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How to Reform the Federal Home Loan Banks

Housing reform is still too hot to handle for members of Congress getting ready to ramp up their campaigns for re-election. The issue has also seemed to lose some steam as Fannie Mae and Freddie Mac started churning out profits for the federal government due to an improved housing market and money from legal settlements with bankers. Though many would say that the crisis has now passed, this is precisely the time to get serious about a reform effort. To accomplish true reform, we must take into consideration something that has been conspicuously absent from the debate: the future of the Federal Home Loan Bank system.

To reform Fannie and Freddie without also reforming the FHLB system is to forget the push-pull dynamic in the lending market. Home Loan banks perform an essential function by providing low-cost funds to financial institutions in the form of advances. This promotes lending and pushes dollars into the economy. Fannie and Freddie then pull that funding through the economy using their loan purchases, guarantee programs and securities. It is simply a pipeline with a number of access points. If you want to better manage the flow of oil through a pipeline while preventing a spill and controlling your maintenance costs, simplify the number of inputs and outputs.

To place this into action, the 12 Federal Home Loan banks could be reduced to a smaller, well-functioning few. Because of advancements in technology, it would be possible to divide them inhalf, or even into Eastern, Midwestern and Western banks that include Alaska, Hawaii, and the U.S. Territories. The savings from reduced operating costs and reduced risk from geographic diversity could translate into lower costs for advances and higher dividends for member banks.

A streamlined Home Loan Bank system is unlikely to affect mortgage rates, but it might encourage community banks to lend more. Simply put, if a bank is paying less on advances from its Home Loan bank then it conceivably will have more money available to lend in its communities.†††

Improving access to credit should be the goal of all policymakers. Letís not forget that the American dream of homeownership is what makes our nation different from every other one on earth. Owning a home remains the hoped-for achieve­ment of a large percentage of our nationís population. Moreover, the housing market creates millions of jobs directly and millions more indirectly in all 50 states. We need to restore the housing market to its vibrancy so that more of our citizens can pursue their version of this dream.

Thad Woodard has served as president and chief executive of the North Carolina Bankers Association and its predecessor organizations since June 1978.


(5) Comments



Comments (5)
Before we look at the use of consolidation in reforming the FHLBank System should we not first identify just what needs to be reformed? Mr. Woodard does not delve into this. Again, just what are the FHLBank's weak points from a global national financial policy point of view? How did they fail to provide liquidity or reduce services during the 2008-9 financial crisis? The truth is that the FHLBank System did not fail and, indeed even prior critics of the System admit that they became a critical source of such liquidity for the entire U.S. banking system. They adhered to their mission and actually became the lender of last resort for their members--and during that period increased advances (loans) to over $630-billion (with total assets reaching $1-trillion in 2009). They did not suffer their own financial set-backs throughout the financial crisis and not one of the twelve FHLBanks took government bailouts to stay operational. Said another way, it appears that Mr. Woodard wants to reform a system of banks that functioned better than almost all other U.S. financial institutions did during the crisis. Throughout this period of time the FHLBanks' regulator and its examiners did not identify unusual or significant weaknesses within the FHLBank System. There was one concern expressed over private label mortgages but this never materialized into a crisis. So, again, I am having trouble figuring out just why Mr. Woodard thinks the FHLBank System needs to be reformed. I would also like to hear Mr. Woodard's explanation of just how "technology" would drive costs down when the FHLBanks already utilize the most current technology with constant upgrading. If he thinks combining IT systems from twelve to six or three banks would be easy or even eventually cost-efficient, he has something to learn about overall IT costs. All the FHLBanks evaluated this possibility three years ago and found, contrary to anecdotal wisdom, no measurable savings. The 12 FHLBanks do indeed already share services, but primarily through back-up systems and best practices.
Finally, circling back to comment on Mr. Woodard's most important thesis: I cannot grasp how his idea of reducing the number of FHLBanks will improve access to credit and cause community banks to lend more. It is an answer to a question which cannot be in play unless one irrationally takes the position that the FHLBank System has not done its job efficiently and with commendable results.
Posted by Buckeye | Monday, July 14 2014 at 1:30PM ET
Well said banker1126 - Mr. Woodward's article speaks to the general lack of understanding that exists about the mission of FHLBs - what they do and how they do it. Actually, the FHLB's seem to prefer flying under the radar, but their members know what they do and how well they do it.
Posted by The Phantom | Sunday, July 13 2014 at 10:41PM ET
I am very surprised that a former State Banking Association exec would write this article. Many would suggest that the same argument could be used to suggest that we have too many bank charters. That of course would be wrong as well, and for the same reason.
Keep in mind that today, advances are down at virtually all the FHLB's due to the overwhelming amount of liquidity in the market today. Banks are swimming in cash. They are not open to having more funds "pushed" to them by the FHLB. Secondly, keep in mind that each bank administers their own housing programs that support affordable housing within their geographic base. More banks provide for more "local" knowledge of housing needs that are guided by "local board members" and "local advisory council members"
The FHLB's are not broken. Don't fix them!
Posted by banker1126 | Saturday, July 12 2014 at 3:39PM ET
Yes, there might be some small savings from consolidation in the Federal Home Loan Bank system, but it would barely be noticeable and it would have absolutely no impact on the advance rates. One needs to keep in mind that the FHLBs are wholesale banks-that the typical FHLB bank with a $50 billion balance sheet may only have 250 to 400 employees. Conversely, a retail bank such as Huntington, with $56 billion in assets, has nearly 11,000 employees. The reality is that the cost savings just aren't there to be had with FHLBs.

There may be no other entity that has done as much for the health, repair, and wellness of U.S. banking over the course the past decade as the Federal Home Loan Bank system. This is not a group that is in crisis; in fact each of the 12 FHLBs are adequately to well capitalized, and all are profitable. Consolidation in analogous situations (see the Farm Credit system in the 1990's) was born out of crisis. That is not the case with the FHLBs today. So Thad, in your retirement, you will have much more time to look for things that need to be fixed in the U.S. banking system outside of North Carolina. I recommend that if you want to fry some bigger, stinkier fish, that you head north to the District of Columbia and put some members of the House of Representatives in your pan.
Posted by The Phantom | Friday, July 11 2014 at 1:02PM ET
The idea makes a lot of sense. Unfortunately, it is not likely to be implemented. Congress very rarely closes unnecessary military bases nor overly expensive rural post offices. They are unlikely to support closure of duplicative Home Loan Banks despite the sound rationale.
Posted by andkel | Friday, July 11 2014 at 11:41AM ET
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