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The Federal Home Loan Bank System

The American Dream is generally equated with the ability of each American family to own their own home. However, homes cost considerably more than most Americans can purchase with cash, and the result has been that Americans and the American economy has introduced a sophisticated system of credit and credit policies to facilitate home purchases. The income tax system effectively subsidizes home purchases by providing a deduction for interest associated with mortgage interest, and homes are commonly used as security for other types of loans. The end result is that the American homeowner has become an integral part of the American economy. This research examines one of the federal programs set up to assist in the funding of home purchases, the Federal Home Loan Bank system. The history, purpose and current activities of this institution are discussed, as well as its future prospects.

The Federal Home Loan Bank (FHLB) system was created in 1932 by the federal government to provide low-cost loans (advances) to home mortgage lenders. In this way, the FHLB effectively loans money to banks and savings institutions which, in turn, loan the funds to home buyers. The banks in the system raise the money for the advances by issuing bonds in the international capital markets. Because investors believe that the system's debt carries an implied federal guarantee against losses, the FHLBs can raise money relatively inexpensively.

The FHLBs were created during the Depression to overcome an imperfection in the nation's credit markets. At that time, many home mortgage lenders were vulnerable to failure during economic downturns when depositors tended to draw out their savings. Because the lenders' funds were tied up in home mortgages, which do not have a high degree of liquidity, lenders had problems satisfying depositors' demands for cash. These liquidity problems hampered the ability of the nation's financial institutions to provide ...

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The Federal Home Loan Bank System. (1969, December 31). In LotsofEssays.com. Retrieved 19:59, March 28, 2024, from https://www.lotsofessays.com/viewpaper/1687570.html