What is the Federal Home Loan Bank Act

The Federal Home Loan Bank Act is an Act passed by the Hoover administration in 1932 designed to encourage home ownership by providing a source of low-cost funds for member banks to use in extending mortgage loans. The Federal Home Loan Bank Act was the first in a series of bills that sought to make home ownership an achievable goal for more Americans.

BREAKING DOWN Federal Home Loan Bank Act

The Federal Home Loan Bank Act was signed by President Herbert Hoover on July 22, 1932. President Hoover said, on signing the act, that it was intended “to establish a series of discount banks for home mortgages, performing a function for homeowners somewhat similar to that performed in the commercial field by the Federal Reserve Banks through their discount facilities.”

The United States was in the Great Depression at the time of passing the Act, and banks did not have money to lend to consumers for mortgages. At the same time, current mortgage holders who had lost jobs were defaulting on their home loans. This defaulting further reduced the money banks had available to lend. Architects of the Federal Home Loan Bank Act intended it to inject money into the banking system and make mortgage loans available to consumers, thereby stimulating the housing market.

Institutions Created by Federal Home Loan Bank Act

This Act created both the Federal Home Loan Bank Board and the Federal Home Loan Banks. The Federal Home Loan Bank Board chartered and managed Federal Savings and Loan Banks and organizations. Federal Home Loan Banks were a series of eight to 12 banks across the country with total funding of $125 million. Those banks would then make these funds available to retail banking institutions, such as savings banks, cooperative banks, insurance companies, building, and loan associations and community development organizations.

Proponents of the Federal Home Loan Bank Act and other loan subsidy programs argue that home ownership was essential to the economic recovery of the country at the time of the Act. Also, they contend that subsidies continue to result in stronger local communities and higher overall quality of living. However, critics claim that this long tradition of federal subsidies for mortgage loans distorted the housing market. This distortion, they feared, would culminate in overly lax lending standards and unnaturally high housing prices. Doubters said funding through the Act leads to a residential real estate cycle with wide swings between crash and boom.

Subsequent Alterations to the Federal Home Loan Bank Act

In 1989 the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was passed in response to the savings and loan (S&L) crisis of the 1980s. During the S&L crisis, one-third of the savings and loan institutions in the United States failed. FIRREA eliminated the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation (FSLIC) and created the Office of Thrift Supervision (OTS) and the Resolution Trust Corporation (RTC) to provide greater stability and responsibility among lenders.

In 2013, Representative Steve Stivers introduced H.R. 3584 to the 113th Congress, which would allow privately-insured credit unions to join the Federal Home Loan Bank. The rule passed the House and went to the Senate Committee on Banking, Housing, and Urban Affairs in May 2014.