Federal Home Loan Banks (FHLBanks) started out with one purpose: to provide low-rate, taxpayer-backed financing for mortgages. It still provides low-rate, taxpayer-backed funds, but only 10% of that money goes to home loans, according to a New York Times article this week.
The rest? Well, Bloomberg says the banks' $1.4 trillion in funds are being tapped by a Las Vegas whale and savvy financiers, many of whom don't lend mortgages.
"Today, [the FHLBanks system] specializes in providing cheap funding for the country’s largest financial institutions," says The Times in an opinion piece on Apr. 8. "Only 10 percent of its net income goes to the mission it was intended to serve. That needs to change. The system should be rechartered to help make housing more affordable."
What Are FHLBanks?
"The FHLBanks are 11 regionally based, wholesale suppliers of lendable funds to financial institutions of all sizes and many types, including community banks, credit unions, commercial and savings banks, insurance companies and community development financial institutions," says the FHLBanks website. "The FHLBanks are cooperatively owned by member financial institutions in all 50 states and U.S. territories."
The Federal Housing Finance Agency (FHFA) is the federal regulator that supervises FHLBanks. "[The FHLBanks system] is composed of 11 regional FHLBanks, about 6,400 member financial institutions, and the System’s fiscal agent, the Office of Finance," says the FHFA. "Each FHLBank is a separate, government-chartered, member-owned corporation."
In the roughly 50 years between its founding in 1932 and the 1980s, FHLBanks focused on providing inexpensive home loans to thrift institutions, mainly savings and loan associations (S&Ls). But in the early '80s, the country experienced a period of high inflation and sky-high interest rates.
Regulators were ill-equipped to deal with the crisis that hit S&Ls. "So instead they took steps to deregulate the industry in the hope that it could grow out of its problems," says the Federal Reserve. "The industry's problems, though, grew even more severe. Ultimately, taxpayers were called upon to provide a bailout, and Congress was forced to act with significant reform legislation as the 1980s came to a close."
So, S&Ls disappeared, and FHLBanks wondered what to do with their funding pile. They ended up today serving pretty much any institution with a charter, including commercial banks and insurance companies.
The taxpayer ultimately guarantees loans by FHLBanks. So, with low to zero risk to the lender, rates are typically below those the market can provide.
Do FHLBanks Do Good?
FHLBanks can and do provide affordable loans to support community regeneration and other public goods.
"The FHLBanks are an integral force behind the nation’s economy, sustaining the financial institutions that drive our communities forward," says the organization's 2024 impact report. "The liquidity they provide empowers local lenders to support businesses, create jobs, and open doors to housing opportunities."
However, supporting businesses and creating jobs with taxpayer-subsidized loans wasn't the original purpose of Federal Home Loan Banks. And, if The New York Times and Bloomberg are to be believed, too much of the $1.4 trillion in FHLBanks' coffers is going to help large institutional lenders with little or no interest in housing.
Is It Time for Reform?
The Independent Community Bankers of America® (ICBA) is already fighting a rear-guard action to block reforms that could see more money being dedicated to improving the housing sector. "ICBA strongly opposes any ongoing mortgage asset test for member institutions to access the FHLB system," it says.
Indeed, the ICBA resists tying FHLBanks' loans to any particular purpose: "Advances [meaning loans] should remain the FHLBanks’ primary focus and members should not be required to track or segregate advances for 'mission-related purposes,'" it continues. In other words, leave it to us to decide how, why and to whom to lend the money.
Maybe the ICBA's right. After all, the FHFA has presumably been satisfied that the system has been working for the public benefit since S&Ls disappeared in the 1980s.
However, the housing crisis is one of American voters' top priorities. Many are struggling with unaffordable rents or mortgage payments. And 771,480 Americans were unhoused in January 2024. So, ensuring that FHLBanks' loans are dedicated to their original purpose would likely be popular.
Filling in the Missing Middle
Economist Chris Hughes wrote The Times's opinion piece. And he suggested a way in which FHLBanks' funding could be diverted into something that could make a real difference to the housing crisis. He identified the "missing middle."
"While single-family homes and luxury high-rises continue to be built, medium-size multifamily condominiums of five to 50 units are so rare that housing experts have come to refer to them as the 'missing middle,'" Hughes wrote. "Too small to attract high-rise developers given the expensive per-unit cost of construction and too large to finance with a conventional home mortgage, these buildings often don’t get built."
Hughes argues that, by changing FHLBanks' regulations, Congress could allow 200,000 missing-middle units to be built annually without a cent of additional funding. And 40,000 of those should be at below-market rents.
Realtor.com reckons the housing stock shortfall reached over 4 million units in 2025. So, reforming FHLBanks isn't an overnight solution — and neither is any other policy change. But a million new units over five years would make a bigger difference than any other initiative of which we've heard.
