Change seems inevitable for the Federal Home Loan Bank (FHLB) System, which has come under criticism from regulators, legislators, and advocates over the last two years. First founded in the 1930s, over the last 40 years it has strayed from its mission to fund affordable housing and engage in lending to support housing and community development, and instead is focusing on maximizing profits and dividends.
The call to reform the Federal Home Loan Bank System comes from across the federal government, including from the Federal Housing Finance Agency (FHFA), the Biden-Harris administration, the U.S. Department of the Treasury, and several senators, led by Sens. Catherine Cortez Masto and Elizabeth Warren. They have all urged the FHLBs to step up to do their part in addressing our nation’s housing supply crisis.
We are members of the Coalition for Federal Home Loan Bank Reform, a group of 17 national housing, labor, and consumer advocacy organizations that represent thousands of local member organizations and millions of individual members. We want to see the FHLB system reclaim its public mission as a government-sponsored enterprise (GSE) by spurring housing supply, supporting affordability, and driving investments in underserved communities.
Federal Home Loan Banks have gone astray. But they could once again return to their housing mission.
What Are Federal Home Loan Banks?
The FHLB System is composed of 11 regional banks, often referred to as “FHLBanks,” that serve 6,500 member institutions, which include commercial banks, insurance companies, credit unions, community banks, and a small number of community development financial institutions. An FHLBank could be thought of as “a bank for bankers.” It offers below-market-rate loans (or advances) to its members, in exchange for collateral that is usually real estate–related. This collateral includes mortgages and mortgage-backed securities, which can be commercial or residential. When the system started back in 1932, it spurred savings institutions and insurance companies—the major mortgage lenders of the day—to make and hold mortgages that would be funded by these advances.
The FHLB System can offer these discounted advances due to its status as a government-sponsored enterprise (GSE), like Fannie Mae and Freddie Mac. As a GSE, the FHLB System enjoys significant public subsidies: around $7.3 billion in 2024, according to the Congressional Budget Office. Most of this subsidy comes from the way GSE status lowers the banks’ borrowing costs—by about 40 basis points (0.4 percent). GSE status comes with an implied guarantee that the federal government will never let the FHLBs fail. The system borrows at rates near those of Treasury-issued debt.
What does the public get in return for that $7.3 billion in subsidies? Right now, very little. For 2023, statutory affordable housing program (AHP) contributions were assessed at $752 million, to be paid out in 2024. By contrast, the system paid out $3.4 billion in dividends to its member banks in 2023. What’s more, most of the cheap advances it offers to its members have little discernible link to housing. In the last quarter of 2023, $138 billion of outstanding FHLB advances were to life insurance companies. A Bloomberg investigation found that as of late 2022, 42 percent of FHLB members had not originated a single mortgage over the previous five years.
Chasing Profits over Housing: Athene Annuity
Take for example, Athene Annuity, an insurer owned by the private equity firm Apollo Global Management. Athene had $11.9 billion in outstanding advances from the Federal Home Loan Bank of Des Moines through June 2024. At year-end 2023, the insurer was the bank’s second largest borrower. Apollo reports that these advances are part of an “investment spread strategy”—borrowing at low rates and reinvesting in higher yielding assets (and not just housing assets). The U.S. Treasury Department’s Office of Financial Research said in 2022 that “life insurers often use these [FHLB] advances as part of a spread arbitrage program…”
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The question is, how does this growing “arbitrage program” for life insurers support an affordable housing mission worthy of public subsidy? While FHLBanks will argue that collateral requirements for advances include real estate–related assets, the reality is the collateral requirement does not do much to support housing. The market for U.S. residential mortgage-backed securities (RMBS) is among the most liquid asset classes in the world with $7.7 trillion of agency RMBS outstanding as of March 2021. In contrast, life insurers held $193 billion in RMBS in 2022. As the amount of collateral that could be posted by life insurers is miniscule compared to this overall RMBS market, any additional demand that life insurers may place on RMBS to gain access to FHLB advances does not lower mortgage rates. While life insurers access an outsized share of government-subsidized FHLB advances, they contribute little to Americans struggling with a housing crisis.
Getting Back on Track: Shared Equity Homeownership
There are several ways for the banks to shift toward housing affordability. The Coalition for FHLB Reform believes that Congress and the FHFA should tie membership of the FHLBs—and who stands to benefit from their cheap loans—more closely to actual home lending, housing construction, or community development activities. The FHLBs should also make it easier for small organizations that are closely aligned with the system’s housing mission, such as community development financial institutions and low-income-designated credit unions, to become members and get attractive advance rates. In addition, we believe that at least 20 percent—up from the current 10 percent—of the banks’ net income each year should go toward Affordable Housing Program contributions, while the banks and FHFA should also find ways to make this spending go further.
One such opportunity is supporting shared-equity homeownership.
These ownership models use resale restrictions to balance affordability with wealth creation, including ground leases, limited-equity cooperative ownership, and deed restrictions. Unrealized market value stays in the home and combines with the initial subsidy to keep the home affordable at each resale. This provides a lasting affordability for household after household.
If the Federal Home Loan banks want to take the affordable homeownership crisis seriously, expanding support for shared equity should be an easy decision. Shared equity programs often struggle to find lenders willing to accommodate their relative complexity. Although many shared equity programs have successfully partnered with local and regional banks, large national lenders often deem resale restrictions too complicated and the loan volume too low to make them worth their while. With their extensive membership, regulatory flexibilities, and sizable balance sheets, the banks could prioritize shared equity in all aspects of their work, from advance lending to grants. Regulations require that a bank’s AHP activities serve households at 80 percent of AMI or below; 95 percent of shared equity homes are affordable to these households, according to the Lincoln Institute of Land Policy. In addition, at least one-third of the homeownership set-aside within the AHP must go to first-time homebuyers, a characteristic that is shared by 87 percent of shared equity homeowners. The banks could also promote shared equity within their member networks, as one of the major roadblocks for growing the sector is that people simply do not know about it.
Making a Difference in Housing
A significant portion of the FHLB System’s subsidized advances boost the profits of life insurance companies and other members with little or no connection to housing. The banks’ housing mission has been reduced to allocating a little over the congressionally mandated minimum to AHP funding each year—a tiny slice of profits, after at least 85 percent of profits has gone to dividends or is kept on the books as retained earnings.
Federal Home Loan Banks can do so much more for housing; shared equity programs are just one example. In its FHLBank System at 100 report, FHFA indicated that FHLBs should align membership and membership incentives more closely to their mission to support affordable housing. The Biden-Harris administration has requested a doubling of statutory AHP contributions from 10 to 20 percent of net income each year. Treasury has called on the FHLBs to leverage part of their $21 billion in unrestricted retained earnings as a loan fund to help finance affordable housing construction. The Coalition for Federal Home Loan Bank Reform has supported these reforms and more, articulating a vision where FHLBs prioritize all of their resources, and direct their programs, to refocus on housing.
We join the U.S. Treasury, the Biden-Harris Administration, FHFA, and members of Congress in urging the FHLBs to increase their Affordable Housing Program contributions. An increase to 30 percent in AHP contributions would have led to an additional $1.5 billion in funding for fair and affordable housing in 2024, without requiring congressional appropriations and without compromising the safety and soundness of the FHLB System.
Millions of Americans, many of them Black, Latino and/or of younger generations, feel they may never own a home. We can no longer allow this trillion-dollar GSE to sit on its hands, while housing costs continue to rise.