Taxpayer support for Federal Home Loan Banks is no longer justified

AP Photo/Charles Krupa

The U.S. taxpayers found out the hard way the cost of their “implicit” guaranty of Fannie Mae and Freddie Mac debt. Even after paying $191 billion, taxpayers are still on the hook for these government-sponsored enterprises (GSE). But the final chapter has yet to be written.   

Another GSE, the Federal Home Loan Bank System, is flying under the radar propped up by the same implicit taxpayer guaranty. Like Fannie and Freddie, it issues debt at a discount due to the perception that taxpayers will make good on it. But unlike Fannie and Freddie, this GSE competes for its funding with the same taxpayers that underpin it.  

The Federal Home Loan Bank of the United States, let’s call it “Bank U.S.,” is in dire straits. The fictional Bank U.S. is based on the consolidation of each of the 11 existing Federal Home Loan Banks. This makes sense because the GSE issues consolidated debt on behalf of all FHLBanks, plus all the banks are jointly and severally liable for the obligations of their sister banks.   

If Bank U.S. were a commercial bank its total assets of $723 billion would rank it #5 just behind Citigroup. 

Have you ever wondered why Bank A pays 0.75 percent on its savings accounts while Bank B pays 0.50 percent? You probably thought it was because of competition. That is partly true. However, in the funding market, Bank U.S. competes with both banks and with you every day. Bank U.S., you may be surprised to learn, is your bank. And, unlike you, Bank U.S. pays no federal income taxes.  

In 2020, according to my calculations of SEC filings, the 11 Bank U.S. CEOs gained over $39 million in total compensation for overseeing what are essentially quasi-governmental agencies. As a practical matter, they cannot fail. Bank U.S. offers just one product: secured loans on favorable terms to member financial institutions. They have no dissident or activist shareholders to worry about and are immune from unwanted takeovers. Their innovation is restricted by law and regulation. Their geographic and customer market is fixed by statute.  

The skillset required to run Bank U.S. is considerably less than what it takes to run a commercial bank. And it doesn’t end with the CEO. C-suite executives are compensated on a similarly lavish scale.   

None of these executives would disagree that without U.S. taxpayers’ support of its debt, Bank U.S. would not exist or survive. Yet its trade association denies such taxpayer support exists. Pure chutzpah!  

The commercial banks that own Bank U.S. fund their own operations from equity along with deposits and other borrowings. If they find it too expensive to pay up for deposits, they bundle some of their mortgages and pledge them to Bank U.S. in exchange for a taxpayer-subsidized advance. What do taxpayers get? Bank U.S. devotes a small fraction of its net income to affordable housing programs. 

In good times, this allowed Bank U.S. to justify its existence, but that’s over. Now, Bank U.S.’s net income is low and heading lower. The member banks are no longer borrowing at sustainable levels. The rationale for the entire enterprise is crumbling.  

Two legislators, Sen. Catherine Cortez-Masto (D-Nev.) and Rep. Ritchie Torres (D-N.Y.), have spearheaded reform bills. The bills would increase the slice of net income devoted to affordable housing from 10 to 20 percent and create a community economic development fund using 10 percent of Bank U.S.s’ net income. 

Whether or not the bills become law, Bank U.S. is in need of a total overhaul.  

The heart of its problem is its mission was set by Congress in the 1930s: It has to be brought into the current millennium. Stakeholders need to be reminded Bank U.S. was not set up to be a vehicle for corporate welfare. Rather, exigencies of the modern era such as climate change, infrastructure repair and small business credit, present unique opportunities.   

There is hope.   

Bank U.S. has a new regulator in FHFA Director Designate Sandra Thompson, an astute executive who understands Bank U.S.’s predicament. And Cortez-Masto and Torres appear to have awakened many of their colleagues in Congress.   

It has been urged that Thompson create an advisory committee within FHFA to help guide her in charting a new course for Bank U.S. A legislative commission has also been proposed and may be better suited for the same purpose.  

Whether it’s a committee or a commission, here are a few key questions that must be addressed:  

First, has Bank U.S. adapted to the modern era of financial services? Hint: Eight of the top ten mortgage originators in the U.S. are nonbanks that are not even eligible to be members of Bank U.S.  

Second, are there significant public goods that Bank U.S. could provide that it is not providing? Hint: Bank U.S. does not currently finance the housing supply chain, climate change initiatives or job-creating loans to small businesses. 

Third, are the taxpayers receiving an adequate return in exchange for their subsidizing Bank U.S.? Hint: Perhaps it would be more efficient with fewer component parts and salaries commensurate with its public purpose.  

Fourth, in terms of its mission, does Bank U.S. take a holistic approach to promote affordable housing or even housing in general? Hint: Ask what it is doing for naturally occurring affordable housing, which accounts for 75 percent of all affordable housing.   

One thing is clear. An advisory committee or legislative commission must be populated with experienced and open-minded people drawn from a wide range of endeavors, not just from the incumbent leadership that feeds off of Bank U.S.

If ever there was a case in which the hackneyed expression, “think outside the box” should be applied, Bank U.S. is that case.  

Cornelius Hurley is a lecturer at Boston University. He was an independent director of the Federal Home Loan Bank of Boston from 2007 to 2021. Follow him on Twitter: @ckhurley.

Tags Economy of the United States Fannie Mae Federal Home Loan Bank System Federal Home Loan Banks Federal Housing Finance Agency Finance Freddie Mac Government-sponsored enterprise Mortgage industry of the United States

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