Federal Home Loan Banks Reject Treasury, Won’t Give 20% for Housing

The highest ranking executives of the Federal Home Loan Banks have rejected the Treasury Department’s request to allocate 20% of profits to public housing, saying any amount above the current 10% set aside required by law must be approved by Congress.

Chairmen of the boards of 11 Federal Home Loan Banks I sent the letter on Thursday to Deputy Treasury Secretary Wally Adeyemo, rejecting his request earlier this month to increase spending on the social housing program.

“We believe that simply increasing the AHP and voluntary contributions to 20% of our pre-assessment net income will not address the underlying problems of the housing crisis,” the bank’s chairmen wrote in the letter. “This increased funding level, which requires annual approval by each FHLBank’s board of directors, is 50% higher than required by statute. Congress should consider a higher level of set aside.”

The answer is the latest skirmish in a bigger battle between the Mortgage Bank System, which is under scrutiny after the collapse of four regional banks last springand the Biden administration, which is trying to fund more affordable housing. Vice President Kamala Harris also has big ambitions to accelerate the construction of more apartments.

Home Loan Bank chairmen have said they oppose any attempt to divert profits from their members, saying it would weaken the system’s capital position. Last year, Home Loan Banks agreed to let each voluntarily contribute 15% of its net income to the system’s public housing program. That contribution is expected to reach $1 billion this year, making it one of the largest public housing funders in the country.

The letters will provide fodder for critics who say the little-known system, created in 1932 to support mortgage lending after the Great Depression, receives billions of dollars in subsidies and generates huge profits for its members while providing far less support for its mission of providing affordable housing.

This Bank profits have soared last year, as more banks tapped the lending system during a regional banking crisis. Mortgage banks earned $6.7 billion at year-endan increase of 111% compared to the previous year. The system also paid a record $3.4 billion in dividends to its members, more than double the $1.4 billion paid in 2022.

In early August, Adeyemo and Federal Housing Finance Agency Director Sandra Thompson met with 11 Home Loan Bank CEOs and asked the system to devote significantly more resources to increasing housing supply, according to Meeting SummaryAdeyemo called on housing loan banks to allocate part of their profits to reduce housing costs.

In a three-page letter, the chairmen refused to carry out this task.

“We oppose any action that could weaken our capital position, as it would ultimately reduce our ability to fulfill our statutory obligation to provide liquidity to the financial system and support the financing of housing and community development,” the letter stated.

Although the Federal Home Loan Banks are government-sponsored enterprises, under their charter they are organized as private cooperatives, financed with private capital from 6,500 financial institutions, including banks, credit unions, and insurance companies.

But critics say Home Loan Bank members receive billions in cheap financing and the system provides too little in return for the massive government subsidies. Last year, the Congressional Budget Office estimated that government subsidy is $7.3 billion, of which $6.9 billion comes from the “implied guarantee” of bonds sold to investors.

Banks that provide mortgage loans are exempt from federal, state and local taxes, as well as from the requirement to register with the Securities and Exchange Commission, which reduces the operating costs of the system.

Mortgage bank CEOs said the structure “must be preserved” to ensure the system’s continued stability and reliability.

“Our retained earnings and capital reserves are not only the foundation for our safe and sound operations; they also protect American taxpayers from risk,” the chairmen wrote in the letter. “But most importantly, they are the foundation for supporting our member financial institutions whose operations within the FHLBanks are a key driver of the FHLBanks’ mission of affordable housing and community development.”

In a second letter to Adeyemo, the Home Loan Banks’ CEOs wrote that FHFA should instead take action to remove “existing barriers” that they say make it difficult for banks to implement and expand their social housing strategies, including expanding access to community development financial institutions and reducing the administrative and regulatory burdens of the housing program.

“The liquidity that each FHLBank provides to its members is a cornerstone of supporting the largest source of private capital for affordable housing and community development initiatives in the nation,” the presidents said. “It is important to preserve the FHLBanks’ value proposition, and we are committed to avoiding changes to the FHLBank system that would reduce net income and result in less funding for affordable housing and community development activities.”

FHFA, the system’s regulator, has already been conducting 100-year system review when a deposit run on Silicon Valley Bank triggered a liquidity crisis last March that spread throughout the banking system. Last week, report from the Office of Inspector General revealed that FHFA took informal enforcement actions against the Federal Home Loan Banks in San Francisco and New York for violating regulations and failing to stop lending to banks whose financial condition and liquidity were rapidly deteriorating.