In this difficult economic time, community economic development practitioners need to leverage every dollar. Congress is currently considering substantial reform of the housing finance system, including not only Fannie Mae and Freddie Mac but also major changes to the Federal Home Loan Banks (FHLBanks). Too often, the FHLBanks are neglected or misunderstood in the debate on housing finance policy, but they can and should play a major, and even increased role, in supporting our communities.
Nationwide, there are 12 independent regional Federal Home Loan Banks. These government-supported enterprises were created by the Federal Home Loan Bank Act of 1932 to support mortgage lending and related community investment. Each bank is structured as a cooperative of its member financial institutions, and the whole system has more than 8,000 members. The FHLBanks and the system as a whole are regulated by the Federal Housing Finance Agency (FHFA).
As GSEs, the FHLBanks receive certain privileges that enable them to raise funds at rates significantly below the rates in the private markets. Bank members benefit not only from dividends, but also from access to low-cost financing known as advances, which they use to finance mortgage loans and housing and community economic development investments, as well as to maintain liquidity for operations.
In exchange for the benefits conferred by their status as GSEs, the FHLBanks have a responsibility to invest in affordable housing and community economic development. By law, all FHLBanks operate a Community Investment Program (CIP) to meet community needs. In recent years, FHFA also established Community Investment Cash Advance (CICA) programs, which are voluntary, though all FHLBanks have set one up. Any member institution can access funds through its FHLBank’s CIP or CICA program upon request. There is no cap on the amount of fixed-rate, long-term financing available to each FHLBank, although some banks do set a cap for their members.
Many great projects have been funded through these programs (see sidebar, Economic Development at FHLBanks), and yet, the overall level of investment in community economic development has been anemic. Since 1990, the FHLBanks provided $2 trillion in advances, but only $16 billion of those were for investments in community economic development in targeted communities. This only created 164,264 jobs.
On the other hand, many housing developers are familiar with the FHLBanks’ Affordable Housing Program, which requires each FHLBank to set aside 10 percent of annual profits to invest in local affordable housing initiatives. The results have been incredibly positive: since 1990, more than $4.2 billion in grants, which have helped create more than 700,000 housing units. AHP has become “the crown jewel of the system” according to many sources, as it brings strong housing development proposals together with appropriate financing. AHP is the largest source of private funds for affordable housing in the nation.