RESTON, Va.—On the second floor of a squat office building in a quiet Washington suburb, workers ensconced in cubicles sell millions of dollars of bonds each day, money that later flows to a range of borrowers, from community lenders to global megabanks.
The trading room, 250 miles from Wall Street, is the nerve center of the Federal Home Loan Banks, a $1.1 trillion network of government-chartered cooperatives that is so obscure there isn’t even a sign on the front of the building.
Founded during the Great Depression to support housing finance, the system’s role has evolved. It was an important source of liquidity during the crisis of 2008 to commercial banks. Since then, it has become a supplier of cheap funding to the likes of
& Co. and
& Co.
Now the system’s federal regulator is considering whether to allow further growth, via lending to nonbank mortgage institutions and real-estate investment trusts, which have come to play big roles in housing finance. The goal is to help those firms fill the void left by big commercial banks, which have cut back on mortgage lending to all but the most creditworthy customers.
“It’s time to make the system reflect the market that it serves,” said
Pete Mills,
senior vice president of residential policy at the Mortgage Bankers Association.
Some observers see risks. They question whether nonbanks like REITs should have access to taxpayer-subsidized funding, given that they aren’t subject to similarly stringent regulations. And they say the cooperative is straying from its mission to provide funds to community lenders.
“I have no idea why they should be providing cheap liquidity for purposes such as commercial real estate,” said
Barry Zigas,
a senior fellow at the Consumer Federation of America, referring to the type of activity financed by some REITs.
Any move to expand the membership of the home-loan banks would run counter to the Trump administration’s goal of shrinking and privatizing Fannie Mae and Freddie Mac, two other government-chartered housing-finance companies that were taken over by the government in 2008 at a cost of some $190 billion.
While Fannie and Freddie buy mortgage loans and package them into securities, the Federal Home Loan Banks play a different role in housing finance: channeling money from global bond markets to thousands of institutions across the U.S.
Photo:
Ian Bates for The Wall Street Journal
As of Dec. 31, the system’s borrowings came to $1.03 trillion, making it one of the world’s biggest debtors. The money flows through 11 regional cooperatives, which feed it to their 6,800 member institutions—commercial lenders, thrifts, credit unions and insurers. Implicit government backing means they can borrow cheaply and pass some of the savings on to members.
Community bankers say they can count on the home-loan banks for funding if other sources dry up. The bank’s regulator says any proposal to allow the home-loan banks to lend to nonbank mortgage institutions and REITs wouldn’t come at the expense of lending to community banks.
“It’s like any type of insurance, sometimes you don’t appreciate the value of it until you really need it,” said Jim Edwards, chief executive officer of UnitedBank, a privately held community bank in Georgia.
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Yet since around 2014, some of the system’s biggest borrowers have been Wall Street banks. They use the system as a cheap source of funds to buy safe assets like Treasury securities in compliance with postcrisis regulations.
The Federal Home Loan Bank of Cincinnati was owed $23 billion by JPMorgan Chase at the end of 2018, or 43% of its total lending, regulatory filings show. Similarly, the Des Moines home loan bank was owed $49.6 billion by Wells Fargo.
John von Seggern,
president of the Council of Federal Home Loan Banks, a trade group, says that having big clients gives the system the financial clout it needs to support smaller banks.
“We have access to world-wide markets because the big banks give us a lot of volume,” he said. “We’re able to then take that favorable funding that we get and we’re able to lend it to all of our members, big and small, at the same rate.”
Photo:
T.J. Kirkpatrick for The Wall Street Journal
Such is their financial muscle that the home-loan banks considered the feasibility of buying
around 2016, according to people familiar with the process, which was led by the Federal Home Loan Bank of San Francisco. Ultimately, they dropped the idea, deeming Freddie’s business model incompatible with their own.
Now they may have a different route to growth. Mark Calabria, head of the Federal Housing Finance Agency, their regulator, has said his agency will consider an expansion of its membership in a review that could start as early as this month.
Mr. Calabria says the agency isn’t prejudging the outcome.
“Everyone would love to have access to cheap funding,” he said in a recent interview. “But how do we make sure that we have the appropriate safeguards and that members are mission-focused?”
Write to Andrew Ackerman at [email protected]
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