Recent news stories have highlighted the Federal Home Loan Bank (FHLB) of San Francisco’s decision to provide billions of dollars in loans to Silicon Valley Bank and Silvergate Bank in the weeks leading up to their failures.
While many Americans are familiar with mortgage giants Fannie Mae and Freddie Mac, far fewer know about the 11 regional FHLBs, a group of government-chartered institutions with a relatively low profile. Nevertheless, the FHLBs are critical players in our housing finance system, with about $1 trillion in assets and significant value derived from their implied government backing. The FHLBs are poised for an overhaul and, given the taxpayer-funded benefits they enjoy, Congress should insist they play a more active role in responding to today’s affordable housing crisis.
Over the past 15 years, the United States has underbuilt housing by millions of units. Since the Great Recession, homebuilding has failed to keep pace with population growth and new household formation, resulting in steep increases in home prices. The scarcity of affordable homes is particularly acute, making it extremely difficult for low-income families to find and secure housing. Nationally, there are 33 affordable and available units for every 100 extremely low-income renters. The annual construction of starter homes for sale has steadily declined over the past 50 years and is now just a fraction of what it was in the 1970s.
It took time to dig this hole, and it will take time to get out. What we do know is that significantly increasing America’s supply of affordable homes will challenge policymakers to use many different tools in their policy toolbox, including pushing the FHLBs to do more.
By way of background, the FHLBs were established more than 90 years ago as for-profit cooperatives with the objective of being a reliable source of mortgage liquidity for their members. Member banks receive below-market-rate loans in the form of cash advances from the FHLBs. In return, they pledge their assets as collateral to the FHLBs. This liquidity function is very important in moments of financial stress: During the Great Recession, when mortgage financing largely dried up, the FHLBs remained a reliable source of liquidity for their member institutions.
FLHBs are also charged with an affordable-housing mission. To this end, each FHLB is required to contribute 10 percent of its net earnings to an affordable housing program, funding that is set aside to support low-income housing construction and rehabilitation. In addition, the FHLBs provide low-cost financing for housing and economic development initiatives in low-income neighborhoods.
However, when you do the math, it appears the advantages enjoyed by the FHLBs from their government-sponsored status dwarf the public benefits they provide. These advantages include the implied government guarantee of their debt, which allows FHLBs to borrow at discounted rates, as well as exemptions from federal, state and local taxes. According to one estimate, the FHLBs receive several billions of dollars in taxpayer subsidies annually. Despite these subsidies, the FHLBs’ paid out more than $1 billion in dividends to their member banks in 2021 while their affordable housing program contributions totaled a mere $350 million.
The FHLBs’ regulator, the Federal Housing Finance Agency (FHFA), announced last year it would undertake a comprehensive review of the FHLBs, examining their mission and role in providing mortgage liquidity and promoting affordable housing. The review will culminate with an agency action plan as well as a list of recommendations for Congress, presenting an opportunity to advance reforms to the FHLB system that enhance their support for affordable housing activities.
As a start, Congress could increase the amount the FHLBs contribute to the affordable housing program above the current level of 10 percent of net earnings. Since the FHLBs are exempt from taxes, the 10 percent represents a small contribution for institutions meant to serve the public. Rather than requiring a percentage of annual earnings, Congress could also consider basing affordable housing program contributions on a multi-year average of outstanding balances of FHLB advances, as some experts have suggested in the interest of reducing year-to-year volatility.
Affordable housing program grants tend to fund a small share of total development costs, so requiring greater contributions from the FHLBs could allow the grants to increase their support for each individual project. Raising the FHLBs’ minimum AHP contribution level could also spread its affordable housing impact to more regions of the country. Due to limited resources, some states get scant support: Of the $17 million awarded by the FHLB Dallas, New Mexico received only $750,000 in 2022.
In the 118th Congress, any significant legislation will require bipartisan support. Both parties should agree that taxpayer-subsidized institutions ought to serve public missions. Once Congress receives FHFA’s recommendations, it should be even better equipped to find common ground working across the aisle to develop solutions that enhance the FHLBs’ affordable housing mission.
Dennis C. Shea is the executive director of the J. Ronald Terwilliger Center for Housing Policy. Owen Minott is senior policy analyst for housing and infrastructure at the Bipartisan Policy Center.