Critics of the Federal Home Loan Bank System are claiming that the banking cooperative is receiving billions of dollars a year in corporate welfare while providing a negligible return to taxpayers in funding affordable housing programs.
As the Federal Home Loan banks undergo the first review in nearly 100 years, more critics are suggesting that the 11 regional banks, created by Congress during the Great Depression, should have a mission more closely tied to solving the affordable housing crisis.
Joshua Stallings, the deputy director of the Federal Housing Finance Agency, said at a panel discussion on Nov. 2 that the agency will be asking “big questions” about the appropriate role of the FHLB system in addressing affordability, community and economic development, and the needs of rural and vulnerable communities. No topic is off limits, Stallings told seven panelists earlier this month, as the FHFA examines the banks’ mission, membership and congressional mandate.
“No suggestions should be considered off the table, and we welcome bold ideas as well as recommendations that can be implemented in the near term,” Stallings said.
Chris Bosland, the FHFA’s chief external risk officer, kicked off the panel discussion by asking what the experts think of the Home Loan banks’ mission. The lively discussion that followed centered around whether the system as currently structured primarily benefits its 6,600 member-banks and insurance companies in what some described as “corporate welfare.”.
“The mission was never” for the Home Loan banks “to be a central bank for privately owned banks,” said Cornelius Hurley, a lecturer at Boston University School of Law, who served 14 years on the board of the Federal Home Loan Bank of Boston. “It’s nice to have a taxpayer-subsidized low-cost funding facility, that’s very nice. But if we’re going to have that, we need a substantial reward for our investment. Acting as a source of liquidity for private banks is a private benefit, it’s not a public benefit.”
Hurley, who has become one of the system’s harshest critics, dropped a bombshell on the panel by estimating that the system’s members receive $5 billion a year in public subsidies in the form of a government guarantee on agency bonds. Hurley based the estimate on the Home Loan banks’ current $1 trillion in outstanding debt with a 50-basis-point “benefit” attributed to the government guarantee. None of the other panelists disputed the $5 billion figure.
The Home Loan banks are mandated to set aside 10% of their profits for affordable housing. Critics claim there is a mismatch between the banks’ public subsidy and private benefits. Last year the banks provided $352 million for affordable housing in the form of grants and other programs. Hurley said the banks typically spend an average of $200 million a year on affordable housing programs.
“The ratio of subsidy to benefit is 20-1,” he said.
The Federal Home Loan banks have largely operated under the radar, receiving little public scrutiny until this year when FHFA Director Sandra Thompson took the bold move in August of launching the review.
“The public doesn’t really know much about the FHLB system,” said former Rep. Bruce Morrison, a onetime director of the Federal Housing Finance Board, the predecessor agency to the FHFA. Morrison, a lawyer and housing lobbyist, agreed with Hurley that the set-aside for affordable housing was too low and the benefits to banks too high.
“I don’t know anybody who criticizes” the Home Loan banks’ affordable housing program “except for its size,” Morrison said. “But it’s a pittance and it doesn’t justify the system.”
Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, the banks’ trade group, said the banks provide “the critical mission of housing finance and homeownership and contribute to the very important work of addressing affordable housing.”
But critics appeared to be raising more compelling questions against the system than those supporting it. Several panelists questioned the need for a public subsidy to provide liquidity to large banks and insurers that have ample funding through the capital markets.
Barry Zigas, an independent consultant and senior fellow at the Consumer Federation of America, questioned the system’s structure, noting that the government-sponsored enterprise is privately-owned by banks that earn dividends.
“There is something inherently odd about having a federally sponsored organization that is owned by its clients who receive dividends based on the operation’s business success,” said Zigas, a former executive at Fannie Mae. “These are organizations that get to control the decisions the boards make, and they are self-interested in those decisions, and that’s a peculiar governance issue. There is an inherent conflict of interest that has to be acknowledged.”
Bosland, the FHFA moderator, asked panelists whether opening the Home Loan Bank System to new members would create more risks. Nonbank mortgage lenders have been vying to join the system to tap its low-cost funding while community banks oppose expanding membership to nonbanks.
“It’s a gravy train and people would like to get on it,” Morrison said. “That’s not the right incentive” for companies to join, “nor is it the right incentive” for having them remain members, he said. “So be careful.”
To which Bosland responded: “So, to paraphrase, the answer to corporate welfare is not more corporate welfare?”
“You said it,” Morrison replied.
Hurley then jumped in, stating: “That’s exactly what we’re talking about here — corporate welfare. Bestowing a government benefit on private enterprises without expecting a commensurate public return. You boil it all down and that’s what it is: corporate welfare.”
Two of the banks’ staunchest supporters countered that community banks in particular need the system for liquidity during periods of stress.
“To say the system is corporate welfare does a disservice to the folks on Capitol Hill,” said Donovan, who seemed to direct most of his comments to lawmakers who were not present. At another point, Donovan said that any effort to restrict access to Home Loan bank funding would accelerate consolidation in the banking industry.
“There is not a politician on Capitol Hill that wants to see the trends of bank consolidation increase,” Donovan said. “Large-bank participation helps us scale the system and increase the dollars that are going to the affordable housing program and other voluntary programs.”
Several panelists said they would like to see the FHLBs focus on the needs of underserved communities by encouraging the purchase of non-performing loans, loans with non-traditional underwriting, or those that banks might normally hold in portfolio.
But Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America and a former CEO of a community bank in New Mexico, suggested opening the system to new members or products would result in “safety and soundness issues.”
Beth Lipson, chief financial officer at Opportunity Finance Network, a group of community development financial institutions that has advocated for years to become members of the Home Loan Bank System, said that few CDFIs are allowed in because of the system’s strict collateral requirements.
“CDFIs that are doing exactly what is the purpose of the FHLBs system,” by funding affordable housing and lending in low-and-moderate income communities, Lipson said. “There is something wrong with the system when the lenders that can most reach [borrowers] for those types of loans are not getting access to those advances.”
The lifeblood of the Home Loan banks — advances to banks, credit unions and insurance companies — plummeted 20% last year to $350 billion, its lowest level in 15 years. The Home Loan banks say the decline is part of the normal ebb and flow of the market and advances are bouncing back as the economy moves toward a recession.
Several panelists agreed with Zigas, who said large banks and insurance companies that are the biggest users of Home Loan bank advances “are not in any way connected to the mission of the Home Loan banks.”
“Today it’s very hard to justify having these kinds of advances and the [companies] that get them don’t have to explain what they’re using them for and they don’t have to be directly tied to the mission,” Zigas said. “Where does the money go? Why have the banks been empowered to access this money so cheaply? Why have they been able to access it with a government guarantee? I would argue there has to be a clear definition of the purpose the money is meant to fulfill.”
Megan Haberle, senior director of policy at the National Community Reinvestment Coalition, suggested that the banks’ role be expanded to include support for down payment assistance programs and for lending to first-time homebuyers. But other panelists said those activities are already supported by other agencies including the Federal Housing Administration and the other government-sponsored enterprises Fannie Mae and Freddie Mac. Haberle also suggested that regulators push back on institutional investors, examine their impact in purchasing single-family homes and flipping them, and scrutinize investors’ role as landlords.
To be clear, any changes to the FHLBs would have to be enacted by Congress. The reelection of Sen. Catherine Cortez Masto, D-Nev., raises the odds of possible changes ahead. Cortez Masto introduced a bill last year that would double the banks’ investments in affordable housing to 20% of their net income, up from the current 10% mandate.
The FHFA is holding a second roundtable discussion in Chicago on Nov. 17 and a third in Greenville, Mississippi, on Nov. 21.
Bosland at the FHFA may have tipped his hand by suggesting there was a “least sympathetic policy argument” being made by some panelists.
“Providing liquidity to the largest banks may be the weakest of the rationales,” Bosland said.