Home Loan Banks Are Adrift and Asking for Trouble
A system designed to reduce the cost of mortgage lending has turned into a liquidity backstop for banks, but without the Federal Reserve’s powers.
Things have changed since the 1930s.
Photographer: Saul Loeb/AFP/Getty Images
A rethink of America’s dysfunctional housing finance system is long overdue. The system’s most infamous exemplars are Fannie Mae and Freddie Mac, still critically undercapitalized after almost 15 years in government conservatorship. But the 11 regional Federal Home Loan Banks may be a better place to start.
The home loan banks were created during the Great Depression to support mortgage lenders and reduce the cost of homeownership. Each one acts as a cooperative funded by its member institutions, which include banks, thrifts, credit unions and insurers. Thanks to a $4 billion federal credit line, generous tax exemptions, and an implicit government backstop, the FHLBs can borrow on favorable terms and provide cheap liquidity to their members. They also support affordable housing and other initiatives.