Kudos to Congress for forcing bankers’ hands on affordable housing

Editor’s note: This piece was updated to correct the spelling of a name. We regret the error.

A recent paper from the Cato Institute calls for the elimination of the $1.3 trillion Federal Home Loan Bank system. This is a reasonable remedy for a government bureaucracy that, during a housing crisis, has deviated so far from its original mission of supporting housing. Should current reform initiatives come up short, elimination is in order. 

However, real progress was made last month when the Senate Banking Committee hauled the CEOs of the nation’s eight largest banks before it for their annual flogging. Jamie Dimon of JPMorgan Chase, Brian Moynihan of Bank of America and others presented themselves before the assembled senators.  

After waiting patiently for two hours and fifteen minutes, the senior senator from Nevada, Catherine Cortez Masto (D), had her five minutes for questioning. She made the most of it. 

She got right to the point. 

“So many people across the country are struggling to afford homes. One way to address that is by investing more in affordable housing through the Federal Home Loan Bank system,” she said. She described the lush taxpayer subsidy enjoyed by the Federal Home Loan banks (FHLBs) and their current affordable housing obligations, calling the latter “too low” at 10 percent of net income. 

Then came the money question for the eight CEOs: 

“Do you think the FHLBs should provide 20 percent or more of their net revenue for affordable housing and economic development?” Lest there be any doubt, she reframed her inquiry, “And does anyone NOT support greater affordable housing investment by the FHLBs?” 

After a long and purposeful pause, she summed up, “For the record, no one has said they don’t think there should be more investment … is 20 percent enough?” 

This prompted an uncharacteristically meek response from Dimon: “Properly done, 20 percent would be fine.” He did not say, “No mas” but it was evident from his tone. 

Finally, leaving nothing to chance, she challenged the panel, “Does everyone agree with that … 20 percent would be fine?” 

After a long pause: “Does anyone NOT agree with that?” 

“Good, all right, good start!” she proclaimed. 

Cortez Masto had much to celebrate. She had just torn down a wall of resistance that the FHLBs and their lobbyists have spent years erecting. Moreover, she had driven an irrevocable wedge in the banking industry between the global systemically important banks that borrow massive amounts from the FHLBs and the community banks that have come to depend on the taxpayer-funded FHLBs for much of their revenue. 

She also sent a clear message to the bankers that 20 percent is the new floor for the FHLB’s statutory commitment to affordable housing. By no means is it the ceiling. 

Sandra Thompson, director of the Federal Housing Finance Agency that regulates the FHLBs, sent the same message recently. She has said repeatedly that the 20 percent target contained in her report, “The FHLBanks at 100,” could “easily” be achieved by the FHLBs. The report calls for “at least” a doubling of the affordable housing assessment on the FHLBs. 

The reason that goal is so easy to achieve is that for every $15 of taxpayer subsidy given to the FHLBs only $1 goes to affordable housing. The other $15 goes to the FHLBs in the form of excessive compensation and to the FHLBs’ member institutions in the form of preferential interest rates and obscene dividends. 

For example, at the FHLB of New York, the CEO made a cool taxpayer-supported $2.3 million in 2022, while his bank is paying its grateful members a dividend of 9.5 percent. 

That’s a great deal for the CEO and his members. But for the rest of us taxpayers, “That’s one shitty deal!” as Goldman Sachs’ investments were characterized during the financial crisis. 

With two minutes of her time left, Cortez Masto was on a roll and not about to yield back a second of her precious time. She went straight to the issue that bedevils the FHLBs — the fact that more than half of the FHLBs’ members are not even in the mortgage finance business. Oops! 

To address this, FHFA proposes tailoring FHLB dividends and advances according to whether the member institution is, or is not, engaged in mission activities, i.e., financing housing and community development. Note to MetLife, Inc., the second largest borrower from the FHLB of New York: Unless you suddenly dive into housing and community development, say goodbye to that 9.5 percent dividend. 

“Does anyone NOT support having FHLB dividends and advances tied to the mission activities of the financial institutions,” the senator asked. “Is that a good start for us?” she pursued, noting “the nods of all” the executive’s heads. 

With her question, the senator again created a huge fissure among the FHLB membership.  

As recently reported, over 45 percent of FHLB members have not made a single mortgage loan in the last five years. To quote the iconic Wendy’s commercial, “Where’s the beef?” If you call yourself the home loan bank but most of your members have abandoned the home loan business, what is your purpose? More importantly, why are the taxpayers supporting you? 

Adding to major progress on the legislative front, last week Moody’s had its say about FHLB reform.  In affirming the FHLBs’ pristine credit ratings, Moody’s volunteered that it does not expect, “a material change in the FHLBanks’ creditworthiness as a result of these [FHFA’s reform] initiatives.” Effectively, this pulls the rug out from under the FHLBs’ Henny Penny defenses that are sure to follow. 

The overhaul of the FHLBs is in its early stages. Reform will come through legislation and rulemaking. Both are long, tedious and uncertain processes. The FHLBs have a record of resisting even the smallest changes. 

One wonders if the FHLBs and their high-priced lobbyists have considered the cost of successfully preserving the status quo for this antiquated bureaucracy. Namely, the elimination of the system altogether. Is that not the definition of a Pyrrhic victory?  

Cornelius Hurley teaches financial services law at Boston University School of Law. He was an independent director of the Federal Home Loan Bank of Boston from 2007 to 2021.