Federal Home Loan Bank Act – Definition

What is the Federal Home Loan Bank Act?

The Federal Home Loan Bank Act was passed under the Hoover administration in 1932. It was designed to encourage home ownership by providing a low-cost source of funds for member banks to use in granting mortgages. The Federal Home Loan Bank Act was the first in a series of bills aimed at making homeownership an achievable goal for more Americans.

Origins of the Federal Home Loan Bank Act

The Federal Home Loan Bank Act was signed by President Herbert Hoover on July 22, 1932. President Hoover said when signing the law that it was intended to “establish a series of discount banks for home mortgages, performing a somewhat similar function for homeowners. to that effected in the commercial sphere by the Federal Reserve banks through their discount facilities.

The United States was in the Great Depression when the law was passed, and the banks had no money to lend to consumers for mortgages because the panicked Americans had rushed on them. banks and withdrawn all their deposits. At the same time, mortgage holders who lost their jobs were defaulting on their home loans. This default further reduced the money banks had available to lend. The architects of the Federal Home Loan Bank Act intended to pump money into the banking system and make mortgages available to consumers, thereby stimulating the housing market. The year after the Federal Home Loan Bank Act, President Franklin Roosevelt formed the Federal Deposit Insurance Corporation, established under the Banking Act of 1933 (also known as the Glass-Steagall Act), insuring deposits individual banking against losses in an effort. restore confidence in the banking system.

Institutions created by the Federal Home Loan Bank Act

This law created both the Federal Home Loan Bank Board and the Federal Home Loan Banks. The Federal Home Loan Bank Board has established and operated federal banks and savings and loan organizations. The Federal Home Loan Bank system began with 12 independent regional wholesale banks with total funding of $ 125 million. The FHLBs were to make these funds available to retail banking institutions, such as savings banks, cooperative banks, insurance companies, construction and credit associations, and community development organizations.

Subsequent Amendments to the Federal Home Loan Bank Act

In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was passed in response to the Savings and Loans (S&L) crisis of the 1980s. During the S&L crisis, nearly a thirds of savings and loan institutions in the United States have gone bankrupt. FIRREA eliminated the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corporation (FSLIC) and created the Office of Thrift Supervision (OTS) and the Resolution Trust Corporation (RTC) to provide greater stability and accountability to lenders.

The Housing and Economic Reform Act 2008 established the Federal Housing Finance Agency and made it responsible for regulating the FHLB system. Since 2000, when savings banks were the main borrowers of FHLBs, commercial banks and insurance companies have become predominant.

The Federal Home Loan Bank Act began as a way to encourage home ownership by providing banks with low-cost funds to use for mortgages, an activity that continues to this day.

Advantages and Disadvantages of the Federal Home Loan Bank Act

Supporters of the Federal Home Loan Bank Act and other loan subsidy programs argue that homeownership was essential to the country’s economic recovery at the time of the law. They also argue that grants continue to translate into stronger local communities and a better overall quality of life.

However, critics claim that this long tradition of federal mortgage subsidies has distorted the housing market. This distortion, they feared, would lead to overly lax lending standards and unusually high house prices. Skeptics say funding by law leads to a residential real estate cycle with wide swings between crash and boom.

Some fear that the growth of federal mortgage banks and the increased reliance on FHLB financing, along with the interdependence of the financial system, may mean that any distress among FHLBs could be passed on to other businesses and markets.

Bernadine J. Perkins