How an Obscure $1 Trillion Government-Sponsored Banking System Can Help Solve Our Housing Crisis

Earlier this month, Deputy Secretary of the Treasury Wally Adeyemo sent a stern letter to the Federal Home Loan Bank (FHLB) Presidents, telling them to step up to their mandate and mobilize a portion of their over $20 billion in resources to help resolve the nation's housing supply crisis. Last Thursday the FHLB Presidents reacted to the U.S. Treasury in their letter, showing once again that they care more about their own and members' profits than about the nation's housing needs.

The FHLB System may seem obscure, but this System that Congress chartered with special tax exemptions, powers and regulatory benefits extends over $1 trillion in discounted loans a year to banks and insurance companies. To do so, it receives an estimated $7.3B in indirect government subsidies each year. Back in the 1930s, it was founded to boost housing construction and lower mortgage rates. But currently over 85 percent of their billions in profits go to paying dividends and boosting the FHLBs investment portfolios every year. Meanwhile, their main line of business - lending cheap loans, so-called "advances" - has lost almost all its connection to housing finance as a diminishing share of FHLB members even originate mortgages anymore.

In their response to the U.S. Treasury, the FHLBs show that they are unwilling to make a true difference for housing in their districts. The FHLBs are balking at the Treasury's request to contribute at least 20 percent of their net income to Affordable Housing Programs (AHP). As the FHLB Presidents wrangle themselves into rhetorical absurdities, to avoid paying one single dollar more on Affordable Housing Programs, they write that "raising the contribution threshold will not address the underlying complexities of the housing crisis," meaning they believe that more money for housing will not solve our housing issues.

But hundreds of housing organizations nationwide are vying to get more AHP funds. Some organizations called the current AHP application process a "lottery" as demand always much exceeds funding availability. Down payment assistance funds allocated through AHP run out in a matter of days. More AHP funding could help fund more affordable housing developments, repair the existing housing stock, and help first-time homebuyers with downpayment assistance. With so much need, we need more funds for housing, not less.

In their reaction to U.S. Treasury, the FHLBs also staunchly defend their right to continue to sit on over $20 billion in unrestricted retained earnings, a capital stock that has ballooned by billions each year since 2008, and currently sits much in excess of the capital standards that FHFA set to ensure safety and soundness. U.S. Treasury requested that the Banks devote a portion of this excess capital to create a capital pool that can be used to lower the cost of housing construction: they are not asking the FHLBs to give it away, but to leverage part of this capital pool to invest in housing. But while the FHLB Presidents in their letter argued that more money for housing is moot, they find that more capital for themselves is better - all purportedly in the name of safety and soundness. But profitability lies behind this refusal, as the FHLBs use their retained earnings as a very profitable investment portfolio to boost dividends and add even more to their capital every year.

It is disappointing and disconcerting - a sign of a government-sponsored banking system gone astray. The FHLBs' defense of their profits and their capital hoarding comes at the expense of millions of families across the country who can no longer afford their rent or fear they may never buy a home.

CFA strongly supports FHLB reform. Such reforms could lead to billions of additional dollars being diverted to tackle our housing crisis. Congress should pass a bill that mandates that 30 percent of FHLB profits go to affordable housing each year and that part of the FHLBs' excessive unrestricted retained earnings become a loan fund to help spur housing construction nationwide.

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