FHFA to launch probe of Federal Home Loan banks this fall

The Federal Housing Financing Agency will conduct a comprehensive review of the Federal Home Loan Bank System this fall.

FHFA Director Sandra L. Thompson announced the forthcoming probe in a statement issued Wednesday afternoon. She said the agency would examine the 11 Home Loan banks on several fronts to "ensure they remain positioned to meet the needs of today and tomorrow."

Bloomberg News

The announcement comes amid growing calls for greater oversight of the Home Loan banks, whose core businesses have changed considerably since their establishment 90 years ago.

The Home Loan banks were created during the Great Depression to provide liquidity for home financing and community development, and to serve as a lender of last resort. In recent years, they have become the subject of increasing scrutiny as demand for advances — the mechanisms through which the Home Loan banks support their member institutions — fell precipitously starting in early 2020. Home loan advances ticked up in the first half of 2022 but still remain persistently below historic levels.

Part of the reason advances have dropped is because of the rise in deposits during the pandemic years, which have kept banks sufficiently capitalized, and evolutions in real estate finance markets that some say have made the Home Loan banks obsolete.

Amid this decline in advance volumes, the Home Loan banks have conducted a greater share of their business in other areas, a trend line that could pose a threat to financial stability, if not properly monitored, according to a paper from former Federal Reserve Gov. Dan Tarullo and two Fed economists. 

The researchers noted that the special treatment provided to Home Loan banks warrants a "well-defined mission" that no longer seems to exist. Without it, "the FHLBs crop up in unexpected parts of financial markets as they pursue profitable opportunities."

Despite being established by the federal government, Home Loan banks are private entities. They are set up as cooperatives, with their shareholders being member banks within their respective regions and they raise funds by selling tax-exempt bonds. The Home Loan banks receive no public funding but they are exempt from paying state or federal taxes.

The FHFA, which oversees the 11 Home Loan banks, will evaluate them on six criteria: their general mission and purpose in the current market; their organizations, operational efficiency and effectiveness; their role in promoting quality, affordable housing and community investment; their ability to address the needs of rural and financially vulnerable communities; their member products, services and collateral requirements; and their membership eligibility and requirements.

As the Federal Home Loan banks turn 90, we shouldn't mess with success

The FHFA will hold a pair of public listening sessions as part of its review. The first session will be held on Sept. 29. It will also hold a roundtable discussion on the future of the Home Loan banks and take written comment through Oct. 21.