The Federal Home Loan Bank System, created in 1932 during the Great Depression, is a government-sponsored enterprise consisting of 11 regional banks that provide liquidity to member financial institutions through secured advances while simultaneously supporting housing affordability through the Affordable Housing Program (AHP), which requires banks to contribute 10% of profits to affordable housing projects; however, the system faces challenges including mission drift toward large financial institutions, with 40% of members not originating mortgages, and coordination issues with the Federal Reserve during financial crises, prompting calls for regulatory modernization and structural reforms to better serve its original housing mission.
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Hearing Entitled: Oversight of the Federal Home Loan Bank System
Added:The subcommittee on housing and insurance will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. This hearing is titled Oversight of the Federal Home Loan Bank System.
Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. I now recognize myself for four minutes for an opening statement. Today, we will examine the dual roles of the Federal Home Loan Banks, both in providing liquidity to member institutions and their obligation to housing affordability. The Federal Home Loan Bank of 1932 created the Federal Home Loan Bank system. At the time, these institutions were created to address liquidity challenges experienced by mortgage lenders during the Great Depression. The 11 federal home loan banks are federally chartered cooperative financial institutions. Each federal home loan bank is privatelyowned and capitalized by its members, but the federal home loan bank system collectively con constitute a government sponsored enterprise. The federal home loan banks were capitalized by the Treasury when they began, but they repaid that investment in 1951 and have not received direct federal financial assistance since that year.
However, the Federal Home Loan Bank system does enjoy some privileges due to its federal status. The system enjoys an implicit federal guarantee which makes it easier for the banks to find buyers of their debt. Additionally, they are exempt from federal, state, and local taxes. Let's talk about the how the federal home loan banks actually provide liquidity to the market. In practice, if a member institution requires liquidity, the federal home loan banks can provide advances or short-term cash loans to that member. Those loans are secured by collateral from the member institution.
To fund these advances, the Federal Home Loan Bank system issues debt and their debt is issued jointly, meaning that all 11 banks are liable to cover the debt together. That structure helps provide confidence to investors that the Federal Home Loan Bank's debt is reliable and low risk, driving demand for their debt.
For member institutions, these advances can help bridge gaps with liquidity, and they can also help finance loans in the community, like mortgage loans. These advances serve as additional funding sources that provide stability in particular to community banks. Their mission has changed since their charter in the 1930s. Most notably, they now have a requirement to provide affordable housing grants in their respective districts. Since 1995, the federal home loan banks are required annually to contribute 10% of their profits to affordable housing projects through what's called the affordable housing program. Additionally, many of the federal home loan banks contribute an additional 5% of their profits to affordable housing activities on a voluntary basis. These AHP grants are a large source of affordable housing development dollars. Last year, the Federal Home Loan Bank system committed more than $1.1 billion to support affordable housing and community development activities. To sum things up, the Federal Home Loan Bank serve an important and related dual roles. They provide short-term liquidity to member institutions that can be used to provide more loans at the local level and they provide direct assistance through grants in the affordable housing program to communities across the country. I have seen firsthand in my district the important role of federal home loan banks. I have found the Federal Home Loan Bank of Topeka's housing programs to be more efficient and effective in getting capital out to communities than many other federal grant programs. In fact, I feel so strongly about the value of the Federal Home Loan Bank's community development capabilities that I have set up meetings between several of the Federal Home Loan Bank of Topeka folks and several communities in my district. Those meetings have helped facilitate more investment in my part of the state and they have helped inform my view that the Federal Home Loan Banks are integral to communities across the country. Both of their roles, providing liquidity to member institutions and supporting housing, are important parts of building stronger communities. My goal with this hearing is to better understand how the federal home loan banks operate and better understand what, if any, changes to their charter would improve their operations and strengthen their impact. I yield back. I now recognize the ranking member of the subcommittee, Mr. Clever, for four minutes for an opening statement.
>> Thank you, Mr. Chairman. Uh it has been nearly 15 years since this committee last held a dedicated hearing on the federal home loan bank system of 2011.
Regulated by the FHFA, the system consists of 11 regional banks, each with its own board and executive leadership operating in a common statutory framework. Together, the home loan banks represent a trillion dollar financial system that provides liquidity to approximately 6,500 members and communities. The work of the system is supported by an estimated net federal subsidy of roughly 7 billion each year.
The system benefits from a statutory treasury line of credit exemption from income taxes, most income taxes, uh, and lower borrowing costs due to an implied federal guarantee. In this committee's responsibility to ensure that federal support advances the mission, Congress assigned to the system and delivers commensurate benefits to taxpayers. The system was created in 1932 to address the fundamental friction facing the housing market at that time, a market that bears little resemblance to today's. Yet, the system's core mission remains as important today as it did 100 years ago. Yesterday I heard from the president of the Missouri Bankers Association who reiterated strong support for the work of the federal home loan banks of demand of De Moine. Since the affordable housing program began, Missouri, my home state, has benefited from more than 175 million in grants, while the bank has assisted over 3600 households through $19 million in down payment assistance and provided Missouri institutions with $6 billion in advance and five billion through mortgage programs. Last month, the De Moine Bank accepted all accepted my call to allow mortgages under written using newer credit scoring models to be pledged as collateral, expanding access to support for an estimated 4 million additional customers. The system remains a key component of housing finance. In 2023, the FHFA released the federal home loan system at 100 focusing on the future report. It recognized that the evolution of the modern market quote necessitates an indepth review of the structure, operations, and oversight of the federal home loan banks to ensure they are most effectively advancing their mission unquote. Most of these recommendations remain unimplemented.
FHFA director has not yet appeared before this committee to discuss FHFA plans. Members of this committee have put forward for forward several proposals aimed at modernizing the system. This includes ensuring that the system is providing the appropriate types and levels of support and complements the mission of other institutions including the Federal Reserve. I look forward to hearing from our witnesses. Thank you, Mr. Chairman.
>> Thank you, Mr. Clever. Today, we welcome the testimony of Miss Jill Nammen, director of the director at the Government Accountability Office. Mr. Ryan Donovan, the president and CEO of the Council of Federal Home Loan Banks.
Mr. Barry Lockachard, the president and CEO of Corn Husker Bank in Lincoln, Nebraska, proudly doiciled in the first district of Nebraska. Here on behalf of the Federal Home Loan Bank of Topeka, and Professor Katherine Judge, the Harvey J. Goldmid Professor of Law at Columbia University. We thank each of you for taking the time to be here. Each of you will be recognized for five minutes to give an oral presentation of your testimony. Without objection, your written statements will be made part of the record. Miss Nmen, you are now recognized for five minutes for your oral remarks.
>> Chairman Flood, Ranking Member Clever, and members of the subcommittee, thank you for inviting me to discuss our work on the federal home loan bank system.
The FHL banks support liquidity in the financial system and promote housing and community development. The failures of Silicon Valley Bank and Signature Bank in March 2023 renewed questions about the system providing liquidity during a crisis. Today, I will discuss the system's role in providing advances, use of advances during March 2023, and issues revealed by the bank failures.
First, FHL bank advances have been a steady source of funding for members.
Banks primarily fund their operations through customer deposits like checking and savings accounts. Advances from FHL banks offer members another lowcost source of funding to make mortgages or manage liquidity risk.
Most US banks were active FHL bank members. They regularly borrowed consistent amounts between 2015 and 2025.
On average, threearters of active members had borrowing that was around 5% of their total assets. Changes in borrowing across quarters was small, even during periods of stress.
Our economic modeling found that higher borrowing was generally associated with positive policy and financial outcomes, especially for smaller banks. For these banks, higher borrowing meant more lending, including real estate lending, and lower likelihood of failure. FHL banks should regularly evaluate members creditworthiness, considering collateral pledge to secure the loans and members financial condition. They assign a credit limit and require advances to be fully collateralized.
They generally lend the amount requested if it is within the member's limit, but they can deny a request based on a member's financial condition or supervisory information from a regulator.
Now, we'll turn to the March 2023 bank failures. Several banks experienced stress in March 2023.
Total outstanding FHL bank borrowing increased substantially at the onset of this period, exceeding amounts during previous financial market disruptions.
97% of this increase, as well as much of the borrowing during our study period, was driven by a small number of large banks. Bank executives we interviewed told us they increased their use of advances at this time due to economic uncertainty, pressure to secure funding and to maintain customer confidence.
At the beginning of 2023, SBB and Signature Bank were among their respective FHL banks largest borrowers.
They were not deemed to be significant credit risks until March. At that point, the relative FHL banks continued to provide advances to both banks, increase the frequency of their communication with the bank's regulators, and began to take steps to limit their exposure.
The last point I'd like to make is the importance of ongoing FHL bank coordination efforts. Timely coordination is critical when a bank is at risk. The relevant FHL banks made several efforts to help the failing banks pledge collateral to obtain liquidity from the Federal Reserve's discount window. However, these efforts revealed some coordination challenges between the systems. Since then, the two systems have begun efforts to address operational challenges and improve coordination. Engagement between the systems has increased through tabletop exercises to test collateral reallocation. In addition, a working group was established to develop standard procedures and an emergency playbook.
GAO's work has also found that more timely escalation of supervisory actions by bank regulators is needed. Regulators identified liquidity and risk management concerns at both failed banks years before 2023.
These were key drivers of the bank's failures. However, the banks were slow to mitigate the problems and regulators did not escalate supervisory actions in time to prevent the failures. We have several recommendations to regulators about addressing the risks of untimely escalation.
Continued commitment to coordination and timely escalation are important to help ensure that the system is prepared to respond quickly in a future crisis. This concludes my statement. I'm happy to answer any questions.
>> Mr. Donovan, you are now recognized for five minutes for your oral remarks.
>> Chairman Flood, Ranking Member Cleaver, and members of the subcommittee, thank you for the opportunity to testify.
Tomorrow marks the 94th anniversary of the Federal Home Loan Bank system.
Congress created the system at the depths of the Great Depression to provide reliable, secured liquidity to mortgage lending institutions through a member-owned cooperative structure that aligns incentives, promotes prudent risk management. That structure has helped the system maintain an unbroken record of no credit losses on advances in its 94year history. Approximately 6,300 banks, credit unions, insurance companies, and CDFIs are members of the home loan bank system. They rely on the bank's liquidity and tools such as the acquired member asset programs to support mortgage lending, multifamily finance, small business and agriculture lending, community development, and contingency funding in both normal times and times of market stress. The breadth of membership is one of the bank's core strengths because it allows the banks to channel liquid liquidity through every region, every market segment, every business model that touches housing and community development. If reforms were to narrow that membership base, they would also narrow the funding available for the affordable housing program and the voluntary and community initiatives that today exceed $1 billion annually.
And they would reduce secured liquidity in the broader financial system at a time when Congress and regulators are focused on resilient sources of funding and stress.
The bank's public mission is supported by a privately capitalized marketfunded model. Federal home loan bank debt is not an obligation of the United States and it is not guaranteed by the United States and the banks have never required a taxpayer bailout received a congressional appropriation.
The safety and soundness record is strong because advances are fully collateralized by high quality assets.
Independent analysis reinforces this record. In December, GAO found that higher borrowing from the banks is associated with more real estate lending and a lower likelihood of distress outcomes for smaller institutions.
Through every major financial disruption in the last four decades, the system has provided countercyclical liquidity at the moments when other funding sources contracted. The system's housing mission is carried out both through its core liquidity function and through direct housing affordability investments. Each bank contributes at least 10% of prior year net earnings to the AHP. And since 1990, the system has delivered more than $9 billion through this program, making it the nation's largest source of privately funded grants for housing and community development. The banks go further dedicating additional earnings to voluntary housing and community initiatives so that total mission contributions significantly exceed the statutory floor. And in the last three years, the home loan banks directly supported more than 200,000 affordable housing units. The totality of our impact on housing affordability is much greater. The Urban Institute found that home loan bank liquidity and housing investments generate between 94 billion and 133 billion in annual economic value through increased lending activity, housing and community investment, and crisis prevention. And that the bank's advances support rough supported roughly $1.8 8 trillion in additional lending from 2002 to 2024, including about $850 billion in additional residential real estate lending. Urban also found that the that membership reduces the probability of bank failure by about 10% while saving the FDIC roughly $950 million annually in avoided failure costs. and that bank advances enable member institutions to pass along approximately $3.8 billion each year and lower mortgage costs to home buyers nationwide.
These benefits come at no out-ofpocket cost to taxpayers. In short, the Federal Home Loan Bank system is a congressional success story. It's a member-owned cooperative network that provides safe, secured liquidity, supports housing affordability and community development, and delivers substantial, independently measured public benefit for the financial systems and for families seeking a home. Thank you for the opportunity to testify.
>> Mr. Lockard, you are now recognized for five minutes for your oral remarks.
Chairman Flood, Ranking Member Cleaver, and members of the subcommittee, thank you for the opportunity to offer my perspective today as a community lender, a cooperative member of the Federal Home Loan Bank system, and the chairman of the Federal Home Loan Bank of Topeka's board of directors. I've developed an increasing appreciation for the ways in which the FHL bank system utilizes its novel architecture to transform private capital into exponential public benefit.
For nearly a century, the FHL bank system has served as a blueprint for the way in which a true public private partnership benefits our country. I appreciate the opportunity to highlight why Cornusker Bank and thousands of local lenders regard the FHL bank system as our lender of first resort and our cooperative partner. While the narrow narrative of the system often revolves around its significant achievements supporting affordable housing innovation and community building, that work is enabled through its liquidity role, utilizing local members as a conduit of capital. Through Corn Husker Bank's membership, we are able to expand access to credit in our communities supported by the use of advances and increases in our role in home mortgage lending by selling these loans to FHL Bank. We also get to help our customers through the various affordable housing programs. FHL Bank's mission in Topeka is to help its members build strong communities. By growing the financial ecosystem of our communities, we create jobs, investment, and more housing. FHL Bank Topeka is a trusted, reliable partner. The member owners of the cooperative count on our products and services are utilized in 99% of the 339 counties that we serve.
Of our approximately 650 members, nearly 93% of our members have less than 1.5 billion in assets. The FHF bank system is a novel and resilient mechanism. The collateral structure allows lenders to transform assets into additional lending capacity by pledging mission related assets to create liquidity. In underserved or rural communities, the FHL banks often represent the only available access for community lenders to the capital markets. FHL Bank Topeka not only helps members by providing liquidity, it also distributed more than $75 million in grants in 2025. Our AHP volunteer programs have been able to address more needs in a more timely and direct fashion. Just recently, we received this thank you note from the volunteer fire department in Goththingberg, Nebraska. Daypring Bank used FLH Bank's care program, which provides a match to members who do donations for natural disasters. The money assisted their community in its rebuilding efforts from the devastating wildfires that hit Nebraska. Another highlight is about a Corn Husker Bank customer named Nathaniel. He wasn't sure if he could ever afford afford a home.
He makes $75,000 a year, which is 73% of the area median income. Through the mortgage rate reduction program, along with providing him $15,000 through FLHL Bank's down payment assistant program, he was able to see this dream come true and afford a home. In 2025, down payment assistance programs supported nearly 873 households in Kansas and 536 households in Nebraska. And in addition to FHL Bank Topeka not only lived out its mission in meaningful and innovative ways in other areas such as providing assistance to Native American home ownership in Oklahoma and funding the affordable housing institute at MSU Denver. This type of impact happens because of collaboration between our board of directors along with our affordable housing advisory council along with the staff at HL FHL Bank Topeka. We get together and we talk about what's going on locally. Our AHACK is comprised of local practitioners who help provide these local insights and expertise to assist us with developing our AHP and volunteer programs. To create certainty would be to codify AMA to permanent. As we continue to offer programs, banks need to know that we have certainty about these rules of the road as we make decisions now and in the future. By doing this and making AMA perfect, it helps ensure a seamless mechanism for small lenders to originate and service mortgages to their communities. In addition, addressing the caps on AMA programs could unlock additional resources for high-cost regions by allowing FHL banks to grow their mortgage programs. Policy or structural changes must always account for the systems cooperative value proposition.
Lenders can and often do obtain wholesale liquidity and funding from a variety of sources. However, if ongoing access to FHL bank funding is perceived to be conditional, unreliable, or simply uncompetitive, the market will migrate.
This would directly reduce the resources available that FHL banks have to dedicate to growing communities, and it would drive local lenders to use other wholesale liquidity sources, which have no equivalent obligation to support housing and community development in such a granular and informed way. The FHL banks look forward to working with you to continue to enhance the systems cooperative value propos proposition.
And on behalf of the thousands of cooperative member owners that across the country, I thank you again for the opportunity to provide my perspective.
>> Professor Judge, you are now recognized for five minutes for your oral remarks.
>> Thank you. Thank you, Chairman Flood and Ranking Member Clever for having this hearing. Thank you all for being here.
The Federal Home Banks are some of the most important and some of the least understood financial institutions in this country. Uh we could really understand that by looking at the history of the Federal Home Banks. I think part of the confusion arises from the fact that they've had really three different lives within their 90-year lifespan. The first period of time from 1932 when they were created up until around 1980, they played a huge role that was largely structural, enhancing the resilience of small thrift institutions and changing the type of housing finance available. So there were more mortgages that better met consumer needs. There was a disruption in the 1980s. From 1989 through 2011, they really created a bridge allowing the country to deal with the incredible cleanup cost of the savings and loan crisis without creating a huge hole uh in terms of the deficit. And so that was the bridge they paid for 20 until 2011.
From 2011 until today, there has been tendencies towards both bloat and mission creep. They still play incredibly valuable roles in promoting affordable housing and helping smaller financial institutions. So I agree with everything that has been said, but their predominant activity is providing implicitly governmentbacked funding to large banks and large insurance companies and doing far less than they could or should to help the very challenging framework that people are facing who are trying to buy affordable homes. So just going back a little bit uh into that history because I think if we learn from those first two phases, we can learn a lot more about where they could potentially be doing more than they're doing today. So we go all the way back to 1932.
As was already mentioned a couple of times in 1932, we had a very segmented banking system. We had commercial banks that really served businesses and they served elites. They had access to the Fed. We then had savings and loans associations, building associations, a lot of small thrifts, communityoriented. They had no access to the Fed. So we created something that looked a lot like the Fed but for these small thrifts. And that was critical in terms of liquidity provision. But Congress also went further. They said, "We don't want you just to provide liquidity. We want you to provide funding because these small institutions don't have access to the capital markets. They're not going to have direct access to the capital markets.
And we want them to also make loans that better serve consumers. So we're going to have smaller haircuts and actually have the federal home loan bank system take on more risks and the banks take on less risk when they're making like the longer term loans that consumers really need. And that really did change the market market in a meaningful way. And it really helped thrifts these small institutions to thrive and survive for the first 50 years. 1980s we had the SNL crisis changed the framework dramatically.
And so there was a and we had the Fed suddenly open its doors to thrift institutions. So there's a question, what do we do with this federal home loan bank system? Congress was trying to meet deficit reduction targets and yet we had all of these different weak SNLs that were really dragging down the rest of the banking system and closing them all was going to be very expensive. So what did they do? They said look we have this government sponsored enterprise that's off balance sheet. If we make it even bigger by allowing all the commercial banks to now become members of this GSE, it can earn a lot of money and we can use that money to pay off this SNL crisis. And that's precisely what we did starting in 1989 with FIA.
So 10% now went to the AHP, the affordable home program, which is a very valuable program. And then originally a fixed amount and later 20% of the profits went separately to pay off the SNL refcore bonds. And so this was a way to clean up the SNL mess. Then 2011 comes along, they pay off the ref core bonds. So the significant burden that had actually been serving the public disappears. They're making a heck of a lot more money. They still only have a 108% AHP. Well, what happens? You have natural mission creep where they are doing the business that is easiest for them to do which means making very significant loans against already very liquid assets quite often where 74% according to the GIO 70% of those loans are going to the 10 billion or plus banks those are the biggest banks 3% of the members are getting 74% of loans and insurance companies are getting a bunch of the rest who are doing almost no work according to Bloomberg 40 over 40% of federal home loan bank members did not originate a single loan in the last five years. So what we have is a system that does still provide important roles in affordable housing but is doing much less in affordable housing than it could and is providing far more in terms of dividends and in terms of cheap funding to the largest financial institutions.
And so the idea is how to look back at those first two stages. So they're taking smart risks that really help smaller financial institutions and really help housing and giving more to AHP.
We'll now turn to member questions. I now recognize myself for five minutes for questioning.
I'm pleased to have a constituent Barry Lockard from Cornhusker Bank and the Federal Home Loan Bank of Topeka at this discussion. As Barry knows, I've done some work with the Federal Home Loan Bank of Topeka in my district. One of the things I personally found illuminating was how much more flexibility the federal home loan programs have relative to other f federal programs as it relates to affordable housing. For example, last year I was looking for assistance for some weatherization projects in my district. Initially, I looked to federal programs for help. I quickly found that the federal government contains a litany of weatherization programs from a wide assortment of agencies and many of them have overlapping purposes but are so difficult to navigate for grantees.
However, when I learned more about the Federal Home Loan Bank of Topeka's programs, I found them to be much more efficient in getting results. in County, Nebraska. We were able to work through a local community bank to get seniors on fixed incomes upgrades to their homes that will make it easier for them uh to make it through the winter.
I'm talking uh better windows to keep the uh the warm air inside and the cold air outside. Uh I I know they've done projects like helping make it wheelchair accessible to get into your house.
Improvements like these make a difference for real people. And when you have the local banker uh assisting, they they're looking for fraud. They're making sure that the people that are getting these dollars are the ones that truly need them. So, Mr. Locker, from the perspective of Corn Husker Bank, why is membership in the Federal Home Loan Bank of Topeka so important? Uh what do the advances from Topeka allow your bank to do in the community?
>> Thank you, Congressman Flood. I would start with the fact that by being a member of the Federal Home Loan Bank of Topeka, we have access to liquidity. By being able to take an illlquid asset on our books and be able to pledge it, we're able to create liquidity that we can then advance into our local communities. That becomes the ability for us to lend, which creates investment, jobs, and housing. When I think about our membership in the Federal Home Loan Bank, I also think about how it impacts the entire financial ecosystem of what we operate in as a community. So the liquidity mission that we provide to our members, especially to Cornesker Bank and others in Nebraska, is vital. It's a very key component. When I talk to other member banks across our district, I hear them say it is very important for our cooperative to make sure that we continue to make this reliable and available to us because it is a very much critical piece of how we fund and go to market. Now, with that being said, you talked about the AHP programs. The beauty of the whole thing is that as we look at that pie of that ecosystem and we get to grow that pie and do more work, we create loans. We get to pledge more collateral. As we increase the pie, there's more dollars that are available for us to put into programs such as our AHP programs. One of the programs that Cornesker Bank has found very beneficial is our mortgage rate reduction program.
I mentioned a a gentleman by the name of Nathaniel, but there was also a gal named Lina not too long ago that came into Corn Husker Bank. We were able to help her with the mortgage rate reduction program, and it lowered her monthly payment by as much as $250 a month. And it also had a consequence on her loan to value side because we were able to help her with a set aside grant to help her lower her value of her home.
And she saved over $38 a month. That's real world savings happening in our district uh today. I would just say and I would leave you with this message to think about as we are looking at the big pie that everything happens from that we want to continue to grow which is the economic value of our communities.
Having that liquidity from the Federal Home Loan Bank gives us a lowcost way to get advances that we can then take out to market, take loans, create jobs, create more collateral that we can then pledge to the Federal Home Loan Bank to keep the system working as it has for decades.
>> And I should point out I live in a state that has a 138 community banks. So we don't have the the GSIBs that are as active in in Nebraska. Uh, Mr. Donovan, the the federal home loan banks were established back in the 1930s. What changes, if any, do you feel Congress should uh think about as it relates to their uh your governing statute?
>> Thank you, Mr. Chairman, and I was remiss in my opening statement and congratulating you and the ranking member and the committee on the enactment of the Road to Housing Act.
So, congratulations on that. Uh, in terms of legislative changes to the home loan bank system, I as as was mentioned uh by Mr. Lockard, I think in the in his opening statement, the cotification of the acquired member asset program is is really really important. The banks have been operating those programs under a regulatory interpretation for uh for several years and and codification would give our members more certainty. Um it would also uh what we've proposed is to to expand those uh to allow um more more loans to be uh pledged there. I'm happy to expand in writing. Unfortunately, I'm out of time, but thank you very much for the answer. I now recognize the ranking member of the subcommittee, Mr. Clever, for five minutes for questions.
>> Thank you, Mr. Chairman. Um, Professor Judge, and you hit on this during um your opening comments.
um we don't actually have uh an overall shortage of physical units uh which is what I think most people believe. Uh the shortage is actually an affordable option and uh what is being built is not what people want to buy or maybe more appropriately afford to buy. Uh and so one one of the central questions uh in the debate over federal home loan bank reform is how the system can better fulfill its housing mission. Uh the FHFA has recommended increasing the affordable housing program contribution from 10% to 20% of net income and your testimony supports that recommendation. Uh but the affordable housing program is only one part of the system's housing mission.
All witnesses have testified, all all four of you uh have have testified uh that the system supports housing more broadly through advances and other missionoriented programs. And in your testimony, you note that the original system model used collateral requirements and advanced pricing to encourage socially beneficial mortgage lending. So if you look at today's housing finance market, where do you see the greatest unmet needs for the system is uh right now positioned to address?
and what types of housing activities should receive pre preferential treatment through advanced collateral policies, pricing uh or or otherwise whatever else you might have in your quiver.
>> The question actually does a beautiful job framing up the answer. So one, doubling the AP makes sense. It's a highly profitable system. They no longer have the burden of paying off the FCC bonds. So having more money available for those grant programs is a is a valuable but insufficient first step.
The second part of your question really gets to the co core of the issue which is how can we use the federal homeland bank system to shape the structure of the financial system and the type of credit available to better meet the needs of families as it did for the first 50 years. I could not agree with everything Mr. Walker said more in terms of the valuable role that banks like his play in serving the communities and part of the value of the Federal Home Banks is they have those local relationships but to harness those local relationships to make more useful loans. They need to be willing to actually take smart risks.
They need to be willing to engage in nonreourse lending but select non-reourse lending in ways where you can show that the advances are actually backing pro projects that would not otherwise occur. So look at the stages of development. There's certain types of home loans where we've gotten a very liquid market and other areas where we're still in multif family and in development where there's still significant shortcomings in the market.
So, it's allowing the federal home loan banks to work with member institutions to understand how we can develop a new type of advance structure that allows those monies lent to be used to really share the risk associated with the type of lending that the public needs to see.
And I would also say you want to see a lot more support for the small institutions. The small institutions, the community financial institutions are still playing a very significant role in mortgages where the large banks aren't.
And yes, they are benefiting from the current system, but they're playing a much smaller role in the current system.
So, we could use all of the acred dividends, all of the wealth that has been built up to have far more impact if we we don't have to take anybody out of the system. You don't have to kick them out. Just really limit their membership and limit their advances. So it is really providing support where it's meant to provide support which is the smaller financial institutions that play much more of an important role in this area.
>> Actually uh this doesn't happen often but you answered my next questions in your comments. Uh so uh thank you very much for uh your your comments. I have a question but we don't have time for you to to do a to provide an answer. So thank you very much.
>> I yield back.
>> A gentleman from South Carolina, Mr. Timmons is now recognized for five minutes.
>> Thank you, Mr. Chairman, and thank you to the witnesses for joining us this afternoon. For decades, the federal home loan bank system has served as a reliable source of liquidity for small community banks, credit unions, and insurance companies across our districts. By ensuring these institutions have dependable access to funding, the system has helped support local lending and expand access to credit for families, businesses, and communities. Much of this important work has taken place behind the scenes, making it easy to overlook the critical role the system plays in maintaining the strength and stability of our financial system. That is why I appreciate the opportunity to examine the federal home loan bank system today. This hearing gives us the chance to evaluate what is working well, identify areas where reforms may be needed, and consider the role Congress must play in ensuring the system remains resilient, transparent, and well positioned to meet the needs of the financial institutions and communities it was created to serve. Uh, Miss Nean, one of the major priorities of this committee over the past year and a half has been improving coordination among regulators to ensure a more timely and efficient supervisory process for American financial institutions. In your testimony, you discussed the quote efforts to improve coordination during periods of stress end quote between the federal home loan banks and the Federal Reserve system. Could you elaborate on the steps that have been taken to strengthen that coordination and whether there are additional opportunities to improve it?
>> Sure. Thank you for the question. When we did our report, uh these efforts were really at the beginning stages. Uh what we heard from the Federal Home Loan Banks and the uh Federal Reserve System were uh efforts to increase their uh engagement with each other. Um for example, doing tabletop exercises to practice uh reallocating um uh collateral from the Federal Homeland Banks to the Federal Reserve. Uh also testing actually testing the transfer of that collateral. Uh we also heard about a working group that was established to um increase uh standardization across the different uh federal home loan banks and the federal reserve banks. Uh the failures really highlighted a very complicated um overlapping system of relationships between federal home loan banks and their local Federal Reserve banks uh with different types of agreements, different types of procedures. and uh this working group was established to try to standardize some of those things.
Uh so we uh do not have an update on the status of those uh those efforts. Uh but we really believe it's important to continue those.
>> Thank you for that. Do you see a role for Congress in ensuring continued coordination between the Federal Home Loan Bank system and the Federal Reserve system?
>> Um that's not something that we had a recommendation on. Um nothing is really coming to mind as a role for Congress in that. Um I think it was in the hands of the of the agencies um to really continue that coordination. If if additional oversight is showing that those uh steps are not continuing to be taken, then there could be a good role for Congress to to step in and ensure that that the coordination continues.
>> Thank you for that. Uh turning to you Mr. Donovan. In 2018, President Trump signed legislation to modernize the credit scoring models used by the government sponsored enterprises. After hearing um from me and many of my colleagues, FHFA Director Bill Py and HUD Secretary Turner announced in April that they were moving forward with implementing these modernized credit score models at both enterprises and the Federal Housing Administration.
Several federal home loan banks, including Dallas and Chicago, have already taken similar steps because modernizing credit scoring increases competition and innovation, improves risk assess assessment, and helps lower borrowing costs for consumers. I recognize that each federal home loan bank establishes its own collateral policies. At the same time, the banks are part of a single congressionally chartered system with a shared mission.
As more banks adopt these modernized credit score models, it is important that member institutions have a consistent and predictable framework for assessing liquidity across the system.
As enterprises begin accepting mortgages that use modern credit score models approved by the FHFA, how important is it for member institutions to have reasonably consistent access across federal home loan bank districts to liquidity backed by those otherwise eligible mortgages?
I think it's critical for our members to have options and for banks and credit unions, insurance companies, CDFIs to have options across the system. I know that um many of the banks are looking at the Vantage score um scoring model and I am also aware that banks and credit unions, mortgage originators across the country are also uh looking at that. So uh we're taking steps in the right direction. Um but it's it's critically important for there to be options.
>> Thank you. I'm out of time. With that, I yield back, Mr. Chairman.
>> Gentleman yields back. The gentleman from New York, Mr. Taus, is now recognized for five minutes.
>> Thank you, Mr. Chair. Um, Mr. Donovan, I share your view that the Federal Home Loan Bank system is a success story, but even a success story is a work in progress. But you wrote something in your testimony that I feel seems to downplay the debt that the Federal Home Loan Bank system owes to the American taxpayer. quote, "The many benefits the FHL banks have delivered to every community in America have come at no out-ofpocket cost to taxpayers. I mean, you enjoy exemptions from federal, state, and local taxes. What are the value of those exemptions?"
Well, the CBO has had a measure of the value of the structure that Congress has created and they've uh put that in the range of uh 4 to7 billion and independent research conducted by the Urban Institute shows that our annual economic impact is um between 94 and $133 billion. So I I just want to I want to make and there's certainly a perception among investors that you have an implicit guarantee from the government and it's fair to say that that implicit guarantee enables you to borrow at unusually low rates.
>> Well, that's exactly right. The investors do perceive that the system is safe and sound and that Congress has created us wisely created a structure uh that perpetuates that safety and soundness. During the 2023 banking crisis, the federal home loan bank system made $675 billion in advances in a single week.
The largest oneweek advance volume in its history. Among the institutions that heavily borrowed from the system were Silvergate Bank, Silicon Valley Bank, Signature, and First Republic, all of which ultimately either failed or entered voluntary liquidation.
Knowing what we know now, if the federal home loan bank system had known that these institutions would ultimately fail, would you still have made those advances?
>> Well, I want to be clear that the system during that period of time complied with all federal laws and regulations. There was close coordination with the um bank's supervisors.
>> I don't doubt there was close, but but knowing what you if you know that a bank is going to fail, would you make the advance? Representative, respectfully, I'm not in the operations uh in risk management.
>> What's the policy?
>> The policy is to to look at the credit risk of the member and determine whether an advance can be made consistent.
>> What if the credit tells us that this bank is going to fail?
>> I'm sorry.
>> What if the credit risk tells us the bank is going to fail?
>> Here's why I want to here's my concern.
I'll lay it out for you.
Make an observation and have you respond. When the Federal Home Loan Bank makes an advance to a failing bank, it secures a priority claim on highquality assets pledged as collap collateral. In doing so, it reduces the pool of assets available to the FDIC as receiver and can potentially increase losses to the deposit insurance fund. So, to many, that feels like an example of moral hazard, right? Privatizing gains while socializing losses. To put a finer point on it, the FHLB system is all but a short of repayment by its priority lean on pledged capital. What exactly is the disincentive against extending advances to a failing bank, especially when the benefits acrue to the system while the costs are likely borne by the FDIC as receiver and ultimately by the deposit insurance firm? What exactly is the real world disincentive? Representative, the federal home loan banks are required by law to perfect a security interest in the collateral that they accept. As as secured lenders, just as any secured lender, they would stand at the front of the line because they've perfected that security interest under the uniform commercial code. When the banks are dealing with members that are in distress, there is close coordination with the supervisors who at any point can tell the banks to not extend additional credit. oftentimes the banks are asked to continue to lend to give the regulators more time to work out resolution.
>> I'm not sure if I heard an answer, but I do feel like there's a problem of moral hazard here, but but but it could be the case the cure could be worse than the disease. So, it's it's a complicated problem. Um, I have a question for GAO.
The Federal Home Loan Bank is a banking system. Yet, the Federal Housing Finance Agency is not a banking regulator. Is it unusual to have a non-banking regulator oversee a banking system? It's it's not a banking regulator in the traditional sense of the word.
>> I think that's uh why the coordination between the banking regulators and the federal home loan banks is so important.
Uh so that >> should we have a new regulator or should it be a credential regulator for a trillion dollar banking system? I'm not the brightest bulb in the chandelier, but that would seem to make more sense than >> right. We haven't really looked at the extent of oversight that FHFA does of the Federal Home Loan Bank system. Um I know there is there is a regulatory um oversight role. That's not something that we have evaluated. Um but in our work it was uh really important for the >> gentleman's time is sure.
>> Gentleman yields back. The gentleman from Wisconsin Mr. Fitzgerald is now recognized for five minutes.
>> Thank you chairman. Um Mr. Lockart. Uh, I'd like to ask you about the mortgage partnership finance, the MPF program.
Uh, one of the draft bills we're considering for this hearing involves, uh, providing additional flexibility and statutory certainty for acquired member assets, AMA programs like MPF.
Uh there's a lot of uh there's a lot of Wisconsin banks and credit unions that use MPF um which allows them to offer traditional 30-year mortgages uh and uh to their customers and transfer the interest rate risk to the FL FHL Bank of Chicago while retaining the servicing of loans which is important for many uh consumers.
uh try and help me understand why you use the MPF program and how it benefits community banks and consumers.
>> Thank you for that opportunity for that question. The reason why we use the MPF program is because we know how important it is to uh fund mortgages in our community. In fact, mortgages are one of our major pillars in terms of our bank, in terms of how we operate. We have an a department. We have a complete program surrounding that. And FHL bank's programs through MPF help us do more and help us do things more effectively and more broadly. Not only, as you said, are we able to take and take the asset off of our books and put it into MPF program. We're able to service the loans locally, which means we get to maintain that relationship with the customer. And that's a huge value for a community bank. We're all about relationships and trust. and to be able to build that community with our constituents and our customers. We call it doing life together. And one of the major points of doing life together is when we talk and and help people with their homes. So the MPF program helps us do that. And it helps us do that not only by able to not only by being able to sell the loans to the bank, but also through those other programs I mentioned earlier. We're able to deliver real value to people who have uh lower incomes with the mortgage rate reduction program. We're able to address the missing middle for teachers and first responders by having a program that fits their needs. The the beauty of our regional structure uh especially for Topeka with our members again 93% of our members have less than 1.5 billion in assets is we rely on Topeka not only from the standpoint for liquidity but we also rely on it in terms of them understanding what's going on in our district so we can tailor these programs in Nebraska. Uh the MPF program is very important to our members in Kansas, Oklahoma, and Colorado. So I appreciate the question. I just want to reiterate that uh without it, we'd have less mortgages happening and we'd have less home ownership in our district.
>> And maybe tell me how it's different than other secondary options that are out there.
>> Well, it's the programs that we have that also allow us to do the rate reduction programs and to be able to customize programs along those lines. In addition to that, uh, as a member, I'm able to look at the MPF program through the lens of of what the cost is. And as I look at that cost for a lot of our members, they don't have internal uh, mortgage programs that they can spin up to become a Freddy shop or a Fanny shop.
This is it. Without the MPF program, they would not be able to originate mortgages. Uh, Mr. Donovan, let me continue with that. FHL banks have offered programs like MPF like I said earlier for 30 years and during that time the country's experienced several instances of uh stress right uh like we talked about earlier 0809 and again in 2020 after co so how did the programs perform during those very stressful financial uh stretches I guess I could >> during times of crisis over and over again the banks have demonstrated that their counter uh counter our cyclical liquidity providers. When other sources of funding contract, the home banks are able to be there uh to make sure that their members have the liquidity they need to stop contagion if there is contagion in the market. Um it's a really important role. They're they're the first responders.
>> So, how did they perform uh from a credit loss experience during those periods? And and did they do better or worse than the national average, would you say? Well, the the banks have never taken a credit loss on an advance because it's um uh fully securitized lending and um over collateralized advances. Um so they've performed very well during during those periods.
>> Thank you very much. I yield back.
Chairman >> gentleman yields back. The gentleoman from Michigan is now recognized for five minutes.
>> Thank you, Professor Judge. In your testimony, you described two core mechanisms that contributed to the early su success of the federal home loan bank uh system which was created during the depression as folks know um to increase home ownership. You know, one is uh the first uh core mechanism community orient to support community oriented institutions to serve working families and then a second is incentivize affordable uh home loans. Correct.
>> Correct.
>> Yeah. Yeah. Today, the largest financial institutions receive the overwhelming majority of the federal home loan advances. And I think that's why we're having this hearing. Um, it's roughly what, 40%.
According to the GAO analysis, the biggest bank, so the 3% the me the 3% of the members with 10 billion dollars or more in assets did about three quarters of the borrowing uh in the period that they studied.
>> Yep. So roughly 40% of the members don't even originate mortgages. Oh >> yeah.
explain that.
>> Yeah, over 40%. So, one of the interesting things, first of all, in 19 way back in 1932, insurance companies actually were some of the only uh figures in the secondary market for mortgages. So, they were allowed into the system. They play almost no role though a small secondary role uh in that system today. Nonetheless, and they also don't shouldn't have the needs for liquidity. One of the reasons they are not regulated at the federal level is they claim they don't need liquidity the way the banks. So, Professor Judge, I think just what I'm trying to have folks that are listening is >> they're not even doing mortgages.
>> They're not. Yeah. So, they're not doing mortgages. And >> that's what I'm saying. It comes down to the fact that like 40% of the people that benefit right now of the programs don't even do mortgages.
>> Yeah.
>> Which means we're not doing home loans, right? I mean, so it's an it's it's something that's interesting for folks.
I mean, the whole creation of it was to increase home ownership. yet that's not what is 40% of the the the resources is not going towards that. So I want to go back go to community development financial institutions which I know a ranking member Maxine Waters is a big champion of um and they seem to be aligned more with the two uh core mechanisms that you mentioned uh you know that they have to meet criteria like what they might must provide at least 60% of their services within economically distressed areas and to and it has to be to individuals uh whose family incomes are for 80% of the average medium income. Um so looking at that I wonder and and you tell me so yeah CDFIS in this mechanism only receive onetenth of 1% of the federal home loan bank advances.
>> Yeah. And this is where our Congress has done a very elegant job of trying to recreate the original system and saying for CFIs and CDFIS we're going to accept broader collateral that really >> have a hard time accessing federal home loan bank loans. So they have this great the the the scheme the statutory scheme is really elegant but it has to go into practice and what we've seen in practice is the ability to actually use the federal home loan banks depends on how burdensome the processes are and how big of a haircut they want.
>> And what we have found is put all the burdens in large quote haircuts.
>> This sounds the opposite of though the mission.
>> It really is. And the federal home loan bank uh 100 report that was referenced earlier does a beautiful job of laying out why CDFIs are facing so many challenges like collateral requirement reforms that could facilitate more CDFIs accessing federal home loan bank uh uh provided liquidity.
>> What you really need to do is change the incentives at the level of the federal home loan banks. right now, if they're maximizing advances, it's going to be cheaper and easier for them to lend against collateral that's already liquid to large institutions. And what we want them to do is create liquidity where it's harder to do because it requires more diligence, but where there's more social value to be unlocked by doing that diligence. So, it's really about changing the incentives at the level of the federal home loan banks and being having them be willing to share some of the risks associated with those really valuable loans.
>> You got to make them do it. So, Professor Judge, simple question. Do insurance companies originate mortgages?
>> No.
>> Why are they members of the federal home loan? Why are they members of the federal home loan bank? They played a role back in 1932 and when there were should have been reforms in 1989, Congress's goal was to enhance profitability.
>> So, so something that was created to increase home ownership is not actually increasing home ownership and a bunch of insurance companies are taking advantage of it more than CF, CDFI, CDFIS. That is precisely what is happening.
>> Yeah. I just want American people to know it's broken. It's not working. We got to get back to increasing home ownership and using these programs that were, you know, built for that. And unfortunately, uh, folks are taking advantage of it because we haven't made the changes um to to to again incentivize where we need to go to the two two core mechanisms that I think you mentioned. Uh, thank you so much for this hearing. Uh, I'm learning so much uh through this hearing and and appreciate it. Thank you. I yield.
Gentleoman yields back. The gentleman from Montana, Mr. Downey, is now recognized for five minutes.
>> Thank you, Mr. Chairman, and and thank you for the witnesses. The federal home loan bank system plays an important role in providing liquidity to rural banks to make it easier for them to lend to their communities. And I know many of the f financial institutions in Montana have been very pleased with the De Moines FHLB. So, I'm going to start with uh Miss Nean.
How would you rate the health of the federal home loan bank system today?
>> Um, not sure I have much to add to that.
That wasn't really the focus of our uh evaluation. Um, we did look at the uh actions during the bank recent bank failures and uh coordination between the systems with the Federal Reserve system. Um, and one of the things that we did hear from from banks in the in the in the uh data that we reviewed is its role as a as a general liquidity provider for the day-to-day um liquidity needs of of their members. Um, and that extended to periods of stress as well.
>> Right. So, have the federal home loan banks ever needed federal financial assistance?
>> No.
>> Or come close? Not not to my knowledge, but that would Yeah.
>> Thank you, Miss Mr. Donovan. What would the US financial system look like today without the federal home loan banks?
>> You'd have a substantially smaller base of community banks and credit unions in the country. We'd probably look more like Canada or Europe.
>> Thank you. Uh back to Miss Dean, do you have any thoughts on which regional federal home loan banks are operating particularly well or which ones need improvement?
Uh, no, we haven't really looked at the um differences between the banks. We do have some ongoing uh work. We'll we'll be digging more deeply into their housing programs and we'll be looking at differences across the banks there.
>> Mr. Donovan, same question.
>> I'm sorry. Could you repeat the question?
>> I'm sorry. Are there any that you think are operating particularly well or which ones need improvement?
representative. I I think the home loan bank system is extraordinarily strong.
They're serving their members. Um asking me to pick which one is doing strong is like asking you which child do you like the best.
>> Thank you. I'll move on. Uh back to Miss Neman. How did the federal home loan bank system fare during the Silicon Valley bank debacle?
uh our from what we saw the they provided some advances to continue to provide advances during uh leading up to the failures. Uh they coordinated with the regulators and increased their engagement with the regul bank banking regulators of those banks um and were in touch with them until until the banks failed.
>> Thank you. You know shifting gears to housing affordability. I'm going to move to Mr. Lockhart. Um, FHLBs are required to contribute at least 10% of profits to affordable home ownership programs. So, what are your thoughts on this requirement? And is it too much, too little, the right amount, or should the FHLBs not have this requirement at all?
>> You know, I think I'll uh defer that to Congress to make that decision, obviously. Uh but I would just say this uh the work that we do around housing that includes the affordable housing programs I believe that the uh when we look at it through the member's eyes as a memberowned cooperative uh we are sharing uh back to the public uh through that statute and we're also gone we've gone above and beyond that as well. So in the last few years we've actually increased that through our volunteer programs by over 50%. So just knowing that the members are finding benefit in helping uh their local communities through programs that can be more directly impacting uh local things and uh needs uh shows you uh where we're at in terms of trying to help uh bring solutions and ideas to the system and to our communities. To put a number on something requires more than just a yes, a no, a number, this number, or that number. It really requires thoughtfulness because without careful calibration of the system and without careful thought. Um we need to really think through just by pulling a lever and saying do more what does that really do? When we look at things that are coming at us in the future we need to take in mind as bankers we think through it in terms of risk. My my position as chairman of the federal home loan bank is to of Topeka is to make sure for its members that we are looking at this through a lens of safety and soundness.
just to pull a lever and increase something might have an effect on the safety and soundness of the bank in the future if it depletes retained earnings or a position within the marketplace.
That's why we love the layered approach.
Um we talk about big banks, small banks, medium banks, they're all part of the financial system. We need everybody participating in the in the layers of our financial system in the United States.
>> Right. Thank you. Uh my time is expired.
So, Mr. Chair, I yield.
>> Gentleman yields. The gentleoman from Georgia, Miss Williams, is now recognized for five minutes.
>> Thank you, Chairman Flood and Ranking Member Clever. Y'all, let's start with the basics because the system doesn't get talked about much outside of rooms like this one. So, it's important for me to make it plain for folks back home.
The Federal Home Loan Banks are a network that Congress set up in 1932 to do one job, just one. Give lenders cheap, steady capital so they'll keep making home loans. That's the whole idea. Federal Home Loan Bank.
It's right in the name. But here's what folks at home should know. 42% of institutions that belong to the system don't make a single home loan. Not one.
How does that happen? Because we only check once. When an institution first applies, it has to show that 10% of its assets are residential mortgages. But that's a one-time entrance exam. Once you're in, nobody checks again. An institution can qualify, get in the door, get access to that cheap capital, and then stop making home loans entirely. It stays a member in good standing with no questions asked. On the other hand, independent mortgage banks who originate over 60% of all mortgages can't join the system directly. So, let me get this straight. The members who've stopped lending for housing are inside the system. and the lenders doing the actual work of housing finance are standing outside the door. The system was created to spur home ownership. My district is losing 1,500 affordable homes each year. We're in the middle of a housing affordability crisis, not just in my district, but across the country.
And by its own numbers, the system is not meeting the moment. So, I want to understand why this gap exists and what it's costing my communities. Professor Judge, we know how valuable access to the federal home loan bank system is. It offers something the open market doesn't, backed by an implied guarantee.
But under current rule rules, as I've shared today, an institution only has to meet the 10% residential mortgage asset test once at application. After that, there's no ongoing requirement to keep doing that lending. It's a one-time entrance exam with a lifetime pass. Can you explain why the Federal Home Loan Bank allows an institution to qualify for missionbased capital access and then never check whether it's fulfilling that mission? It's a decision that's been made that I think should likely be revisited. And so the question is, do you want to have an ongoing obligation to have a meaningful impact on the housing market to have ongoing ongoing access to the federal home loan bank advances? And I think it'd be a very appropriate and healthy step to take.
>> So I think it would as well. So, and that's what we need to look into as members here. Professor Judge, non-bank financial institutions now originate 64% of all mortgages in this country. And there are others like midsize multifamily developers who frequently can't get comparable access to capital without a bank partner if the mission is to provide liquidity for housing finance and community development. Why does the membership structure exclude the institutions doing the work? Is that a question for Congress? It is definitely a question for Congress and I think it really highlights how ills suited the structure of the system is to today's housing market. So what I'm hearing today confirms what the data already shows. The Federal Home Loan Bank is not meeting the moment during this housing affordability crisis. And part of the reason is because it's not doing everything that it can to encourage more direct lending from its members. I don't think the answer is opening the door to anyone who asks, but safety and soundness of course it matters. But the status quo just ain't working, y'all. If you're a member of the Federal Home Loan Bank, you also need to be an active participant in the market. That should be an easy win. I look forward to working to ensure that the system does what Congress created it to do. Get capital into the hands of the people building housing in the communities that need it most. Thank you, Mr. Chairman, and I yield back.
>> Gentleoman yields back. The gentleman from New York, Mr. Garbarino, is now recognized for five minutes. Thank you, Chairman Flood, and uh thank you to all the witnesses for being here today.
Earlier this year, I participated in a housing roundt in my district hosted by the Federal Home Loan Bank of New York, where I heard firsthand from community community lenders about the important role the Federal Home Loan Bank system plays in supporting local lending and housing finance. Congress created the Federal Home Loan Banks during the Great Depression to provide stable funding uh sources for savings and loans and support the 30-year home mortgage. Since then, the systems liquidity mission has helped stabilize financial markets during the 2008 financial crisis, the CO 19 pandemic, and according to the GAO, the 2023 regional banking turmoil following the failure of Silicon Valley Bank. During that uh episode, the federal home loan banks provided significant funding in a single day to more than 20 of the nation's largest community banks, helping stabilize the financial system and prevent broader market disruption. Mr. Mr. Mr. Donovan, given the system's proven record of providing reliable liquidity during times of market stress, what can Congress do to strengthen and preserve the mission without undermining a system that has performed so well for nearly a century?
>> Thank you uh Mr. Gabino for the for the question.
There's a bill that is included in the um in the hearing notice that would um direct the FDIC and the NCUA, the banking regulators to treat home loan bank advances as core liquidity uh for banks. Uh that's really important to continue to give the the banks, credit unions, the other members of the of the system uh the confidence that the advances that they receive from home own banks um are are considered strong for supervisory purposes. It'd be important for Congress to enact that.
>> Wonderful. Thank you very much. Um, and now looking at the backs, looking back at the events of 2023, what lessons did the Federal Home Banks learn about coordinating with the Federal Reserve and other regulators during the periods of financial stress?
>> So, since the um since March 2023, we've had some very significant engagements with the Federal Reserve across a number of different work streams. uh each of the banks has been encouraging their members to develop relationships with the with Federal Reserve banks and test the lines. We've been working on uh interoperability uh collateral transfer practices, subordinate master subordination agreements, and in March uh the home loan bank system uh sent a letter to the Federal Reserve asking them to consider whether they would change uh their um regulation A and a few of their operating um guidances to be able to accept a letter of credit from the home loan bank on behalf of a member. And what that would do is it would allow us to to bridge time when the markets are closed and give regulators the um space that they need to work out resolution with troubled members. There's been a ter a terrific amount of um discussion and coordination with the Federal Reserve and uh it's headed in in the right direction.
>> Great. Other than the bill that um you mentioned that was noticed with the hearing, um is there anything else Congrovements Congress should consider?
Well, we we we also have um proposed codifying the acquired member asset program uh legislation um that would you know again give us a lot of certainty uh to our members that they can continue to use that programs and it would allow the AMA programs to expand to meet the needs of of uh local communities in a way that they can't today.
Um, insurance companies have been eligible members of the Federal Home Loan Bank system since its creation in 1932 and have long played an important role in financing residential multif family housing through long-term mortgage investments.
They, Mr. Gentlemen, what policy rationale exists for disrupting that long-standing membership of insurance companies, and what would the nation's housing finance system look like without insurance companies >> participating in it? Representative, you're asking an important question and I and I think it it requires just a little bit of context.
In order to participate in the Federal Home Loan Bank, not only do you need to meet the 10% requirement on on entry, but whenever you take an advance from the bank, you have to pledge eligible collateral. And insurance company members pledge whole mortgage loans and mortgage back securities. and they're a very important part of keeping the mortgage back security market liquid. Uh and and that's important because it provides scale not just to that market but to the home loan bank system that allows us to provide advances to our other members to contribute to AHP and to develop the voluntary community development investment programs that um that are tailored to the local needs.
So, they are really important to the system and I don't know of any policy rationale for excluding them.
>> I had a follow-up question, but I'm out of time, so I'm going to submit it for you to respond to in writing. Uh, thank you very much, Mr. Donovan. I yield back.
>> Gentleman yields back. The gentleoman from Massachusetts, Miss Presley, is now recognized for five minutes.
>> Thank you, Mr. Chair. Uh and uh I begin every uh question line with the same opener, which is that I represent the Massachusetts 7th Congressional District, a beautiful, diverse district, um but one that is deeply unequal. I'm sure my colleagues tire of me repeating um the statistics I'm about to enumerate, but until these material conditions change, I'll continue uh to lift them up. If we're tired of hearing them, imagine how tired people are of living them. in a three-mile radius from Cambridge, home to MIT and Harvard, to Roxbury, um a historic majority black neighborhood in my district, median household income drops by $50,000 and life expectancy by 30 years. That's according to the color of wealth report from the uh Federal Reserve Bank of Boston. And this is not by accident. uh the Federal Home Loan FHL bank board along with other federal agencies like the Federal Housing Administration as we've spoken throughout this uh hearing to provide the history distributed maps that were guided uh that guided where investments went in times of crisis redlining places like Roxbury out of investments during the Great Depression.
Now today FHL banks are required by law to contribute 10% of their income to affordable housing programs. Now, this has helped places like my district, the Massachusetts 7th, build and preserve over 130 affordable rental units in 2025 alone. FHL Bank Boston, they've piloted programs like Jobs for New England and CDFI Advance to provide lowinterest loans to small businesses and community development financial institutions.
These kinds of investments are essential are critical in making sure that our economy is inclusive and works for everyone. Mr. Dunovan, in 2025, less than 2% of FHL bank members were CDFI, which seems low. Has the FHL bank system conducted research on the barriers to um becoming a member uh or accessing uh funding supports?
>> Representative, the the numbers that uh you have cited are um are really hard to hear and I'm and I'm and I'm sorry to hear them. The question you've asked is very important in terms of how the system um can better serve the CDFI members. There are some some barriers to this. You know, one of the barriers is the type of collateral that they that they present.
Another barrier is the um valuation uh supervisory guidance that uh we receive. you know, there's um they aren't subject to the same type of credential regulation as our other members and that is taken into account in uh the risk profile.
Having said that, we have offered um during the previous administration a proposal to use the community development bond guarantee fund to help guarantee portions of the advances in order to bring better pricing to CDFI members. um it that proposal was not advanced but there what I want to leave you with is that there is um a lot of attention being given to in the home loan bank system to the CDFI community and we'd be happy to work with you.
>> Okay. I would I would certainly welcome on that and continue to build on these ideas. Miss Judge, what are some of the benefits of studying barriers to entry for membership or accessing program funding from those members >> at the level of the Federal Home Loan Bank? And a lot of it is they are not willing to do the extra work and the extra diligence that it would require to actually accept as collateral on advances uh collateral that is atypical but it is actually really serving the community in a meaningful way. If you look at the federal home loan bank at uh federal home banks at 100 report that came out, they talk about the fact that in practice, federal home loan banks are creating significant frictions on the ability of CDFIs to understand the processes and to work through the processes. And I think the numbers that you referenced show the outcome. They might be trying to work really hard, but they're not working nearly hard enough because we see a tiny fraction of the advances actually going to CDFIS even though those institutions play an outsized and vital role in the type of lending that you would like to see.
>> So, M Miss Judge, while I have you before I lose all my time here, since we're in a housing crisis, an affordability crisis, an unemployment crisis, just as a final word here, why is it important that FHL bank system specifically continue to bolster investments into housing?
because there's still parts of the housing sector where there's a lot of underserved uh communities and so we end up with some areas that are served very well and other areas where there's not nearly enough development.
Thank you. Having additional data on barriers to accessing FHL bank system and better tracking the impact how those banks dollars are used will allow all of the regional banks to better meet the needs of community. So, I hope to continue to build on these ideas with each of you and uh and I yield back.
>> Gentlewoman yields back. The gentleman from California, Mr. Licardo, is now recognized for five minutes.
>> Thank you. Um I'd like to direct my first question to Mr. Donovan.
Undoubtedly, you've seen proposals such as I think Chris Hughes New York Times editorial urging that FHL be requirements for investing retained earnings uh be boosted from statutory 10% to I think 25% as I understand it currently I'm sorry this is the affordable housing program the H AHP I understand that federal home loan banks have voluntarily increased that recently to 15%. help me understand why we shouldn't as Congress simply say, "Hey, the threshold should be minimum 25% contribution net earnings of the federal home loan banks nationally to the affordable housing program."
Thank you, Representative, for the question. I offer a couple of of responses. The first is just arbitrarily picking a number without consideration of the impact it may have on the safety and soundness of the of the system. The ability of the system to um continue to grow its retained earnings which is the capital buffer that uh protects uh not just the bank and the system but the taxpayers from exposure to the system. I think there needs to be some thought to that. There are proposals to go to 1520 2530 um those are just arbitrary numbers. So that's the first >> Well, I picked the one that I found in the New York Times, so I'll take that.
>> Yeah. No, you know, the the other thing that I would point out is when the when each of the banks uh made a commitment to go to 15%.
That was a a reflection of the number that the House of Representatives passed in the Build Back Better Act. uh it didn't become law as part of that but that was where the system went and the way that we have implemented that commitment I think should get some attention. The affordable housing program that's run by FHFA is subject to 13 different regulations and six different advisory bulletins. It's highly cumbersome. It's difficult to apply for. So much so that the home loan bank of San Francisco um used targeted funds to help train the Nevada housing uh authorities on how to apply for it.
>> But the San Francisco bank does commit 25% absolutely earnings.
>> They do affordable housing.
>> The why can't every do that >> the importance here is that what they're doing with that additional resource above 10% is investing it in voluntary programs. the money goes out immediately and the programs are tailored to meet the needs of the districts. Um, so just changing the AHP number would crowd out those types.
>> Isn't there a housing crisis in every district in this country? There are 44 cities in this country that have at least 1,000 unhoused residents. And if we talk about the millions of people struggling to pay rent, not enough multif family housing that's affordable, isn't there a crisis in every district?
Shouldn't this be the top priority in every district since the mission of the Federal Home Loan Bank is to support lending >> and and that's why each of the banks has committed to doing substantially more than the than the statutory floor. I I it seems to me the statuto floor should go up and and as I see it uh we've seen since the time that the home loan banks have been relieved of their obligations to contribute 20% to Ref Corp to retire debt from the SNL scandals and and and the challenges of the of the 90s. Uh we have seen retained earnings balloon from a little less than 9 billion to 33 billion last year. Uh there is a much bigger pot. uh you don't have the obligation anymore of paying back obligations from failures of the past.
Why shouldn't Congress require every bank to do exactly what FHLB in San Francisco is able to do?
Because every district is different. The needs of the districts are different and the capacity of the banks to do um to to make that type of commitment are different. Um the Refcore obligations may have been fulfilled, but the banks still have an obligation to operate in a safe and sound manner, which means growing retained earnings as a buffer to losses.
Sir, I I'm concerned. I mean, look, I see a system that seems bloated. Uh, I see presidents of HLB banks that are paid six times what Federal Reserve presidents are paid with smaller numbers of of of employees to oversee. Uh, I I don't understand why there would be a resistance given all the discussion today about the drift of this system away from its core mission of providing financing for housing.
>> Gentleman's time is expired.
>> I yield. Gentleman yields. The gentleoman from Texas, Miss Da Cruz, is now recognized for five minutes.
>> Thank you, Chairman Flood, for holding this hearing today. And thank you to our witnesses for being here. I am, I believe, the last question. And so, um, today's a good day for us to talk about the FHL banks and the Federal Reserve.
Um, Mr. Mr. Donovan, I want to start with you by discussing the need for coordination between the Federal Reserve and FHL banks. I introduced uh legislation the bringing the discount window into the 21st century act which passed the House of Representatives and among other provision the provisions.
This bill directs the board of governors to examine how the discount window interacts with other sources of liquidity liquidity including the federal home loan bank system. Mr. Donovan, I am encouraged that the FHLB system has said it is working to improve collateral collateral mobility and strengthen interoperability with the Federal Reserve. And I encourage you to also consider private solutions as part of this push to help speed the movement of collateral. Can you please update the committee on the progress of that work, outline the barriers that remain, and commit to continuing to work with regulators and the private sector to help ensure that institutions can access liquidity swiftly and effectively in times of stress?
>> Thanks, representative, for the for the question. The interaction with the Federal Reserve over the last couple of years has been very positive. Um, I'd start by saying that the home loan banks have worked to encourage their members to develop relationships and with the reserve banks and to test their lines at the discount window. We've been working across several work streams with the with the reserve banks and with the Federal Reserve Board of Governors um to address issues of interoperability um specifically um collateral transfer particularly in times of crisis, subordination agreements, um information sharing and our uh proposal that uh the home loan bank that the Federal Reserve may be able to take a letter of credit from the home loan bank in a uh on behalf of a member in stress. Um I think we're making progress on on all of those. I know that there has been some concern um across the information sharing work stream, but uh we continue to work with um work in those work streams. Um we've had positive meetings with Vice Chair Jefferson and Vice Chair Bowman and um it it's a longer process than anybody wants it to be, but I think it's headed in the right direction.
>> Thank you. And Mr. Mr. Lockhard, is there anything else you would like to add to this discussion regarding how your bank is working with the Federal Reserve on this?
I would just say this, the Federal Reserve is important um to us as well as the FHL bank. When we look at the Federal Reserve, they're our regulator.
Uh they also are there for overnight borrowing from a contingency standpoint as well as from uh what we might need in practice. But when we look at the Federal Home Loan Bank of Topeka, we're looking at it through the longer lens.
when we have longerterm loans that are out there, the FHL bank is there for us and we can count on it. It's there for us every day. And that's what our members that are part of the Federal Home Loan Bank at Spika are asking us to do as board members is to make sure that this system stays reliable. Both Federal Reserve and FHL Bank have a place, but at the end of the day, we all do recognize the commentary that is going on around the room here today in terms of where we're at. I would say from a member's perspective, for a member-owned cooperative, I believe the FHL Bank is doing its mission because we are providing affordable housing programs and we're doing housing finance. For our members to be able to pledge mission related collateral and for advances to be going up, that means we are doing more, which is why I keep coming back and saying, wouldn't it be great if we could just expand the pie and do more together that way? That's what we need Congress to do. Open us up. help us to unlock potential here to do more. If we can do that together, I think we're going to find that that modernization of what we're looking for and that benefit that's going to come is going to benefit all of us.
>> Thank you. And you talked about unlocking potential. Give me some examples.
>> So, we go back to talking about the AMA program. There is potential in the AMA program by providing certainty that that program can be codifi codified. There's also the opportunity for us to look at what other types of loans that we might be able to take. If we could take different types of loans into the into that, such as a jumbo loan, and a house today could cost $830,000 to build, that's hitting up against the jumbo loan qualification.
>> Thank you. I yield back.
>> Gentleoman yields back. The gentleoman from Colorado, Miss Patterson, is now recognized for five minutes.
>> Thank you, Mr. chairman and thank you all for being here today. I I really appreciate the discussion and hearing from my colleagues who are highlighting some of the concerns about not having the priority where it was originally intended and making sure that we're addressing the housing crisis facing our country and what we can do to um support you all in the the critical work that you're doing. I want to highlight some of the things that are working well though um and and really would love to hear about what we can do to expand on that. So, Mr. Lockard, over the past few weeks in my district and across Colorado, catastrophic fires have took the lives of four firefighters and um unfortunately have destroy destroyed hundreds of homes and structures. And when families and businesses face this level of devastation, rebuilding can feel impossible, especially uh with the financial burden and not knowing where to even begin. So I [snorts] was happy to learn about the care program championed by FHLB Topeka and they have helped our region respond to wildfires with matching grants for emergency housing recovery, uninsured repairs, and hardened our communities. And so my question, Mr. Lockhart is uh my district and communities across the country need to know about these resources that exist especially as disasters become more prevalent. So how has FHL Bank Topeka worked with communities to ensure they're aware of programs like care and what steps can we take to help member institution use these funds to quickly and effectively uh address and support people going through these disasters?
>> Thank you for the question. It's well thought out and uh obviously does have a lot of impact to lives on the ground when we're going through a natural disaster. I think the first thing to recognize, you know, community banks are a distribution channel that can get funding out because we know our customers and we're doing live with them every day. We go back and look at community banks that stepped up during the PPP program. We look at what's going on with the CARES program from Topeka.
The match with the uh members in the FHL bank district has been nearly $1.2 2 million this year to help with natural disaster. In that framework, that distribution channel becomes that community lender. That community lender is given access to these programs through various different ways to be able to help get that information out.
The most important thing here though is we're taking our guidance and our approach from the community lenders lens because we are matching their donation.
So, they know what they are trying to do in their local community to help that community recover. We're coming alongside of them with a substantial match to what they are already doing.
And that program gets announced to them through many different ways including our area management uh conferences uh through our website through uh our presidential our president's letter that comes out to members and through the uh formats that we have with operations uh every single day. So back to your question, how can we get this information out there more? I do believe the information is out there through our community lenders and I believe they're doing a really good job in trying to find where this can make a difference.
But we are coming alongside of them as they are making their donations in their communities to support them, which is what FLHA bank is there to do. and more broadly would love to hear how we can um what we need to do in Congress to support the work that was intended to be focused on to address the housing crisis. I I want to highlight I know we don't have time for a response but official bank of Topeka is also doing great work partnering with MSU Denver where I graduated from and I has launched the affordable housing institute that's already training the next generation of housing professionals. So I would love to know what we need to do to build up programs like this. So Mr. Donovan you have one minute. [laughter] Well, I I think the the most important thing that Congress could do is to make sure that we're not if through any change, not crowding out the bank's ability to develop and implement voluntary housing and community de development initiatives. Uh those allow programs like that to exist.
They allow the banks to work with their affordable housing advisory councils to um identify and address the needs. And importantly, the money goes out the door immediately as opposed to uh with the affordable housing program, it can take years to get a commitment to a contribution.
>> All right, you're under time. Anything else that you want to add?
>> I really appreciate the committee's attention to to the home loan bank system. We believe that we play an important role in the financial infrastructure of this country. Um we are um we are happy to take the feedback from the committee and um we look forward to continuing to work with um members on both sides of the aisle.
>> There you go. Right on time. Thanks so much.
>> Gentlewoman yields back. I'd like to thank all of our witnesses for your testimony today. Without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for your response. Witnesses, please respond no later than August 25, 2026. This hearing is now adjourned.
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