Grab your ankles, it's another bailout
- Thread starter nevadan
- Start date
The Federal Home Loan Banks to the Rescue!
For those who have been speculating on how the government might bail out participants in the collapsing US subprime mortgage market, an unlikely savior has stepped forward: the Federal Home Loan Banks (FHLB).
Compared to their limelight-hogging cousins â the Federal Reserve, Freddie Mac, and Fannie Mae â the FHL Banks don't get much press. But from March to September, the amount of loans these banks have made to their 8,125 members has risen some $200 billion to stand at $822 billion, a whopping 32% jump in just six months.[1]
This large increase in government-sponsored lending to financially troubled banks is unfortunate. It threatens to spread the consequences of poor choices made by lenders, regulators, and borrowers to all taxpayers, including those who made every effort to avoid the whole mess to begin with.
The Function and History of the FHL Banks
The FHL Banks were established in the midst of the Great Depression to provide a stable source of funding for member thrifts, otherwise known as savings & loan associations. Much like the Federal Reserve Act that established the Fed, the Federal Home Loan Bank Act chartered twelve regional institutions through which funds would flow to member banks. Whereas the Fed regulated and lent to commercial banks, the FHL Banks dealt with institutions that focused on mortgage origination, or thrifts. To this day the public mission of the FHLB is the provision of cost-effective funding to members for use in housing, community, and economic development; to provide regional affordable housing programs, which create housing opportunities for low- and moderate-income families; to support housing finance through advances and mortgage programs; and to serve as a reliable source of liquidity for its membership.
The FHLB is a welfare-state institution to the bone.
The FHL Banks raise money by issuing bonds and notes in domestic and international markets. Investors assume that FHLBank debt has a federal government guaranty, even though none is mentioned explicitly in the Federal Home Loan Bank Act. Bond rating agencies Moody's and Standard & Poor's bless FHLB with their very best Aaa/AAA ratings. These factors enable the institution to raise debt at rates only a fraction above government treasury bonds, and below the rates at which the average thrift can raise money.
Flush with cash, the FHL Banks advance this money to members. This money is granted on demand, as long as members maintain an acceptable level of financial health and deposit collateral (usually mortgages) to back the loans. The FHLB member list currently includes such luminaries as Citibank, Wachovia, Washington Mutual, and Countrywide. For members, this cheap funding is a godsend. Thrifts have historically depended on deposits from savers for funds, lending this money out as mortgages. Savers are fickle, turning to whichever institution offers the best rates and security. They require good service and a voice at the end of the phone. And they have been known to leave thrifts en masse, with an old-fashioned bank run as the result.
For those who have been speculating on how the government might bail out participants in the collapsing US subprime mortgage market, an unlikely savior has stepped forward: the Federal Home Loan Banks (FHLB).
Compared to their limelight-hogging cousins â the Federal Reserve, Freddie Mac, and Fannie Mae â the FHL Banks don't get much press. But from March to September, the amount of loans these banks have made to their 8,125 members has risen some $200 billion to stand at $822 billion, a whopping 32% jump in just six months.[1]
This large increase in government-sponsored lending to financially troubled banks is unfortunate. It threatens to spread the consequences of poor choices made by lenders, regulators, and borrowers to all taxpayers, including those who made every effort to avoid the whole mess to begin with.
The Function and History of the FHL Banks
The FHL Banks were established in the midst of the Great Depression to provide a stable source of funding for member thrifts, otherwise known as savings & loan associations. Much like the Federal Reserve Act that established the Fed, the Federal Home Loan Bank Act chartered twelve regional institutions through which funds would flow to member banks. Whereas the Fed regulated and lent to commercial banks, the FHL Banks dealt with institutions that focused on mortgage origination, or thrifts. To this day the public mission of the FHLB is the provision of cost-effective funding to members for use in housing, community, and economic development; to provide regional affordable housing programs, which create housing opportunities for low- and moderate-income families; to support housing finance through advances and mortgage programs; and to serve as a reliable source of liquidity for its membership.
The FHLB is a welfare-state institution to the bone.
The FHL Banks raise money by issuing bonds and notes in domestic and international markets. Investors assume that FHLBank debt has a federal government guaranty, even though none is mentioned explicitly in the Federal Home Loan Bank Act. Bond rating agencies Moody's and Standard & Poor's bless FHLB with their very best Aaa/AAA ratings. These factors enable the institution to raise debt at rates only a fraction above government treasury bonds, and below the rates at which the average thrift can raise money.
Flush with cash, the FHL Banks advance this money to members. This money is granted on demand, as long as members maintain an acceptable level of financial health and deposit collateral (usually mortgages) to back the loans. The FHLB member list currently includes such luminaries as Citibank, Wachovia, Washington Mutual, and Countrywide. For members, this cheap funding is a godsend. Thrifts have historically depended on deposits from savers for funds, lending this money out as mortgages. Savers are fickle, turning to whichever institution offers the best rates and security. They require good service and a voice at the end of the phone. And they have been known to leave thrifts en masse, with an old-fashioned bank run as the result.