remarks. “There is more that the banks can and should do.”
The agency is looking at the banks’ operations and mission to determine if it is meeting the goals set by Congress in 1932 when the system was created during the Depression to provide liquidity and spur homeownership.
“No decisions have been made,” Thompson added. “We’re here to map the future of the banks, not to announce it.”
Bank trade groups and some Home Loan bank members suggested that the system is working well and that nothing should change. But many other housing experts said far more needs to be done to address the affordable housing crisis. Over the three-and-a-half-hour session, many of the nearly three dozen speakers criticized the banks’ Affordable Housing Program, or AHP. In 2021, the Home Loan banks provided $352 million to the program, which some experts said was a drop in the bucket compared to what is needed.
“The level of investment of the AHP program is not impacting affordable housing efforts,” said Marty Miller, executive director of the Office of Rural and Farmworker Housing in Yakima, Washington.
Reporting requirements for the AHP program are onerous, Miller said, and the amount of money provided for housing projects has not kept pace with construction costs and typically averages just 5% of a development’s costs.
“The FHLBs’ priority is to remain in the good graces of FHFA, which can discourage innovation,” Miller added.
The Federal Home Loan banks have come under harsh criticism in the past year by critics including former Federal Reserve Gov. Daniel Tarullo, who has called for more oversight of the 11 regional banks, claiming they have expanded beyond their mission of supporting housing and into activities that pose risks.
Cornelius Hurley, an adjunct professor at Boston University School of Law and a former independent director of the Federal Home Loan Bank of Boston, first suggested in an opinion piece in American Banker, written with William M. Isaac, the former chairman of the Federal Deposit Insurance Corp., that the FHFA create an advisory committee of outside experts to explore ways to modernize the banks.
Bob Broeksmit, president and CEO of the Mortgage Bankers Association, called for independent mortgage bankers to be allowed in as members since nonbanks have supplanted banks in the past decade and now originate the vast majority of home loans.
“New classes of members would increase FHLB advances and earnings,” Broeksmit said, noting that mortgage banks are state-licensed and adhere to liquidity requirements set by Fannie Mae and Freddie Mac.
But bankers generally oppose allowing nonbanks into the system.
Ron Haynie, senior vice president of housing finance policy at the Independent Community Bankers of America, urged the FHFA to “do no harm” to the Home Loan banks by making changes.
“ICBA would oppose any changes to permit nondepositories to access the system,” Haynie said.
His view was echoed by Joseph Pigg, senior vice president and general counsel at American Bankers Association, who said the Home Loan banks are “working as intended and designed.”
“We certainly agree and recognize that more needs to be done by the Home Loan banks and banks generally in addressing the problem of affordable housing,” Pigg said.
Membership of the bank is set by statute and any change would have to be approved by Congress, Pigg said.
Some lawmakers also have called for the banks’ affordable housing mandate to be raised. Last year Sen. Catherine Cortez Masto, D-Nev., introduced a bill that would have doubled the banks’ investments in affordable housing to 20% of their net income, up from the current 10% mandate.
“Allocate more profits to the AHP program,” said Joshua Yurek, director of government affairs at the Midwest Housing Equity Group, a nonprofit in Topeka, Kansas. “FHFA should encourage member banks to allocate an even higher percentage” than the 10% mandate. “These entities have plenty of retained earnings and are well-capitalized. It’s time to put more of FHLB’s profits to work.”
Yurek also suggested that the Home Loan banks should treat community development financial institutions, or CDFIs, as equal members of the system.
The lifeblood of the Home Loan banks is liquidity that comes in the form of so-called advances to banks, credit unions and insurance companies. Advances jumped to $518.9 billion at the end of the second quarter, up from about $350 billion at the end of last year, when advances were at a 15-year low.
Hurley said a core problem is that members can use advances to enhance their earnings.
“Advances can be used for anything,” he said. “They can be used for automobile loans. They can be used for commercial loans. They can be used to pay the CEO’s bonus. The upshot is that there is no connection between system advances and housing finance … none whatsoever.”
Hurley has outlined a plan to establish a bipartisan, 10-member legislative commission to examine the structure, operations and costs of the Federal Home Loan banks. The commission would examine the cost of the banks’ operations including of the implicit government guarantee of the banks’ debt. It also would have control over changes to the banks’ membership including setting standards as to what collateral is eligible to be pledged in return for Home Loan bank advances.
But it is unclear whether lawmakers think there is enough wrong with the banks to support the creation of yet another commission with subpoena power and the ability to hold hearings and take evidence. The listening sessions will continue on Sept. 30 and Oct. 4.