As Federal Home Loan Banks turn 90, we shouldn’t spoil the success
This year marks the 90th anniversary of the founding of the Federal Home Loan Bank System. Rather than using this moment to celebrate the essential role that the 11 regional mortgage lending banks play in supporting the economy with liquidity as a lender during times of economic crisis as well as during normal economic cycles, some have instead decided to aim for the mortgage. Banking system and call for change. My advice: don’t mess with success.
Since mortgage lending banks are not well understood by those who do not work with them regularly – over the past nine decades they have been an invaluable and often behind-the-scenes partner for banks and other regulated financial institutions invested in building communities. better and ensuring access to credit for all Americans. As member-owned and capitalized institutions, they have quietly fulfilled a critical need – ensuring liquidity for lenders like my own bank, Reading Cooperative, no matter what economic conditions or crisis may have gripped the economy. in its entirety.
When global credit markets freeze up, as they did during the 2007-2008 financial crisis or at the start of the COVID-19 pandemic, mortgage lenders are the lenders of first resort, stepping up to maintain liquidity in the market when other sources of financing disappear or are slow to act. In response to COVID-19 and the shutdown of the global economy, system-wide advances — loans that mortgage lending banks make to their members — increased by $165 billion, or 25% , over a brief period between March and April 2020, peaking at over $805 billion.
System advances have declined from this April 2020 peak, largely due to federal stimulus measures that have flooded the market and members of banks with real estate loans with liquidity and record levels of member deposits. This is how the Home Loan Bank System is designed – its scalable model allows each bank in the system to grow and contract according to the needs of regional members. And because these members (about 6,600 well-regulated banks, credit unions, insurance companies, and community development financial institutions in the United States) cooperatively own every mortgage bank, the system is very risk averse. Each member of the Mortgage Bank monitors their investment in their respective Mortgage Bank and no Mortgage Bank has ever suffered a loss on an advance in the 90 year history of the system.
Because they are not well known and not very well understood, it leads some to wonder whether the mortgage banking system has lost its usefulness or should be “reformed” to change its purpose. These calls usually come in times of abundant liquidity – like the one we are experiencing – when the appetite for bank advances on home loans is low. It’s a short-sighted view that would be tantamount to removing your furnace in the summer. Believe me, no matter how hot it gets in Boston in July, you’ll need this furnace in December. When economic conditions change – as they certainly will – member financial institutions will need mortgage lending banks as we have for the past 90 years.
Liquidity levels appear to have peaked locally: rising rates, investment returns and an endemic sense of normalization make the Home Loan banking system’s promise of liquidity a necessity for the continued flow of credit. Businesses and consumers in Massachusetts are probably unaware that our local home loan bank in Boston provides a “just-in-time inventory” source of cash and instruments for local banks and credit unions, ensuring the availability of credit to meet all their financial needs.
Moreover, those who believe that mortgage banks should be reformed to extend their usefulness to other types of lenders, such as mortgage companies or fintechs, are missing the fact that these entities have limited tangible assets. and sparse regulations. Since these proposed new members would not have the assets to secure their borrowings or the capital to invest or strict oversight, the risk to existing members would be significantly high. A reform of this type could destabilize the Home Loan Bank System and jeopardize its ability to fulfill its mission.
Some say there is no need for 11 individual mortgage banks – that in an age where funds can be allocated at the click of a mouse, the system should be centralized for efficiency. This argument misses another key mission of mortgage banks, which is to meet the needs of local communities. By law, mortgage banks must dedicate 10% of their profits each year to funding affordable housing grants that support their members’ efforts to increase affordability and access to housing in the communities they serve. .
The regional nature of the system ensures that each mortgage bank is closer to and knows more about its members and the communities it serves, and thus remains better able to assess and respond to the needs of these unique regions and communities. . For example, existing Federal Home Loan Bank of Boston programs provide down payment assistance, affordable housing financing, and small business stabilization and expansion support. The regional nature of the Home Loan Bank System ensures that the impact of the lending and investment activity of member financial institutions is felt locally. Otherwise, community financial institutions would have to compete for resources nationwide, and the funding and benefits of system programs might not reach every corner of America, as it does today.
Safe, solid and reliable access to capital provided by local lenders who know their communities have fostered a vibrant American economy. For 90 years, Federal Home Loan Banks have helped make this possible. Let’s take a moment to celebrate this success and move on.