Throughout my career, I have seen the Federal Home Loan Bank System from various angles — first from outside the system as United States Deputy Secretary of Housing and Urban Development for three years, then from within as president and CEO of the Federal Home Loan Bank of New York for more than 21 years, and, for the past six years as a member of the system, serving as chairman of Flushing Bank, a longtime member of the New York bank.
From any angle, it is clear that the Home Loan banks play a vital role in our nation’s financial system as both a reliable source of critical liquidity for America’s local lenders, and as a catalyst for significant investment in housing and community development activities across every state.
The Home Loan banks are able to play this vital role through the execution of their congressionally mandated liquidity mission. In March 2023, just as in other times of market stress, we saw just how critical this mission is, as members across the nation turned to their Home Loan banks as reliable sources of funding amid an extraordinarily challenging operating environment. The Home Loan banks’ response was equally extraordinary, raising a record amount of private capital to meet a record need for liquidity, helping to play a stabilizing role for the banking industry.
Everything the Home Loan banks are able to support flows through this liquidity mission — not just in times of stress, but in all markets. However, thus far, the majority of the focus of the Federal Housing Finance Agency’s “FHLBank System at 100: Focusing on the Future” review has been on the housing component of the FHLBanks’ mission, most notably through the Affordable Housing Program (AHP).
The AHP is a very important tool for the Home Loan banks, one that each institution has built into its strategy and culture. When I first joined the Federal Home Loan Bank of New York in 1992, the AHP was in its nascent stages, having been incorporated into the Home Loan banks’ mission in 1989, with the first round of grants issued in 1990. Over the course of my career at the New York bank, I had the pleasure of seeing the tremendous growth of this program, to the tune of more than $7.3 billion in grants through 2021. More importantly, I was able to see the impact of these grants at groundbreakings and ribbon-cuttings for the housing initiatives they helped fund.
However, while the AHP positions each Home Loan bank to make a direct and targeted contribution to housing and community development efforts in the communities it serves, it is through executing on its foundational liquidity mission that the Federal Home Loan Bank System makes its most broad and significant impact on these efforts nationwide. I understand why the liquidity mission is not as central to this review as the housing component: “liquidity” is a nebulous term, a bit of regulatory and industry in-speak that does not tell a story. The real story, however, is in what Home Loan bank members are able to do with that reliable source of liquidity in any operating environment.
What Home Loan bank liquidity means for community lenders is that we can lend out our deposits knowing that we have a reliable source of funding to repay those depositors whenever the need arises. That means that members, like my institution, are able to make the mortgages that put people in homes. Yes, Home Loan bank members still originate mortgages, despite some critics’ claims otherwise. It is equally important to note that nonbank mortgage originators do not portfolio the loans they originate, but package them into securities that community banks — and credit unions and insurance companies — purchase. These institutions can then hold these securities on their balance sheets knowing that they can be pledged as collateral at their Home Loan bank — a relationship that supports the ongoing availability and accessibility of mortgages, including the cornerstone 30-year mortgage, to American households.
Access to Home Loan bank liquidity also enhances members’ community development lending activity. Across the country, these local lenders continue to make the loans that keep their communities growing and strong. This includes everything from agricultural loans that help farmers in rural areas to construction loans that bring health centers and schools to city neighborhoods. And, of course, small business loans that create, preserve and expand job opportunities in cities and towns nationwide. This activity is crucial to the health of local economies and the growth of individuals, households and communities, and is supported by local lenders who know that they have readily accessible liquidity at their Home Loan bank.
My institution is just one of the more than 6,500 Home Loan bank members — and all of us have our own stories to tell about the impact of our loans on the communities we serve. These 6,500 institutions are of different shapes and sizes, with different business models and areas of focus. But each is supported by the liquidity mission of the Home Loan banks, a mission that makes it easier for them to make the loans that create housing and job opportunities, and that grow and strengthen their communities.
This is the true impact of the Federal Home Loan Bank System. It is important that, in developing recommendations resulting from the FHFA’s review, this critical and foundational liquidity mission be recognized and preserved, so that the Home Loan banks, through their members, can continue to make the same broad, significant and positive impact on American life well into their second century.