This summer, Sandra Thompson, the director of the Federal Housing Finance Agency (“FHFA”), announced, as part of her testimony to the House Financial Services Committee, that the FHFA would be undergoing a comprehensive review of the Federal Home Loan Banks (“FHLBanks”) system as it approaches its 100-year anniversary. Specifically, she noted, “We want to make sure they [the FHLBanks] are positioned to continue to serve the needs of today and tomorrow, so we plan to engage a variety of stakeholders in the coming months, in addition to holding public listening sessions throughout the country. We want this review to be an opportunity to examine everything from the FHLBanks’ membership base, operational efficiency, and effectiveness, to more foundational questions about mission, purpose, and organization.”
The FHLBank system was founded in 1932 by the Federal Home Loan Bank Act for the purposes of fostering mortgage lending and increased investments in community development. The FHLBank system consists of: (a) 11 regional FHLBanks, each of which is a separate, government-chartered, member-owned corporation, and (b) the FHLBanks’ Office of Finance, which serves as the FHLBank system’s fiscal agent. As stakeholders in the housing, mortgage finance, capital markets and other related industries are aware, the FHLBank system has played a key role in promoting the real estate finance sector over the last 100 years, including, most notably, by serving as a key source of liquidity, particularly during times of market distress such as the 2008 financial crisis or the COVID-19 pandemic, as well as fostering community development and low- and middle-income housing and related efforts via programs such as the Affordable Housing Program (“AHP”) and the Community Investment Program.
As part of the discussion surrounding the FHLBank system, some have raised concerns in recent years regarding the increased usage of the FHLBanks by their largest members and that nonbank mortgage lenders, which originate a substantial share of mortgages today, are prohibited from being members of the FHLBanks by law. In light of evolving market trends and industry participants, and some broader discussions about the purpose of the FHLBank system, on Aug. 31, 2022, the FHFA formally announced the commencement of its comprehensive review of the FHLBank system to address and clarify the purpose, mission and organization of the FHLBank system. FHFA sought public input on the below six areas of focus:
- The FHLBanks’ general mission and purpose in a changing marketplace;
- FHLBanks’ organization, operational efficiency and effectiveness;
- FHLBanks’ role in promoting affordable, sustainable, equitable and resilient housing and community investment;
- Addressing the unique needs of rural and financially vulnerable communities;
- Member products, services and collateral requirements; and
- Membership eligibility and requirements.
The FHFA commenced this review with a public listening session held on Sept. 29, 2022, and a public comment period, which closed on Oct. 31, 2022. The agency is currently hosting a series of community roundtables. The goal of these engagements is to “consider and evaluate the mission, membership eligibility requirements, and operational efficiencies of the FHLBanks.”
Listening Sessions and Regional Community Roundtables:
During the three listening sessions, 85 speakers participated, of which approximately 75 represented financial institutions that are current members of the system or nonprofit housing entities that take advantage of AHP, among other low-income housing-related programs implemented by the FHLBanks.
The speakers were given six-minute increments to address any of the six topics noted above. The set of speakers encompassed a broad set of stakeholders representing (i) small to mid-sized community banks, community development financial institutions, credit unions and similar financial institutions; (ii) trade associations such as the Mortgage Bankers Association and National Association of Home Builders and others; (iii) individual FHLBanks; and (iv) nonprofit housing groups, among others.
Similarly, the FHFA also convened regional roundtables to hear concerns and input from local stakeholders. Regional roundtables were held on:
- Nov. 2 in Washington, D.C.: To discuss the mission and purpose of the FHLBank system;
- Nov. 17 in Chicago, Illinois: To discuss FHLBank support for community development and affordable housing activities; and
- Nov. 21 in Greenville, Mississippi: To discuss housing and community development in the Mississippi delta area and other rural communities.
Upcoming announced roundtables include:
- Dec. 1 in Oklahoma City, Oklahoma, and Dec. 8 in Washington, D.C.: Each to discuss Native housing and community development;
- Dec. 12 in Baltimore, Maryland: To discuss efforts to close the minority homeownership gap; and
- Dec. 15 in Philadelphia, Pennsylvania: To discuss membership eligibility and requirements, collateral, and safety and soundness of the FHLBank system.
While the various speakers for the listening sessions and roundtables were selected by FHFA and covered a broad range of relevant representatives encompassing the private sector, nonprofit sector, academia and government, there were some instances of general agreement. For example, representatives from the FHLBank system, community banks and nonprofit housing groups, among others, complimented the regional nature of the FHLBank system by noting that the regional nature enabled the 11 FHLBanks to address local concerns in their communities in an efficient and effective manner. Similarly, there was widespread appreciation for the role the FHLBank system has played in providing liquidity, particularly during times of economic distress, including, most recently, during the onset of the pandemic. In addition, a significant number of speakers lauded the impact of AHP; although, there was some debate as to whether the required 10% contribution of funds from each FHLBank to AHP should be increased.
At the same time, there were differences in opinion between certain speakers, particularly with respect to whether the FHLBank system is satisfying its statutory mission. Housing and community development advocates argued that the increasing role of larger financial institutions as members of individual FHLBanks has resulted in the FHLBank system serving larger institutions at the expense of depositors and taxpayers.
In addition, community banks and other small or mid-sized institutions cautioned against an expansion of membership to non-depository entities citing potential risks to the safety and soundness of the overall system. In contrast, representatives for certain trade associations, among others, asserted that given changes to the mortgage lending market over the last 100 years, an expansion of FHLBank membership, including to captive insurers, would better reflect current industry participation without material risk to the safety and soundness of the overall system.
Next Steps and Brownstein’s Take:
As noted above, the FHFA has scheduled additional regional roundtables over the next few months covering a broad array of issues related to housing and community development as well as membership eligibility in the FHLB system. Further, the FHFA is expected to announce additional roundtables and opportunities for public input into the new year as well.
It is important for entities currently involved or looking to get involved with the FHLBank system’s various programs to be active in the FHFA’s ongoing comprehensive review of the FHLBank system to ensure that applicable programs are designed and/or amended to maximize current and future potential opportunities. Brownstein is uniquely equipped to assist any such entity looking to interface with the FHFA, FHLBank system, relevant policymakers in Congress or in the administration and/or other stakeholders in this space.
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