It’s time to rethink the mission of the Federal Home Loan Bank System
Below is an open letter to Sandra L. Thompson, President Biden’s nominee for director of the Federal Housing Finance Agency.
Dear Mrs. Thompson:
Please add our voices to the chorus of those who applaud your appointment by President Biden as Director of the Federal Housing Finance Agency. Your many accomplishments at FHFA and the Federal Deposit Insurance Corp., the indications of Senate support for your nomination, and the skill with which you handled your confirmation hearing on January 13 leave no doubt that the U.S. Senate will take favorable measures. on your appointment in the near future.
At your confirmation hearing last month, you noted the “relatively low profits” of the 11 banks that make up the Federal Home Loan Bank System. As we pointed out in a recent article in American bankernot only are system bank profits low, but their advances have fallen precipitously in recent years, as have their future prospects.
The system faces at least two strategic challenges. First, it finds itself in the unenviable position of fighting the Federal Reserve as the latter has flooded the banking system with liquidity. Second, the members/owners of the system are exclusively depository institutions and insurance companies at a time when the vast majority of mortgages are issued by non-banks who are excluded from the system by law.
The secular decline of the system has prompted some to call for the consolidation of the 11 regional banks. Others question the very relevance of a system designed to meet the challenges of the Great Depression versus a modern financial system whose perimeter is being reshaped daily by the forces of competition and fintech.
It is understandable that at the start of your tenure as director of the FHFA, your focus was on the future role and structure of the two largest government-sponsored corporations, Fannie Mae and Freddie Mac. However, we urge you, even in the early days, to initiate a strategic review of “the other GSE,” the Federal Home Loan Bank system.
This review can begin by asking these two key questions: 1) Currently, and for the foreseeable future, does the federal home loan system serve a useful purpose? and 2) Should the system be reoriented to meet the financial needs of the modern era? The answers to these questions are, in our opinion, respectively and categorically, “No” and “Yes”.
Federal mortgage lenders figure prominently in the housing industry complex, that firmament of lobbyists, lawyers and various actors called the “housers” by Joe Nocera and Bethany McLean in their book on the 2008 recession- 09, “All the devils are out there.” For nearly 90 years, they have provided emergency liquidity to banks, credit unions and insurance companies that own all 11 banks from New York to San Francisco. In addition, the system plays an admirable, if underappreciated, role in financing affordable housing.
There are, however, many financial deserts where the oasis of banking liquidity could provide the same public good as housing did in the 1930s. Infrastructure, climate change, small businesses, economic inequality, and serving the unbanked are just a few of the sectors currently outside the regulatory scope of federal mortgage lending banks. It doesn’t have to be that way.
Unleashing the full potential of the system does not mean turning on the taps of federal dollars for every particular interest that arises. Federal Home Lending Banks are experienced in using haircuts, credit enhancements and strong underwriting to ensure that the modernized mission of the system is carried out in a safe and sound manner under the watchful eye of the FHFA. It is this culture of cautious lending that allows the federal mortgage banks to boast that not a single dollar has been lost on advances from any of its banks.
To help you explore the possibilities inherent in a redesigned system, we invite you to appoint an advisory committee that meets the standards of the Federal Advisory Committee Act. From your experience at the FDIC, you realize how effective these committees can be for the senior management of an agency.
Committee members would be appointed by you and would represent current system stakeholders in accordance with the Act. However, the nomination of industry leaders and academics who could bring their creative talents to the exploration of potential stakeholders a more modern and relevant system… a system in line with current liquidity demands.
In order to inform the work of the advisory committee, we also invite you to publish a call for contributions on the theme of reinventing the system. In this regard, the recent statement by Acting Comptroller of the Currency Michael Hsu call for Papers to combat climate change and banking regulations can be instructive. We anticipate that consumer groups, specialty lenders, non-governmental organizations, academics and many more will be eager to pitch their ideas on how a currently declining system can be reinvigorated to meet today’s needs. today.
Of course, we are ready to help you in any way possible in this effort.
With every good wish,
Cornelius Hurley and William M. Isaac