Hidden Value: Data Reveals Economic Impact of Little-Known Federal Home Loan Banks

By Brenda Thompson

For many Americans, the Federal Home Loan Banks (FHLBanks) are a mystery. Unlike household names like Fannie Mae and Freddie Mac, these government-sponsored enterprises operate largely behind the scenes, providing funding to financial institutions across the country. A recent study, however, is shining a new light on their significant economic impact – and igniting debate about whether they are truly fulfilling their original mission.

According to the study, conducted by the Urban Institute and released earlier this month, the FHLBanks delivered approximately $8.4 billion in economic value in 2023. This includes support for community lending, affordable housing initiatives, and providing a crucial liquidity backstop for banks, especially during times of financial stress. The findings come as policymakers increasingly scrutinize the role of government-sponsored enterprises in housing finance.

A System Rooted in the Great Depression
The FHLBank system was established during the Great Depression to provide a stable source of funding for home loans. The system is comprised of 11 regional banks, each serving a specific geographic area. These banks are owned by their member institutions – banks, credit unions, insurance companies, and community development financial institutions (CDFIs). Member institutions purchase stock in their regional FHLBank, granting them access to low-cost funding, known as advances.

"The FHLBanks are an incredibly important component of the financial system, though often overlooked,” said one financial industry analyst who wished to remain anonymous. “They provide a vital layer of support for community banks and credit unions, which are essential for lending in underserved areas."

Beyond Liquidity: Quantifying the Economic Impact
The Urban Institute study breaks down the FHLBanks’ impact in several key areas. It found that the system supported over $40 billion in residential mortgages, roughly 4% of all single-family mortgage originations in 2023. More than half of these loans went to first-time homebuyers. The study also highlighted the FHLBanks’ crucial role during the banking turmoil of 2023, providing a vital source of liquidity when several regional banks faced collapse.

However, quantifying the FHLBanks’ impact isn’t straightforward. A significant portion of their economic value comes from providing low-cost funding, which translates to lower mortgage rates for borrowers. But accurately measuring this impact requires complex modeling and assumptions.

A Shifting Mission and Concerns About Subsidies
The FHLBanks are funded through a combination of member stock and debt. They receive an implicit government subsidy, estimated at $6.9 billion to $7.3 billion annually by the Congressional Budget Office (CBO). This subsidy allows them to borrow at lower rates than private institutions. The critical question is how effectively this subsidy is being used.

Critics argue that the FHLBanks have strayed from their original housing finance mission. A growing portion of their advances now goes to non-housing related activities, such as funding commercial real estate and municipal bonds. They point to the fact that in 2023, dividends paid to member institutions – $3.7 billion – vastly exceeded the funds allocated to affordable housing programs – $856 million.

“The system is increasingly benefiting large institutions and diverting resources away from its core mission of supporting affordable housing,” said one advocate for housing reform, who spoke on condition of anonymity. “It’s a case of public funds benefiting private profits at a time when housing affordability is a national crisis.”

This criticism isn’t new. Several reports have highlighted the increasing proportion of advances going to non-housing activities. The Brookings Institution, in a recent analysis, found that the FHLBanks’ lobbying efforts and high executive compensation raise concerns about a shift in priorities.

Defending the System’s Value

Defenders of the FHLBanks argue that the system remains vital for financial stability and community lending. They point out that the FHLBanks provide a crucial liquidity backstop for banks, particularly during times of stress. They also emphasize the system’s support for community development financial institutions (CDFIs), which are essential for lending in underserved areas.

“The FHLBanks play a critical role in supporting small and medium-sized banks, allowing them to compete with larger institutions and serve their communities,” explained one industry analyst. “They’re a vital part of the financial ecosystem.”

They also counter that the dividends paid to member institutions are a legitimate return on investment and incentivize participation in the system.

The Road Ahead: Reform and Reassessment

The Urban Institute study and ongoing debate surrounding the FHLBanks are likely to fuel calls for reform. Possible reforms include:

• Increased Focus on Housing: Directing a larger proportion of advances towards housing finance, particularly affordable housing.
• Strengthened Oversight: Enhancing oversight and accountability to ensure the system is fulfilling its public mission.
• Recapitalization: Addressing the system’s capital structure and ensuring its long-term stability.
• Transparency: Increasing transparency about the FHLBanks’ activities and financial performance.

“The FHLBank system has evolved over time, and it’s time for a comprehensive reassessment of its mission and structure,” said a policy analyst specializing in housing finance. “Policymakers need to ensure that the system is effectively serving the public interest and addressing the urgent need for affordable housing.”

As the housing landscape continues to evolve, the future of the FHLBanks remains uncertain. However, one thing is clear: a robust debate about their role and value is essential for ensuring that they continue to serve as a vital pillar of the American financial system.