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Comment

The Federal Housing Finance Agency (the “FHFA”) has requested Input regarding the regulatory statement of the Federal Home Loan Bank System’s (the “System”) mission to better reflect its appropriate role in the housing finance system. I commend the FHFA for being realistic about the System in its Request for Input; it acknowledges that there is a mismatch between its mission and its current operations.

The System’s operations do not do nearly enough to support the System’s stated mission of supporting the financing of housing. The System should recommit to that goal in measurable ways or its name and/or mission should be changed to better reflect its current operations.

While the System was originally designed to support homeownership, it has morphed into a provider of liquidity for large financial institutions. Banks like JPMorgan Chase & Co., Bank of America Corp., Citibank NA and Wells Fargo & Co. are among its biggest beneficiaries and homeownership is only incidentally supported by their involvement with it.

As part of the comprehensive review of the System, we should give thought to at least changing the name of the System so that it cannot trade on its history as a supporter of affordable homeownership. Or we should go even farther and give some thought to spinning off its functions into other parts of the federal financial infrastructure as its functions are redundant with theirs. But best of all would be a recommitment by the System to the measurable support of financing for housing.

It was not always the case that the System supported homeownership in name only. For the first decades of its existence, the regional Federal Home Loan Banks lent to their thousands of member depository institutions, mostly savings and loans.

In return for these loans, the members gave residential mortgages to their Federal Home Loan Bank as collateral. Because of their special relationship with the federal government, the federal home loan banks could borrow at lower rates in the national credit markets and then turn around and lend those funds to their members.

Joining a Federal Home Loan Bank gave its members indirect access to the capital markets so that they could borrow to improve their liquidity and increase their home lending. This was not otherwise possible for most of the System's members in the middle of the 20th century.

The System thus freed up members' capital so that they could meet the increased demand for withdrawals by depositors and could continue to originate new mortgages. The System required members to limit their customers to their local communities, thereby tying each of their fates to that of its community.

After the savings and loans crisis hit in the 1980s, Congress dramatically changed the mission of the System. Among many other reforms of the savings and loans industry, the 1989 Financial Institutions Reform and Recovery Act opened up membership in the System to more types of depository institutions, among them commercial banks. Commercial banks then began using the System to obtain advances that funded almost all types of financial assets, not just housing.

Although the 1989 law established two affordable housing programs, the System was no longer focused on homeownership financing as it had been during its early years. Rather, it had become just one of many financial-sector lending facilities. This was crystal clear within the decade.

In 1998, then-U.S. Department of the Treasury Secretary Robert Rubin stated that most of the System's investments "do nothing to support residential mortgage lending or otherwise advance the System's public purpose." (Quoted in Susan Hoffman & Mark K. Cassell, Mission Expansion in the Federal Home Loan Bank System at 5 (2010).)

The Federal Home Loan Bank System has moved away from its mission of primarily supporting homeownership to one of primarily helping financial institutions with their liquidity needs. The System is clearly in need of reform.

There is a strong argument that the System has veered so far from its original mission that it should just be terminated. Its liquidity function should be assumed by the Federal Reserve, and its affordable housing and community development function should be taken over by other components of the housing finance system as part of a more general congressional housing finance reform plan.

The financial industry as well as affordable housing advocates may find much to criticize in a proposal to terminate the System. The financial industry benefits from having multiple funding options, of which the System is one.

Liquidity providers such as the System and the Federal Reserve have different technical requirements to access their programs. They have different philosophies about their appropriate role. They have different leaders and staff. All of these differences can play out differently at different times, particularly during financial crises.

During the 2008 financial crisis, many members found the System's services more attractive services than those of the Fed. Financial institutions will not give up this alternative without a fight.

Affordable housing advocates will also be concerned about any proposal that threatens subsidies, pointing — rightly — to political forces that seek to shrink support for all types of affordable housing subsidies.

Why, they might ask, should even the relatively small subsidies provided by the System be exposed to cuts? Such advocates might prefer a plan to rededicate the System to its original purpose: providing liquidity to financial institutions that provide mortgage credit. Given that most financial institutions no longer really specialize in housing finance, this proposal would not address the System's inherent problems.

If the System were to recommit to meaningfully support housing, the mission statement should clearly state how it will do so without cannibalizing the work of the other federal housing instrumentalities (GNMA, Fannie, Freddie, etc.). Scholar have demonstrated that that is often the case when one instrumentality seeks to increase its affordable housing footprint. The goal should be a total increase in support for housing and affordable housing in particular, and not just a reshuffling among the federal housing instrumentalities.

The mission statement should also commit to measuring the financial support the System provides for housing against the savings that members receive because of the government-subsidized cost of credit they receive from the System. If it turns out that the federal government could provide the same or more benefit to housing through direct expenditures, it calls into question the legitimacy of the System.

We have to balance all of the concerns outlined above regarding the legitimate functions of the System. Comprehensive reform of the entire federal housing finance infrastructure is the best way to do this. This is a better approach than engaging in piecemeal reform that may primarily benefit a subset of industry players, like the current power users of the System's lending facilities.

The System’s mission, name, and/or operations need to change significantly to ensure that its reputation matches its activities. It is not an acceptable path forward to allow its members to exploit reputational benefits that are based on what is now the ancient history of the System in order to increase their own bottom lines at the expense of the public.