FHFA’s Thompson: Home loan banks not meant as lender of last resort

The Federal Housing Finance Agency is seeking to better balance the mission of the Federal Home Loan Bank system to stress that FHLBs should be a provider of reliable liquidity to financial institutions, but for the purpose of making available funding for housing and community development, FHFA Director Sandra Thompson said today. During a Q&A at the Bipartisan Policy Center in Washington, D.C., Thompson discussed the findings of the agency’s recently released overview of the FHLB system. She said the focus of the system over the past few years has been on providing liquidity, even though the FHLBs were not meant to be a lender of last resort for financial institutions.

“That is the primary responsibility of the Federal Reserve’s discount window,” Thompson said. “When you don’t have those agreements in place [with the Fed], then home loan banks end up being the lender of last resort. Home loan banks are established to provide liquidity, but when an institution is in trouble or when markets are challenging, then we need to have a process in place where the home loan banks work together with the Federal Reserve banks—they work together with a primary federal regulator and FHFA to make decisions that result in stability in the financial system.”

The FHFA instead is seeking to “refocus the pendulum back to having a more balanced perspective—providing liquidity for the purpose of making sure that we have housing finance,” Thompson said. For example, the report calls on FHLBs to focus more on the creditworthiness of their member institutions. “When you have a failing bank or when a bank fails, and the home loan banks have the collateral and they’ve got the prepayment fees, then they can lend all day and say, ‘Well, you know, you know, we haven’t lost any money,’” she said. “Well, you can’t just have collateral-based lending. You’ve got to take a look at the financial condition of the member.”

Affordable housing to receive more attention in FHLB system

Among its many recommendations, the report on the FHLB system calls on home loan banks to step up their game on providing affordable housing, although accomplishing part of that objective will rely on an act of Congress, according to Thompson. Currently, FHLBs must set aside 10% of the annual net earnings for affordable housing development. The report recommends that Congress raise that amount to 20%.

“We’ve looked at the numbers and we think that the home loan banks can afford to at least double their affordable housing program commitments,” Thompson said. “The home loan bank system right now is contributing about 15% of their net earnings to affordable housing.…  People will say that they’re private corporations, but these are government-sponsored entities and they have a public purpose.”

In terms of agency rulemaking, FHFA plans to look for ways to expand access and streamline compliance requirements to the FHLB affordable housing program, according to Thompson. “We’re trying to relieve administrative burdens of implementing the program, and are just looking at ways we can make things easier, make access easier and make utilization easier for the banks and the participants involved.”