What are the Federal Home Loan Banks?
The Federal Home Loan Banks are a group of cooperatives that lending institutions use to finance housing and economic development in local communities.
About 80 percent of U.S. lending institutions rely on the Home Loan Banks for low-cost funds. Because the Home Loan Banks are cooperatives, their low costs are passed on to consumers and communities. They've been around for the better part of a century, a fundamental part of the country's financial system, like the Federal Reserve or federal deposit insurance.
No matter what size lender you see doing business, it's likely they're financing much of their community lending through funds provided by a regional Home Loan Bank.
What do they do?
The Home Loan Banks raise billions of dollars in the financial markets so that local lending institutions can get those funds out into their communities.
Imagine a bank or savings and loan that you're familiar with. That institution needs to borrow the funds which it lends out. When it comes time to borrow those funds from its Home Loan Bank, the institution puts up collateral. Once the Home Loan Bank approves a loan to the lender, it advances the funds.
The lender then uses those funds to support home mortgage lending and other community investments, such as small business and agricultural loans.
How do they work with the federal government?
There is an important relationship between the federal government and the Home Loan Banks. They have agreements with the Federal Reserve and the U.S. Treasury related to how they operate.
Congress created them and has worked closely with the Home Loan Banks for eight decades. All their activities fall under federal regulatory oversight that continues to be updated and kept strong.
These are the things that make Home Loan Banks unique government-sponsored enterprises.
What makes them different?
The Federal Home Loan Banks comprise a unique structure.
As member-owned cooperatives, they don't have the pressure for high returns that they otherwise would have if their stocks were publicly traded.
The returns they do make go directly toward replenishing their ability to keep a reliable supply of funds flowing to communities through local financial institutions.
Are they a risk to the taxpayer?
They are highly regulated institutions that have never had a credit loss on their lending to members. They routinely earn high marks on their management of risk.
Federal Home Loan Banks require their members to put up collateral against the advances they receive. The collateral always meets or exceeds the value of the loans made to the lenders.
The Home Loan Banks are strong, important components of the nation's financial system.
Why are they important now?
As a nation, we are experiencing major challenges in economic conditions and credit availability. Keeping low-cost funds flowing to communities is key to the nation's economic health as the country works its way through the problems in the financial markets and beyond.
Lending institutions, policymakers and community leaders agree: the role of the Federal Home Loan Banks has never been more important.
The Federal Home Loan Banks expand and contract as community and regional needs change. That flexibility and reliability are part of the Federal Home Loan Banks' unique role in the financial system. In the policy arena for financial institutions, demand is increasing for smarter regulation, better underwriting and more consumer-friendly financial instruments.
We're working with Congress and regulators to ensure that the Federal Home Loan Banks remain as strong and vital as ever in this new environment.