American taxpayers have discovered the cost of their “implicit” guarantee of Fannie Mae and Freddie Mac’s debt the hard way. Even after paying $191 billion, taxpayers are still responsible for these government-sponsored enterprises (GSEs). But the last chapter has not yet been written.
Another GSE, the Federal Home Loan Bank System, flies under the radar, backed by the same implicit taxpayer guarantee. Like Fannie and Freddie, he issues debt at a discount because of the perception that taxpayers will benefit. But unlike Fannie and Freddie, this GSE competes for its funding with the same taxpayers that underpin it.
The Federal Home Loan Bank of the United States, let’s call it “Bank US”, is in dire straits. The US shell bank is based on the consolidation of each of the existing 11 federal mortgage banks. This makes sense because the GSE issues consolidated debt on behalf of all FHL banks, and all banks are jointly and severally liable for the obligations of their sister banks.
If Bank US were a commercial bank, its total assets of $723 billion would rank it #5 just behind Citigroup.
Have you ever wondered why Bank A pays 0.75% on its savings accounts while Bank B pays 0.50%? You probably thought it was because of the competition. It is partly true. However, in the financing market, Bank US competes with both banks and with you every day. Bank US, you may be surprised to learn, is your bank. And, unlike you, Bank US pays no federal income tax.
In 2020, according to my calculations of SEC filings, Bank US’s 11 CEOs earned over $39 million in total compensation for overseeing what are essentially quasi-governmental agencies. In practice, they cannot fail. Bank US offers only one product: secured loans on favorable terms to member financial institutions. They don’t have to worry about dissident or militant shareholders and are safe from unwanted takeovers. Their innovation is limited by law and regulation. Their geographic and clientele market is fixed by law.
The skill set required to run Bank US is considerably less than what it takes to run a commercial bank. And it doesn’t stop at the CEO. C-suite executives are compensated on an equally lavish scale.
None of these leaders would disagree that without the support of US taxpayers of its debt, Bank US would not exist or survive. Yet his trade association denies the existence of such taxpayer support. Pure cheek!
The commercial banks that own Bank US fund their own operations from equity as well as deposits and other borrowings. If they find it too expensive to pay the deposits, they bundle some of their mortgages and pledge them to Bank US in exchange for a taxpayer-subsidized advance. What do taxpayers get? Bank US spends a small fraction of its net income on affordable housing programs.
In good times, it allowed Bank US to justify its existence, but that’s over. Now Bank US net income is low and heading down. Member banks are stop borrowing at sustainable levels. The raison d’etre of the whole enterprise crumbles.
Two lawmakers, Sen. Catherine Cortez-Masto (D-Nev.) and Rep. Ritchie Torres (DN.Y.), have reform bills at the forefront. The bills would increase the portion of net income devoted to affordable housing from 10 to 20 percent and create a community economic development fund using 10 percent of Bank US net income.
Whether the bills become law or not, Bank US needs a total overhaul.
The crux of its problem is that its mission was set by Congress in the 1930s: it must be brought into the current millennium. Stakeholders should be reminded that Bank US was not created to be a vehicle for corporate welfare. On the contrary, the demands of the modern era such as climate change, infrastructure repair and small business credit present unique opportunities.
There is hope.
Bank US has a new regulator in the FHFA Director Designate Sandra Thompson, an astute executive who understands Bank US’ predicament. And Cortez-Masto and Torres seem to have woken up many of their colleagues in Congress.
He was urged That Thompson create an advisory committee within the FHFA to help chart a new course for Bank U.S. A legislative committee has also been proposed and may be better suited for the same purpose.
Whether it’s a committee or a commission, here are some key questions to answer:
First, has Bank US adapted to the modern era of financial services? Index: Eight of the top ten mortgage originators in the United States are non-banks who are not even eligible to be members of Bank US
Second, are there important public goods that Bank US could provide that it does not provide? Hint: Bank US does not currently fund housing supply chain, climate change initiatives, or small business job-creating loans.
Third, are taxpayers getting an adequate return for their subsidy from Bank US? Hint: Maybe he would be more efficient with fewer components and salaries commensurate with his public purpose.
Fourth, in terms of mission, does Bank US take a holistic approach to promoting affordable housing or even housing in general? Hint: Ask what it does for natural affordable housing, which accounts for 75% of all affordable housing.
One thing is clear. An advisory board or legislative commission should be made up of experienced, open-minded people from a wide range of backgrounds, not just the incumbent management that feeds on Bank U.S.
If there was ever a case in which the hackneyed phrase, “think outside the box” should be applied, Bank US is that case.
Cornelius Hurley is a lecturer at Boston University. He was an independent director of the Federal Home Loan Bank of Boston from 2007 to 2021. Follow him on Twitter: @ckhurley.