How Federal Home Loan Banks Favor Big Lenders Over Community-focused Lenders
The small town of Drew, Mississippi, has been left behind by the modern economy. Its main street is lined with closed businesses, making it difficult for residents to purchase everyday necessities. The majority of the population, low-income Black residents, face challenges in securing home loans due to the reluctance of banks to lend to them, despite the US government-backed lending system designed to assist aspiring homebuyers in these communities. James Green, a long-time resident of Drew, faced numerous rejections when trying to obtain a mortgage, until Hope Credit Union, a Black-owned lender, came to his aid. Green’s experience highlights the disparity between small, community-focused lenders and huge financial institutions like Regions Bank, which have greater access to Federal Home Loan Banks (FHLBs).
Recent analysis conducted by Bloomberg News reveals that large banks are providing fewer opportunities for homeownership compared to smaller banks and Community Development Financial Institutions (CDFIs), despite borrowing considerably more funds from the FHLBs. From 2018 to 2022, community banks and CDFIs allocated a higher percentage of their home lending to low- and moderate-income areas than larger institutions. However, smaller lenders face limitations in their access to FHLB funding and often pay higher borrowing costs due to being deemed riskier borrowers.
This discrepancy is particularly significant as the US grapples with an affordable housing crisis, and raises concerns about the original purpose and effectiveness of FHLBs. These institutions, initially established during the Great Depression to stabilize the mortgage market, have veered away from their intended mission and instead become a source of quick cash at low rates for large companies. Proposals to align the FHLBs more closely with affordable housing and community development goals are under consideration, including the introduction of a cap on loans to large financial institutions and expanding borrowing options for nonbank mortgage lenders.
FHLBs raise funds at low rates through special tax breaks and government support, passing these benefits onto their members. Larger banks have more flexibility in borrowing money from FHLBs due to their perceived financial stability, enabling them to secure loans with less stringent collateral requirements. In contrast, CDFIs face higher borrowing costs and frequently engage in other types of lending that cannot be used as collateral for FHLB loans. This unequal treatment has resulted in some large private banks offering smaller community lenders better access to capital than the FHLBs.
While larger banks have regulatory obligations to serve low- and moderate-income Americans, they often struggle to offer the lowest rates and long-term funding options needed for mortgage lending. This is where community lenders like TrueCore Federal Credit Union step in, providing opportunities for individuals with lower credit scores to achieve homeownership. TrueCore, which caters to lower-income borrowers, relies on its FHLB line of credit primarily to subsidize existing home loans instead of issuing new mortgages due to collateral restrictions.
The focus on aligning the activities of FHLBs with their original purpose is likely to result in changes to the system, including increased support for lenders committed to community development and affordable housing. By addressing the disparities between large lenders and community-focused lenders, the hope is to provide equal opportunities for homeownership and alleviate the affordable housing crisis.
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