Is the Federal Home Loan Bank reform a safe bet or a spectacle?
Move over Fannie and Freddie.
Conventional wisdom until now was that Sandra Thompson’s tenure as director of the Federal Housing Finance Agency would be judged by how well she handled the enduring conservatories of Fannie Mae and Freddie Mac. A little note would be taken on how she handles the sleepy federal home loan banks.
Fannie and Freddie are the titans of the national housing finance market. FHLBs, on the other hand, play little or no role in housing finance beyond their minimum statutory affordable housing contributions.
That math changed with Thompson’s recent testimony before the House Financial Services Committee. In her otherwise routine remarks, she outlined a bold and comprehensive plan to overhaul the fundamental purpose and structure of the huge FHLBs. At the same time, she eased all expectations regarding Fannie and Freddie’s upcoming release from their guardianships.
She had telegraphed her thoughts on a comprehensive FHLB review in public remarks to the Bipartisan Policy Institute where she endorsed the idea of creating an advisory committee to conduct such a review. But his formal testimony calls into question the very purpose of the FHLB for the first time.
As Fannie and Freddie grow from $80 billion in capital to the goal of $300 billion, FHLBs now take center stage. How Thompson orchestrates the remake she launched of that little-known, trillion-dollar government-sponsored enterprise (GSE) will be her lasting legacy.
How did this backsliding of the GSE come to the fore of the GSE debate? The answer is threefold: hubris, the Fed, and public awareness.
For decades, FHLBs have purposely flown under the radar. Exempt from congressional appropriations and oversight and backed by a hefty government subsidy, “FLUBs,” as they are now called, have carved out a profitable niche for themselves at taxpayer expense. Their members are banks and insurance companies who enjoy the dividends they receive from the FHLBs – again at taxpayer expense. Always withdrawn into themselves, the FHLBs have failed to adapt to a market that has radically changed around them.
Beginning with the 2008 financial crisis and continuing with the 2020 COVID economic crisis, the Fed pumped trillions of dollars of liquidity into the financial system. However, liquidity is everything the FHLB offer. Even the most ardent members of FHLBs no longer need the cash that FHLBs have to sell. Naturally, lower income is the result.
Finally, the public understood the reality that the FHLBs do not provide any public good in return for their government subsidy. As Ms Thompson said in her testimony last week, “the main function of the FHLBanks is to provide liquidity in times of crisis”.
Provide liquidity to private banks; however, is not a public good. It’s a private benefit to. We already have a government agency, the Fed, which was created to act as a lender of last resort. This glaring lack of any public good provided by the FHLBs has been highlighted by various commentators in recent months.
In her written statement, Thompson hit all the right notes. It is especially important that the “fundamental questions of mission, purpose and organization” are ripe for reassessment. Likewise, buy-in and operational efficiency, that is, consolidation and effectiveness, are on the table.
In short, when it comes to FHLBs, all bets are off.
A key question is whether his testimony launches a charette or a show. A charette would be a convocation of all the stakeholders in an authentic project trying to resolve conflicts and trace solutions. A show is, well, just performative.
Knowing Thompson by reputation and experience with both the FDIC and FHFA, smart money is about the process she is about to initiate being a genuine effort to identify not only current stakeholders, but stakeholders who may have never even heard of FHLBs. . Small businesses creating jobs, infrastructure lenders, climate change enthusiasts, and affordable housing players are some of the potential new players that come to mind.
This is very early in her full review process and she has signaled that a series of listening sessions are in order. A first indicator of the seriousness of this effort will be the organization of listening sessions. If the 11 FHLBs are the conduit for organizing these sessions, it will be a sure sign that the process is captive. However, if an aggressive, imaginative and independent outreach effort to potential stakeholders is undertaken, we are embarking on a very productive process.
Thompson was confirmed as director of the FHFA just over two months ago. Five of his predecessors presided over the guardianships of Fannie and Freddie. None of them challenged the politically connected and intractable FHLBs. The search for a meaningful public purpose for FHLBs is long overdue.
Thompson is exactly the right person to lead this quest.
Cornelius Hurley was an independent director of the Federal Home Loan Bank of Boston from 2007 to 2021. He teaches financial services law at Boston University School of Law.