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THE Federal Housing Finance Agency ongoing review of the Federal Home Loan Banks has already had very concrete consequences for local banks that use these entities as part of their founding objective, namely supporting housing finance and community investments.

As the FHFA begins to implement recommendations from its year-long study of the home loan system and federal banking regulators pressure community banks away from bank advances on home loans, the repression against this vital facilitator The increase in local lending threatens the housing finance system in an era of high prices and limited supply.

Home loan banks are an important source of financing for their member-owners, including most of the nation’s community banks. Community banks use the mortgages they hold in their portfolio to fully guarantee advances that provide liquidity, allowing them to make more mortgages and invest more in their communities.

This is how Home Loan Banks were designed to operate when they were established in 1932, and the system continues to promote access to the housing market in local communities across the country. In addition to funding local loans, home loan banks are required by law to earmark at least 10% of their revenue to fund the system. Affordable Housing Programwhich is one of the nation’s largest sources of private sector grants for housing and community development.

The result is a proud record of support for the housing finance system. A University of Wisconsin study found that the mortgage banking system increases mortgage originations by $130 billion and saves borrowers $13 billion in mortgage interest payments per year. And last year, Home Loan Banks helped 65,000 low- and moderate-income households and supported more than 400 targeted economic development projects through the Affordable Housing Program and the Community Investment and Cash Advance programs for community investment in the system. according to the FHFA.

Not all financial institutions that are members of Home Loan Banks have direct access to the advances, but they know that these funds are there as a backup source of liquidity. Throughout the financial crisis, home loan banks continued to provide advances to their members without interruption, while other segments of the capital markets ceased to operate. This strong support system plays a vital role in the national housing finance system.

All this is done without any direct federal credit or government guarantee of securities issued by home loan banks, which are purchased by private investors with private funds because of the relative safety of the debt.

Unfortunately for local communities that rely on the federal home loan system, these effective fundamentals are at risk of being undermined by a regulatory crackdown that could hinder access to home loans.

Even before the FHFA issued a recent advisory bulletin By setting new expectations for how home loan banks should conduct credit evaluations of their member banks, community bankers have witnessed increasing regulatory scrutiny of advances. For example, the Federal Home Loan Bank of New York notified its member banks this summer that it would impose additional qualitative and quantitative information reporting requirements to align with the FHFA’s more restrictive approach. in terms of loans – an unnecessary burden on an advance system. fully secured by residential mortgages. No member should be denied a fully secured advance due to their business model or strategy, especially as all members own the home loan banking system.

Meanwhile, community bankers report they are being penalized by bank examiners for including access to bank advances on home loans in their liquidity stress test scenarios. Instead, prudential regulators are steering banks toward the Federal Reserve’s discount window, which presents technical and operational challenges and delays for many community banks.

Ultimately, the combined regulatory pressure of the FHFA on home mortgage banks and prudential regulators on the system’s homeowner members could severely hamper access to mortgage credit at the worst possible time.

To avoid impeding mortgage lending, FHFA should ensure that its review does not create additional requirements that restrict advances to members in good standing and with eligible collateral. Any new arbitrary standards for member-owners threaten to cut community banks out of the system, which would restrict local investment.

While the FHFA reviews the mission of home loan banks, their statutes assignment The goal of “providing liquidity to their members to support housing finance and community development throughout economic cycles” is clear and does not need to be substantially modified or clarified. Congress defined the mission in 1932, modified it in subsequent laws, and is the only entity authorized to modify it today.

Instead, regulators should work together to maximize access to the system. For example, the FHFA should align capital requirements for home loan bank member advances with those of prudential regulators to avoid disruptions and possible liquidity problems for otherwise well-capitalized community banks.

The federal home loan system has worked well for more than 90 years, providing community banks with liquidity to finance mortgages and community development projects. Given the current challenges of the housing market, this system must remain a strong, stable and reliable source of financing, based on a regional and cooperative structure that best meets the diverse needs of its members and the local markets they serve.