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.

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1992. The system's Affordable Housing Program (AHP) provides subsidies to members that finance the construction and rehabilitation of residential properties for low-income renters and provide home mortgages to low-income families. Approximately two-thirds of these benefits go to those whose income does not exceed 50 percent of the median income for their geographic area. In 1992, the system spent more than $50 million on the AHP, and is projected to spend $100 million in 1995 and from there on. These two programs (CIP and AHP) are relatively small compared to the overall activity of providing untargeted advances to FHLB members. Some untargeted advances help members finance low-income mortgages, but there is no evidence that members that heavily borrow FHLB advances are more likely to finance a low-income mortgage. Once an advance leaves the banks, it is difficult to trace its ultimate destination. In this way, FHLB advances can fund any asset on a member's balance sheet, including those which are unrelated to home mortgage lending. Because of this, there is strong pressure to maintain the CIP and AHP in the system. The Thrift Industry Crisis and the FHLB The FHLB system is required to make a $300 million annual payme

Category: Economics - T