Home Loan Banks May Veer Into Unregulated Territory
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Here's your Money Briefing. I'm J.R. Whelan at The Wall Street Journal in New York. When credit unions and smaller banks along Main Street need a loan, they turn to community lenders. And in turn, those lenders rely on a little-known government-owned cooperative of home loan banks as a lifeline to obtain funding. Well, now that group wants to grow and potentially lend to arms of the housing industry that aren't regulated.
What is the Federal Home Loan Banks system and why does it matter?
There's some concern that you're kind of straying from the core mission of helping out these community lenders that are subject to really strict oversight at the state and federal level. And instead, you've got these players that don't really have any prudential oversight. They don't have strong capital or liquidity requirements of their own.
That's Wall Street Journal reporter Andrew Ackerman. He'll also tell us how the group's plans for expansion are at odds with the Trump administration's goal of limiting the government's role in housing finance. That's next.
A government-backed system that's part of the support network for banks and credit unions on Main Street wants to branch out and make loans to unregulated entities like non-bank mortgage institutions. That has some people worried. Wall Street Journal reporter Andrew Ackerman is on the line with us to discuss why. So Andrew, this organization, the Federal Home Loan Banks, is pretty obscure, but it's almost 100 years old.
Yeah, it was set up during the Hoover administration to provide access to the mortgage market for all these smaller institutions, thrifts, insurance companies, I believe. And over time, it's kind of it's sort of morphed into it and provides an important it's an important source of liquidity or cheap funding for investors. For commercial banks today, basically every commercial bank in the country is a member. Some use it all the time, especially the bigger banks now. And the community lenders kind of see it as this insurance blanket. If they have trouble getting access to funding, they can always rely on the federal home loan banks sort of on demand to provide very cheap funding to kind of keep their operations going.
And this is a sort of cooperative group, and it gained a lot of prominence during the 2008 recession.
Yeah. During the recession, there's a lot of sources of funding that dried up for people, deposits to ride up. So it did play a stabilizing role as a lender of next to last resort during the crisis. The last resort was sort of the Fed going to borrow at the discount window with the Fed. Federal homeowner banks also played a role sort of before that. Their core business is very safe. They basically borrow in the global markets. They borrow every day, millions of dollars. And then they turn around and use those proceeds to disperse through their 11 regional banks to their individual member commercial banks and insurance companies and credit unions.
But there's some concern about this cooperative growing.
Yeah, there's concern that if they are allowed to expand their membership to some of the players who are currently very big in the mortgage market, non-banks that originate about half of the loans and REITs that do a lot of investing in banks, multifamily and commercial real estate projects. There's some concern that you're kind of straying from the core mission of helping out these community lenders that are subject to really strict oversight at the state and federal level. And instead, you've got these players that don't really have any prudential oversight. They don't have strong capital or liquidity requirements of their own. There might be ways around that. You could basically require them for any loan that they get from the Federal Home Loan Bank, they'd have to post a lot more collateral than a bank would.
But there's still this concern about the straying from the core mission, just as they basically want more revenues. On the other hand, these guys are much more prominent players in the housing market. These guys, meaning the non-bank mortgage lenders and REITs, and they lack a stable funding source in a future downturn.
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