The Unsung Hero Behind Mortgage Lending in America

The FHLBank System, formed more than 90-years ago to help increase homeownership in the U.S., was a key player in bringing the 30-year fixed rate mortgage to fruition.

SAN FRANCISCO, March 16, 2023 — If you’ve ever purchased a home, you’ve probably at least considered a 30-year fixed-rate mortgage. It’s the most popular type of mortgage loan in the U.S. But this wasn’t always the case. The 30-year mortgage was a product of the Great Depression — and the Federal Home Loan Bank System, which was formed more than 90 years ago to help increase homeownership in America, was a key player in bringing it to fruition.

The FHLBank System was created by the federal government in 1932 to promote mortgage lending by thrifts and insurance companies in response to the economic devastation of the Great Depression. Previously, mortgages typically could be “called due” after three to five years if the bank didn’t choose to extend, resulting in the demand for a balloon payment. Obviously, this would wreak havoc during a financial crisis, and the new FHLBank System began working to support the creation of a true 30-year fixed-rate, fully amortizing mortgage loan (meaning a loan with the principal and interest paid down via equal payments over the life of the loan), that would provide more stability for everyone.

Today, the 11 regional FHLBanks continue to support homeownership and mortgage market stability by providing member financial institutions with reliable liquidity — the ability to quickly access cash when it’s needed — in the form of low-cost loans, which in turn facilitate lending at the community level. FHLBank System lending benefits lenders, homeowners and local communities in three key ways.

  • Providing consistent, low-cost liquidity that reduces the cost of borrowing for both businesses and consumers. Lenders need money to lend, and the less they are required to pay for the money they lend (referred to as liquidity), the greater the savings they can pass on to borrowers. Although the FHLBank System is overseen by the Federal Housing Finance Agency, the FHLBanks themselves are private cooperatives owned and supplied with capital by their members, receiving no government funding. As cooperatives, they pay no income tax, have moderate overhead, and the loans to members are low risk because they are fully collateralized. As a result, the FHLBanks are able to offer low-interest loans that help reduce the overall cost of borrowing — saving homeowners as much as $17 billion in interest payments each year, according to a recent University of Wisconsin study.
  • Enabling community lenders to keep loans on their books. The ability of member institutions to obtain liquidity through loans from their FHLBank using mortgages and mortgage-backed securities as collateral gives community lenders the confidence to provide mortgage loans and hold mortgages long term rather than selling them on the secondary market. When local lenders keep home loans on their books and service them from start to finish, borrowers benefit as well, since their banker is better able to get to know their particular situation and work with them if their circumstances change suddenly. “We saw the clear benefit of this approach during the Great Recession,” said Teresa Bryce Bazemore, president and CEO of FHLBank San Francisco. “Borrowers still need to be qualified and uphold their obligations, but if we can help people through tough times and they fully repay their loan, that’s far better — for them, for their bank or credit union, and for the community as a whole — than letting them default and lose their home.”
  • Boosting community lending. Low-cost liquidity enables community lenders to invest in mortgage-backed securities, making more money available for home loans generally, and also levels the playing field, allowing community lenders to better compete with larger institutions and giving them more opportunity to draw on their deep knowledge of local credit needs. When local institutions have access to the liquidity they need, they can more effectively respond as the credit needs of their community evolve. Ultimately this results in more home, business, and economic development lending that grows local economies.

You may never have heard of the FHLBanks, but they play an important behind-the-scenes role in keeping money flowing within the mortgage lending and banking system, making sure that community lenders have the liquidity they need to support housing finance and community investment. While the housing and financial markets are in constant evolution, and housing affordability continues to be a critical concern across the country, the FHLBanks’ efforts — from the initial work facilitating a true 30-year mortgage to helping keep local lenders in our communities today — have played a pivotal role in fueling community lending and helped millions of families achieve their dream of homeownership.

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