Susan M. Hoffmann - Mission Expansion in the Federal Home Loan Bank System

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The Wolf at the Door by Gene Elderman, used by permission of the Washington Post.

MISSION EXPANSION IN THE FEDERAL HOME LOAN BANK SYSTEM

SUSAN M. HOFFMANN

and

MARK K. CASSELL

STATE UNIVERSITY OF NEW YORK PRESS

Published by
STATE UNIVERSITY OF NEW YORK PRESS, ALBANY

2010 State University of New York

All rights reserved

Printed in the United States of America

No part of this book may be used or reproduced in any manner whatsoever without written permission. No part of this book may be stored in a retrieval system or transmitted in any form or by any means including electronic, electrostatic, magnetic tape, mechanical, photocopying, recording, or otherwise without the prior permission in writing of the publisher.

For information, contact
State University of New York Press, Albany, NY
www.sunypress.edu

Production, Laurie Searl
Marketing, Anne M. Valentine

Library of Congress Cataloging-in-Publication Data

Hoffmann, Susan.

Mission expansion in the Federal Home Loan Bank System / Susan M. Hoffmann and

Mark K. Cassell.

p.cm.

Includes bibliographical references and index.

ISBN 978-1-4384-3341-7 (hardcover : alk. paper)

ISBN 978-1-4384-3342-4 (pbk. : alk. paper)

1. United States. Federal Home Loan Bank System. 2. Federal home loan banks United States. 3. HousingUnited StatesFinance. I. Cassell, Mark K., 1964 II. Title.

HG2040.5.U5H643 2010

332.7'220973dc22 2010004940

10 9 8 7 6 5 4 3 2 1

To
Ilse and William Cassell
and
Shirley and Joseph Hoffmann

FIGURES AND TABLES

FIGURES

FHLBank districts

FHLBank system assets, 19892007

FHLBank consolidated obligations, 19892007

Percentage appointed directors with housing and community development or local government backgrounds

FHLBank System advances, 19982007 (in millions)

Mortgage purchases, 19982007 (in millions)

FHLBank System investments, 19982007 (in millions)

TABLES

FHLBank System balance sheet highlights, year end 2007

Interviewees' view of mission

Statutory provisions shaping affordable housing and community development mission

AHP project scoring criteria

Backgrounds of appointed FHLBank directors

Commercial banks as a share of FHLBank members, 2001

Foreclosures in the third quarter 2007

Percentage of total FHLBank System assets

Percent of MPP and MPF loans by region (December 31, 2007)

FHLBank System's mortgage-backed securities (December 31, 2007)

PREFACE

As this study goes to press in 2009, the ultimate severity and consequences of the financial crisis that took hold last year and the economic downturn it precipitated are not yet known. One outcome that is apparent, though, is renewed appreciation for the critical role of government in crafting and regulating a healthy financial sector that can support a vigorous real economy. Around the world and across the ideological spectrum governments are deploying public administrative capacity to rein in the financial crisis and address its fallout across industries. Policy makers are also debating how best to strengthen existing regulators and what new public agencies may be needed.

When we began this research ten years ago, U.S. policy makers attitude toward regulating financial companies and practices and toward public agencies charged with that responsibility was different. Regulation had been stepped back for two decades through major statutes, including the Depository Institutions Deregulation and Monetary Control Act of 1980, the Garn-St Germain Depository Institutions Act of 1982, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, and the Financial Services Modernization Act of 1999. In the debate over this last statute, prominent executive branch and congressional participants raised questions about the need for the Federal Home Loan Bank System and whether it served a public purpose anymore. These concerns caught our attention and sparked this study.

The Federal Home Loan Bank System was and remains arcane. Created in 1932 to channel resources systemically toward home ownership and to improve housing finance practices, the system grew noticeably in the middle and later 1990s. What accounted for the growth? Had the mission drifted? Were FHLBank managers or private partners in the system operating FHL-Bank mechanisms in their own interests?

By the fall of 2007 we were looking for a publisher for the first draft of this manuscript. Also by fall 2007, people who pay attention to housing finance had noticed an upward trend in home mortgage foreclosures. Assurances that there would not be a crisis were the order of the moment, but the studies began as foreclosures mounted. Poorly underwritten subprime and Alt-A mortgages emerged as the culprits. By fall 2008, people who pay attention also grasped that those loans had been securitized and were in the portfolios of every kind of major financial institution. The downward spiral was on. A U.S. senator publicly suggested that FHLBanks had played a role in the foreclosure crisis. Our manuscript was still under review, so we looked at that question and added the afterword.

This book is not about the financial crisis or about the whole of the U.S. administrative state. It is about why and how the mission expanded in one public instrumentality. We argue that FHLBanks grew in the 1990s and their mission expanded beyond home ownership finance because Congress chose to exploit their administrative capacity to address conditions perceived as public problems. Attention-driven expertise was a central behavioral mechanism in the dynamics that ensued. In the 2000s, problematic housing finance practices developed outside of the FHLBank System, while FHLBanks remained a key institution in supporting sustainable, affordable home ownership finance.

Can larger lessons be inferred for public policy and public administration? Public administrative capacity is valuable. Growth in the administrative state, in a democracy, may be legitimate. We do not suggest assuming legitimacy, but neither should it be assumed that mission expansion and agency growth serve particular interests. This is an empirical question in each case.

ACKNOWLEDGMENTS

We would like to thank the many senior managers and board members in Federal Home Loan Banks across the United States who provided the interviews at the heart of this study. Busy men and women were generous with their time. They tutored us in the mechanics of FHLBanks and FHL-Bank member institutions, shared insights about institutional challenges and opportunities, and responded thoughtfully to our central question about their views of the mission of their FHLBank and the FHLBank System. FHLBank staffs as a whole were responsive and helpful. We thank also the similarly generous community bankers, former federal regulators and congressional staff, and Affordable Housing Program partners whom we interviewed. Needless to say, this study could not have been done without the contributions of these people.

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