What Is the Federal Home Loan Bank System (FHLB)?

Eguaogie Eghosa
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Apr 16, 2022

The Federal Home Loan Bank System (FHLB) is a group of 11 regional banks in the United States that offer a steady flow of funds to other banks and lenders to help them finance housing, infrastructure, economic development, and other individual and community needs. The FHLB is under the supervision of the Federal Housing Finance Agency.

While the FHLB is managed by a government agency and its mandate reflects a public purpose, each FHLBank is privately owned and receives no government financing.

The Federal Home Loan Bank System (FHLB) in Action

The Federal Home Loan Bank System, or FHLBanks, is made up of 11 regional banks organized as privately held businesses, or cooperatives. They are owned by their members, which are local financial institutions that invest in the FHLBank through stock purchases. As a requirement of membership, the institutions must make real estate loans. FHLBanks do not pay federal or state income taxes because they are cooperatives.

Banks that are members of the FHLB

The Federal Home Loan Bank System's 11 institutions are dispersed across the country. Each one serves a geographical area that includes many states. Among the 11 FHLBanks are:

Atlanta Federal Home Loan Bank
Boston Federal Home Loan Bank
Chicago Federal Home Loan Bank
Cincinnati Federal Home Loan Bank
Dallas Federal Home Loan Bank
Des Moines Federal Home Loan Bank
Indianapolis Federal Home Loan Bank
New York Federal Home Loan Bank
Pittsburgh Federal Home Loan Bank
San Francisco Federal Home Loan Bank
Topeka Federal Home Loan Bank

Services provided by the Federal Home Loan Bank

FHLBanks have low expenses and overhead since they are cooperatives, which is reflected in the interest rates they charge their member banks. This implies that member banks can obtain low-cost loans, which they can then offer to their consumers.

Real estate finance is the FHLBanks' principal focus. FHLBs, unlike other real estate-focused government-sponsored organizations such as Fannie Mae and Freddie Mac, do not guarantee or ensure mortgage loans. Instead, FHLBs serve as a "bank to banks" by offering long- and short-term loans to its members, as well as specific grants and loans aimed at improving affordable housing and economic development. FHLBs also provide secondary market venues for members who want to sell mortgage loans in particular situations.

FHLBanks are involved in and run a variety of federal initiatives. Affordable Housing Program, Community Investment Program, Mortgage Partnership Finance Program, and Mortgage Purchase Program are just a few of them.

Federal Home Loan Banks are used by over 80% of U.S. lending institutions.

The Funding of the FHLBanks

To raise funds, the Federal Home Loan Banks use the capital markets to sell bonds, discount notes, and other types of term debt. Consolidated commitments are the name for this. All 11 FHLBanks' debt is issued through the FHLB Office of Finance. While each bank issues its own debt instruments, they are all backed by the system's banks, resulting in a lower-risk investment.

The FHLB System's Background

The Federal Home Loan Bank System was created in the aftermath of the Great Depression, which destroyed the American economy, particularly the banking industry. The Federal Home Loan Bank Act of 1932 established it as the first in a series of measures aimed at making homeownership more accessible to more Americans. The rationale was to provide low-cost financing to banks for mortgage lending. They'd be more willing to provide loans, making it easier for people to borrow money to buy houses and boosting the residential real estate market.

The Federal Home Loan Bank Board was established to oversee the system as a result of the Act. In 1989, the Federal Housing Finance Board (FHFB) took over oversight and the Office of Thrift Supervision took over regulatory responsibilities (OTS). The Federal Housing Finance Agency, established by the Housing and Economic Recovery Act of 2008, has been in charge of overseeing the FHLB since 2008. (HERA).

Savings and loan institutions dominated the FHLB's member financial institutions during much of the organization's 89-year history. After the Savings and Loan Crisis in the 1980s and 1990s, their numbers started to fall. Commercial banks (who were allowed to join in 1989) and insurance companies now make up the majority of the membership in the twenty-first century.

The Federal Housing Finance Agency's (FHLB) Impact

Proponents of the Federal Home Loan Bank System claim that it is vital in maintaining a steady flow of funds into the residential mortgage market, allowing millions of people to acquire a home. FHLBs also fund rental homes, small companies, and other neighbourhood development projects, resulting in increased economic and employment growth, stronger local communities, and a better overall quality of life.

Critics argue, however, that the FHLB distorts the basic supply-and-demand economics of the housing market by utilizing federally funded programs. They claim that using the FHLB to fund residential real estate increases irresponsible lending and a more turbulent boom-bust cycle.

FHLBanks have had their fair share of financial challenges throughout the years, with FHLB Seattle merging with FHLB Des Moines due to an inability to recover from capital losses. Their methods, on the other hand, are still effective. The FHLBanks, unlike sister GSEs Fannie Mae and Freddie Mac, did not need government bailouts during the subprime mortgage-induced financial crisis of 2008. They even boosted their financing as other sources of funding dried up.