The Federal Home Loan Banks Approach 100: Evolution from Housing Lender to Liquidity Provider

NORTH CAROLINA BANKING INSTITUTE Volume 28 Issue 1 Article 6 3-1-2024 The Federal Home Loan Banks Approach 100: Evolution from Housing Lender to Liquidity Provider William C. Handorf Reginald T. O'Shields Tyler Holt Follow this and additional works at: https://scholarship.law.unc.edu/ncbi Part of the Law Commons Recommended Citation William C. Handorf, Reginald T. O'Shields & Tyler Holt, The Federal Home Loan Banks Approach 100: Evolution from Housing Lender to Liquidity Provider, 28 N.C. BANKING INST. 45 (2024). Available at: https://scholarship.law.unc.edu/ncbi/vol28/iss1/6 This Article is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina Banking Institute by an authorized editor of Carolina Law Scholarship Repository. For more information, please contact . The Federal Home Loan Banks Approach 100: Evolution from Housing Lender to Liquidity Provider WILLIAM C. HANDORF, REGINALD T. O’SHIELDS, & TYLER HOLT* I. INTRODUCTION The Federal Home Loan Banks (“FHLBanks”) have evolved dramatically and intentionally through statutory changes since their creation. The FHLBanks were created almost a century ago during the Great Depression to support mortgage lending, an industry that collapsed as a result of dire economic conditions.1 Commercial banks and savings and loan associations (“S&L”) alike experienced disintermediation as depositors withdrew funds over concerns about the * William C. Handorf, Ph.D., is a professor of finance, real estate, and banking with the School of Business at George Washington University. He had been affiliated with the Federal Home Loan Bank System for 50 years including positions as a supervisory financial analyst, long-term consultant, and a director with both the Office of Finance and the Federal Home Loan Bank of Atlanta. Reginald T. O’Shields is Executive Vice President and Chief Legal and Compliance Officer of the Federal Home Loan Bank of Atlanta. Tyler Holt is a Juris Doctor candidate at Vanderbilt Law School and former legal intern at the Federal Home Loan Bank of Atlanta. The views expressed in this article are those of the authors and do not reflect the views of the Federal Home Loan Bank of Atlanta or the Federal Home Loan Bank System. 1. By 1934, almost half of all outstanding urban home mortgages were delinquent, and foreclosures had decreased the pool of loanable funds by building and loan associations. See David C. Wheelock, Changing the Rules: State Mortgage Foreclosure Moratoria During the Great Depression, 90 FED. RSRV. BANK ST. LOUIS REV. 569, 570 (2008), https://files.stlouisfed.org/files/htdocs/publications/review/08/11/Wheelock.pdf [https://perma.cc/862D-54G8] (discussing the rate of mortgage foreclosures during the Great Depression); Kenneth Snowden et al., Collateral Damage: Foreclosures and New Mortgage Lending in the 1930s, Column in VoxEU, CTR. FOR ECON. POL’Y RSCH. (Jan. 18, 2019), https://cepr.org/voxeu/columns/collateral-damage-foreclosures-and-new-mortgagelending-1930s [https://perma.cc/EU3C-89WB] (discussing the impact of foreclosures on available funds for new mortgage loans). Many individuals either had lost their homes to foreclosure or were unable to pay interest or repay principal on short-term (one to five-year) balloon mortgage loans despite having initially provided down payments of 40–60% of the home value. GEORGE J. GABERLAVAGE, THE FEDERAL HOME LOAN BANK SYSTEM: A CHRONOLOGICAL REVIEW AND DISCUSSION OF KEY ISSUES 5 (2017), https://consumerfed.org/wp-content/uploads/2017/06/6-14-17-FHLB_Report.pdf [https://perma.cc/D7X5-GKTP]. 46 NORTH CAROLINA BANKING INSTITUTE [Vol. 28 safety and soundness of local and regional financial institutions.2 These commercial banks and S&Ls had insufficient cash to meet withdrawals from anxious depositors or renew maturing residential mortgage loans. Panic swept the country. Home prices plummeted, foreclosures soared, and many banks failed. Public policy and legislation have long attempted to cure the boom-and-bust cycles of home lending and recurring consumer panic.3 The Federal Home Loan Bank Act4 (the “Act”) strived to provide S&Ls with liquidity to moderate housing cycles and reduce waves of foreclosures.5 The Act initially applied to certain types of financial institutions—including S&Ls—that no longer represent the majority of American financial institutions.6 The FHLBanks have evolved significantly throughout their lifetime and will enjoy a centennial celebration in 2032. This article chronicles key laws that have been enacted over the past century to remedy episodic economic and financial problems in the country. Further, this article identifies how each piece of legislation changed the FHLBanks’ mission and shifted the Act’s focus of membership from S&Ls to the commercial bank sector. These statutory revisions also shifted the focus of the FHLBanks’ mission from the promotion of housing through the savings and loan industry to providing liquidity to depository institutions for the purpose of promoting financial stability and preventing future banking crises. 2. See CARMEN M. REINHART & KENNETH S. ROGOFF, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY 144 (2009) (explaining bank runs generally and how depositors “lose confidence” and withdraw their funds “en masse”). 3. See CHARLES P. KINDLEBERGER & ROBERT Z. ALIBER, MANIAS, PANICS, AND CRASHES: A HISTORY OF FINANCIAL CRISES 203-04 (5th ed. 2005) (discussing generally government initiatives to minimize losses during financial crisis). 4. Federal Home Loan Bank Act, Pub. L. No. 72-304, 47 Stat. 725 (1932) (codified as amended at 12 U.S.C. §§ 1421–1449). 5. See, e.g., Herbert Hoover, Statement About Signing the Federal Home Loan Bank Act (July 22, 1932) (transcript from The American Presidency Project), https://www.presidency.ucsb.edu/documents/statement-about-signing-the-federal-homeloan-bank-act [https://perma.cc/LLA3-KHKH] (“The immediate credit situation has . . . restricted the activities of . . . institutions making loans for home purposes . . . . [The Federal Home Loan Banks] should provide the method for bringing into continuous and steady action the great home loaning associations which is so greatly restricted due to present pressures.”). 6. See Federal Home Loan Bank Act § 4(a) (listing eligible institutions to become members of a Federal Home Loan Bank). 2024] EVOLUTION OF FHLBANKS 47 These statutory changes also incorporated the promotion of affordable housing and community lending within the FHLBanks’ mission. Part II of this paper will provide a brief overview of the theory and history of legislative attempts to address financial instability.7 Part III will trace the statutes governing the FHLBanks and the accompanying changes to their mission against the backdrop of the larger quest for financial system stability.8 Part IV of the paper will outline how the legislative and regulatory changes (...truncated)