The support the Federal Home Loan Bank System’s new regulator, William Pulte, is giving to its statutory mandate for affordable housing — with some openness to discussion — will likely come with some change in direction around what types of programs fulfill the goal.
Ryan Donovan, CEO of the Council of FHL banks, predicted that given Federal Housing Finance Agency Director Pulte’s family homebuilding ties and the Trump administration’s priorities, the support for this mandate voiced in his confirmation hearing will arrive with more emphasis on home inventory as a means of fulfillment.
“The previous administration focused very much on the demand side of the housing finance problem, and I think this administration is going to focus very much on the supply side,” Donovan said.
That means lenders that are system members, who previously agreed to voluntarily exceed a 10% statutory goal with 15% commitments due to pressures to get to 20%, will have to lean into different types of housing programs amid broader reform in Washington.
What follows are other predictions Donovan shared about what the FHL banks would like to see and anticipate from the change in regulatory direction this year.
A potential reset in FHFA interactions
“One of the opportunities that we see is an opportunity to reset and really improve a relationship with the FHFA,” Donovan said.
While Pulte’s predecessor was proactive in setting policy for the FHL banks, Ryan foresees a shift to a dynamic where the FHL banks are “doing what they are supposed to be doing instead of the agency running them, and where we have transparent regulatory expectations.”
Given scrutiny of how the FHL banks and others responded to the 2023 crisis, this could include an opportunity for there to be more coordination between all parties to agree how to respond to such events in the future.
Federal budget scrutiny raises questions about FHL banks’ future
The federal budget is being examined closely. Donovan foresees that potentially leading to staff cuts at its regulator, but said they are less of a concern for the system itself.
“There are risks for every institution when there’s political change. We would have more risks if the leadership coming into FHFA didn’t have the background or understanding or appreciation of what we’re doing,” said Donovan. “We’re privately funded cooperatives, so I actually think that we are the type of entity that an administration that is interested in private private capital solutions to problems would look to.”
The system’s $7.3 billion cost to the government as quantified in a recent Congressional Budget Officer report stems largely from an implied guarantee, Donovan noted.
“The implied guarantee is actually a market action. The investors are the ones that look at the system and say that even though the bonds are not an obligation of the United States and not guaranteed by the United States,” Donovan said.
The FHL banks also receive some exemptions from taxation and Securities and Exchange Commission requirements that add up to $900 million, according to the CBO. Their mandated 10% allocation of earnings to affordable housing in 2023 total $350 million.
The potential consequences if there were cuts
Government officials could potentially make changes to its support for the system based on criticisms like concern that its financing puts downward pressure on consumers’ deposit rates. However, it is also a source of liquidity in the housing market that could be leaned on more if large mortgage investors Fannie Mae and Freddie Mac — which FHFA also oversees — get privatized.
“Any disruption to the FHLBank System’s liquidity function would have far-reaching consequences for housing,” Donovan noted in a recent letter to legislators supporting Pulte’s confirmation.
“For thousands of community banks and credit unions, we are their access to the capital markets,” he added in the interview. (The FHLbanks provide advance funding to its members secured by housing finance and securities collateral.)
Prospects for expanded membership
“That’s a decision for Congress to make,” Donovan said of when asked the possibility of broadening the system’s membership parameters.
“One of the things that we note is that there are some common characteristics in the current field of membership, and one of them is that they all have the same form of supervision and regulatory expectations,” he said. “Congress should probably take that into consideration if that were to go down that aisle. Our position on that hasn’t changed.”
— Brad Finkelstein contributed to this report
