How the FHFA Can Increase Federal Home Loan Bank Affordable Housing Investments
Affordable Housing remains a critical national priority, yet the mechanisms designed to fund it often fall short of their full potential, prompting urgent calls for regulatory reform. As the Federal Home Loan Bank (FHLBank) system enters its 10th decade, the Federal Housing Finance Agency (FHFA) has initiated a sweeping review to determine how this massive financial network can better serve its original mission. At the core of this comprehensive review, spearheaded by experts like Michael Stegman of the Urban Institute, is a vital question: how can the system leverage its unique position to expand Affordable Housing and community investment? Created in 1932, the 11 regional FHLBanks operate as a cooperatively owned network providing liquidity to roughly 6,700 member financial institutions. Thanks to an implied federal guarantee, the FHLBanks borrow at near-government rates, generating substantial profits. However, critics argue that the returns provided to taxpayers in the form of Affordable Housing do not adequately reflect the massive $6 billion annual implied government subsidy the system enjoys. The mandate to provide Affordable Housing is enshrined in the system's charter, but modern market realities demand a more aggressive regulatory approach.
The Current Landscape of Affordable Housing Production
By law, FHLBanks must allocate 10 percent of their net earnings to their Affordable Housing Program (AHP). In 2021, this mandate yielded $352.4 million, supporting an estimated 32,771 homes, including 19,785 low-income rental units and 12,986 homeowner units. While the AHP has historically allocated $7 billion to support 756,000 units since 1990, these competitive grants typically fund only a tiny fraction of total development costs—ranging from just 2.7 percent in Atlanta to 10.6 percent in Pittsburgh. Furthermore, the homeownership set-aside programs provided approximately $1.5 billion between 1995 and 2021, supporting over 251,000 low- and moderate-income households, 84 percent of whom were first-time homebuyers.
When compared to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the FHLBanks' output pales in comparison. In 2021 alone, the GSEs funded 360,000 single-family affordable purchase loans and acquired loans on approximately 750,000 low-income rental units. Furthermore, the GSEs generated over $1.1 billion through a statutory assessment directed to the Housing Trust Fund and the Capital Magnet Fund. This stark contrast highlights a significant shortfall in the FHLBanks' contribution to national Affordable Housing goals, raising questions about systemic efficiency and mission focus.
Evaluating the True Value of Affordable Housing Subsidies
The value proposition for taxpayers is currently under intense scrutiny. In 2021, the FHLBank system generated $1.8 billion in net profits, returning 57 percent to members as dividends, which totaled over $1 billion. Weighing the $352 million in AHP funding against the $6 billion implied subsidy and the $1 billion in member dividends reveals a compelling argument that the public is not receiving a sufficient return on its investment.
While legislative efforts, such as the proposed Build Back Better Act and bipartisan measures like H.R. 3323, have sought to increase the mandatory AHP set-aside to 15 or 20 percent, congressional action remains unlikely in the current session. Consequently, the burden falls on the FHFA to utilize its supervisory, regulatory, and administrative authorities to significantly boost Affordable Housing investments without waiting for new legislation. FHLBanks must prioritize Affordable Housing over pure profit maximization to justify their privileged status in the financial markets.
Strategic Reforms to Expand Affordable Housing Access
To bridge the gap between current outputs and community needs, the FHFA can implement targeted administrative actions across three primary areas.
1. Empowering Community Financial Institutions and Mission Lenders
Community Development Financial Institutions (CDFIs) and Community Financial Institutions (CFIs) play an outsize role in financing projects in rural and underserved markets. However, these mission lenders face severe structural barriers within the FHLBank system, most notably punitive collateral haircuts. In 2021, the weighted average effective haircut on CFI collateral was a staggering 43.8 percent, meaning a CDFI must post $178 in collateral for every $100 in advances. Shockingly, 4 of the 11 FHLBanks failed to issue a single advance to a CFI in 2021, and in the CDFI-rich Boston district, only 4 of 47 certified CDFI loan funds are members.
To rectify this and unlock more capital for Affordable Housing, the FHFA should:
Reduce collateral haircuts for highly ranked community banks based on metrics like the Independent Community Bankers of America scoring system.
Establish a system-wide first-loss reserve fund, capitalized by the FHLBanks' $23 billion in retained earnings, to backstop potential losses and encourage lending to CFIs.
Permit approved third parties to post collateral on behalf of designated CFIs.
Explore an internal cross-subsidy system that lowers advance markups for mission-critical lending while offsetting the costs with marginally higher markups on non-mission advances.
2. Maximizing Project-Based Investment Programs
Beyond the AHP, the Federal Home Loan Bank Act established the Community Investment Program (CIP) and the voluntary Community Investment Cash Advance (CICA) program. These vehicles provide discounted advances and grants for targeted economic development and Affordable Housing projects. Despite their potential, total CIP and CICA investments amounted to less than 1 percent of total system advances ($351 billion) in 2021. Furthermore, less than 3 percent of the 6,500 members participated in these programs. The FHFA must use its supervisory guidance to ratchet up participation, ensuring these underutilized programs become central pillars of the system's Affordable Housing strategy.
3. Strengthening the Community Support Program (CSP)
Since the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Congress has required FHLBank members to meet community support standards to maintain access to long-term advances, factoring in their performance under the Community Reinvestment Act (CRA). Currently, the FHFA’s enforcement of this rule is largely a pro forma, check-the-box exercise that lacks minimum thresholds for adequacy. To ensure members actively contribute to Affordable Housing, the FHFA should establish strict minimum thresholds for mortgage lending and add a mandatory affordable rental housing finance component. Furthermore, because 41.5 percent of total advances in 2021 had a duration of one year or less, the FHFA should lower the threshold defining a "long-term advance" from one year to 180 days. This would tighten the nexus between FHLBank liquidity and sustained mission lending.
Methodology and Secondary Market Initiatives
The recommendations outlined in this policy analysis are grounded in a rigorous review of statutory requirements, FHFA regulatory frameworks, and 2021 FHLBank financial reports, including the Division of Bank Regulation's collateral data. The methodology also evaluates secondary market initiatives like the Mortgage Partnership Finance (MPF) program and the Mortgage Purchase Program (MPP), which held $55.5 billion in portfolio loans at year-end 2021. By analyzing collateral discounting practices, dividend distributions, and statutory set-asides, the research provides a data-driven roadmap for regulatory reform. Deepening support for mission lenders through refinements to these secondary market programs is a vital step toward recentering the FHLBank system around its original intent to expand Affordable Housing credit.
Conclusion
The Federal Home Loan Bank system was founded to provide essential liquidity to financial institutions, ensuring that American households have access to reliable mortgage credit. As the secondary mortgage market has evolved, the system's direct impact on vulnerable populations has waned, necessitating a modernization of its regulatory oversight. By reducing collateral barriers for mission lenders, maximizing underutilized project-based programs, and enforcing stricter community support thresholds, the FHFA can dramatically increase the system's output without requiring new congressional mandates. The ongoing value of this policy framework lies in its pragmatic, administrative approach to solving systemic funding gaps. For researchers, policymakers, and housing professionals, understanding these regulatory levers is essential. Ultimately, prioritizing administrative reforms to maximize Affordable Housing investments is vital for ensuring that the FHL Bank system fulfills its public mandate, fostering resilient, equitable, and thriving communities for future generations. Expanding the reach of Affordable Housing must remain the central compass guiding the future of American housing finance.
