What is the Federal Home Loan Bank Act?

The Federal Home Loan Bank Act was passed during the Hoover administration in 1932. It was 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.

Origins of the 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 the act's passage, and banks did not have money to lend to consumers for mortgages. At the same time, mortgage holders who had lost jobs were defaulting on their home loans. This defaulting further reduced the money that 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 the Federal Home Loan Bank Act

This act created both the Federal Home Loan Bank Board and Federal Home Loan Banks. The Federal Home Loan Bank Board chartered and managed Federal Savings and Loan Banks and organizations. The Federal Home Loan Bank system began with 12 independent, regional wholesale banks with total funding of $125 million. The FHLBs were to make those funds available to retail banking institutions, such as savings banks, cooperative banks, insurance companies, building and loan associations, and community development organizations.

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.

The Housing and Economic Reform Act of 2008 established the Federal Housing Finance Agency and charged it with regulating the FHLB system. Since 2000, when thrifts were the primary borrowers of FHLBs, commercial banks and insurance companies have come to predominate.

The Federal Home Loan Bank Act started out as a way to encourage home ownership by providing banks with low-cost funds to be used for mortgages, an activity that continues to this day.

Pros and Cons of the Federal Home Loan Bank Act

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. They also 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 say that funding through the act leads to a residential real estate cycle with wide swings between crash and boom.

There are concerns that the recent growth of the Federal Home Loan Banks and increased reliance on FHLB funding, along with the interconnectedness of the financial system, could mean that any distress among FHLBs could be transmitted to other firms and markets.