Moran 1 ABSTRACT With the changing nature of the mortgage market from corporate banks and other standard lending institutions to nonbank mortgage lenders, the Federal Housing Finance Agency (FHFA) released in 2020 a Request For Information (RFI) for changing Federal Home Loan Bank (FHLB) membership. The main issue concerns whether or not nonbank mortgage lenders have the safety and soundness, and mission alignment to gain membership to the FHLB. This research analyzes the FHLB, the changes to their membership requirements since its inception, and the submissions to the FHFA’s RFI on expanding membership to nonbank mortgage lenders. Although there are reasonable concerns over safety and soundness, nonbank mortgage lenders should be extended FHLB membership due to their prominence in the mortgage market and their mission alignment. Moran 2 TABLE OF CONTENTS: I.Definitions……………………………………………………………………………….3 II.Housing Market Prior to and During the Great Depression………………………………………………………………………………..6 III.Federal Government Response to Depression’s Housing Market Crisis………………...6 IV.Federal Home Loan Bank Act: regional banks, member definitions and requirements, raising funds, cash advances, collateral, profit distribution and loss mitigation…………7 V.FHLB Today…………………………………………………………………………………….10 VI.Current Membership and Asset Totals……………………………………………………………………………………..10 VII.FHLB Membership Changes…………………………………………………………………………………..11 VIII.1989 Membership Changes……………………………………………………..............................................11 IX.2010 Membership Changes………………………………………………………………12 X.2016 Membership Changes………………………………………………………………13 XI.Current FHLB Membership Policy Debate……………………………………………………………………………………13 XII.Request for Information (RFI) dated February 2020: Chart, Approvals, Denials, Neutral Positions………………………………………………………………………………….14 XIII.Policy Recommendation………………………………………………………………………...20 Moran 3 XIV.Conclusion……………………………………………………………………………….23 XV.References………………………………………………………………………………..25 Moran 4 I. DEFINITIONS: Affordable Housing Program (AHP) - policies implemented by government entities or private organizations which give money or discounted housing to low-income families, or increase the number of affordable dwellings in a given metropolitan area American Recovery and Reinvestment Act of 2009 (Recovery Act) - the law passed in 2009 to rescue U.S. financial markets, businesses, homeowners and individuals from the 2007-2009 economic crisis. Captive Insurance Company (captive insurer) - a wholly owned subsidiary created to provide insurance to its non-insurance parent company; a form of self-insurance whereby the insurer is owned by the insured Commercial Bank - a financial institution that accepts deposits, offers checking and savings account services, and makes loans Community Development Financial Institution (CDFI) - a financial institution that provides credit and financial services to underserved markets and populations Credit Union - a nonprofit-making money cooperative whose members can borrow from pooled deposits at low interest rates Federal Housing Finance Agency (FHFA) - provides supervision, regulation, and housing mission oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks Federal Home Loan Bank Act (FHLB Act) - the1932 Act passed by Congress and signed into law by President Herbert Hoover which created the Federal Home Loan Bank system Federal Home Loan Bank (FHLB) - a system of regional bank centers which offers its members cash advances to provide home mortgages to the public Moran 5 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) - a set of regulatory changes to the U.S. savings and loan banking system and the real estate appraisal industry, passed in 1989 in response to the savings and loan crisis of the late 1980s Government Sponsored Entities (GSE)- a quasi-governmental entity established to enhance the flow of credit to specific sectors of the American economy Insurance Company - a corporation serving as a financial intermediary, offering direct insurance or reinsurance services which provide financial protection from possible hazards in the future Nonbank Mortgage Lender - financial institution that offers typical bank-related lending services, like mortgage lending and mortgage refinancing, while providing users an easier path to obtaining loans Request for Information (RFI) - a common business process whose purpose is to collect written information about the capabilities of various suppliers Savings Bank - a financial institution whose primary purpose is accepting savings deposits and paying interest on those deposits Savings & Loan Association (S&L) - an institution which accepts savings at interest and lends money to savers, mainly for home mortgages Moran 6 II. HOUSING MARKET PRIOR AND DURING THE GREAT DEPRESSION The housing market in the 1930’s was fundamentally different than it is today. In the decades prior to the Great Depression, most residential lenders were Savings & Loan Associations (S&L). Mortgages were typically 10 year loans with 50 percent down payments (Gaberlavage, 2017). The mortgages were balloon mortgages, the type of which involved interest only payments for the life of the loan, with a single, one time payment of principal at the end of the loan’s terms (Gaberlavage, 2017). In 1929 and the ensuing years, the stock market crash caused housing values to plummet, leaving many with debt larger than the value of their home. Rising unemployment left many unable to make required payments on their balloon mortgages. On the lending side, many banks that held mortgages had less than optimal reserves to manage the defaults. They also no longer offered mortgage refinancing. Thus numerous foreclosures began, and in 1933 foreclosures reached approximately 1,000 homes daily (Gaberlavage, 2017). III. FEDERAL GOVERNMENT’S RESPONSE TO THE DEPRESSION’S HOUSING MARKET CRISIS As a result of the Depression’s financial crisis, the federal government became a significant actor in the housing market, as it did in other sectors of the economy. President Herbert Hoover convened authorities in government, finance, and the housing market to determine what the lenders needed to recover from the Depression induced liquidity shortfalls, default, and foreclosure problems. A plan was conceived to create a system of home loan banks to provide cash advances to struggling S&L lenders. The plan Moran 7 was supported by Savings and Loan Associations but not by savings banks, insurance companies, and commercial banks. These entities opposed government intervention for fear it would lead to a slippery slope of unnecessary regulation in the free market (Hoover, 1932, as cited in The American Presidency Project, n.d.). IV. FEDERAL HOME LOAN BANK ACT OF 1932 In 1932 Congress passed the Federal Home Loan Bank (FHLB) Act and Hoover signed it into law. Since financial institutions need to borrow money themselves at a low rate in order to keep giving out much-needed mortgage loans, FHLB’s primary mission was to provide cash liquidity to participating members who offered qualified home mortgage loans. This reflected a public purpose - get cash into the housing mortgage market throughout the U.S. Although FHLB served and continues to serve a public purpose, each FHLB is a federally chartered cooperative financial institution, which means each FHLB is privately owned and capitalized by its individual members. FHLBanks are chartered by Congress and considered Government Sponsored Enterprises (GSE). FHLB REGIONAL BANKS The system initially consisted of twelve regional, member owned and federally chartered banks, each with its own board of directors. In 2008, due to the losses incurred by Seattle’s FHLB, it and the Des Moines, IA bank merged (Gissler & Narajabad, 2017). The regional office for that geographic area is now served by the Des Moines FHLB bank. Hence there are currently eleven regional banks: Atlanta, GA; Boston, MA; Chicago, IL; Cincinnati, OH; Dallas, TX; Des Moines, IA; Indianapolis, IN; New York, NY; Pittsburgh, PA; San Francisco, CA; and Topeka, KS. These eleven banks function Moran 8 both separately and as a unit to reliably and securely provide lending capital to thousands of member financial institutions. FHLB MEMBER DEFINITION AND REQUIREMENTS The original definition of FHLB members included “Any building and loan association, savings and loan association, cooperative bank, homestead association, insurance company, savings bank, community development financial institution, or any insured depository institution (as defined in section 1422 of this title)...” It further requires that any member institution must be duly organized under the law, is subject to inspection and regulation under banking laws, and makes home mortgage loans (Federal Housing Finance Agency, 2013). An eligible financial institution that participates in housing finance markets can apply for membership in the regional FHLB serving the state where its home office or principal place of business is located. Four types of financial institutions are currently eligible for FHLB membership: 1) federally insured depositories such as banks with Federal Deposit Insurance Corporation (FDIC) insured deposits and credit unions with National Credit Union Administration (NCUA) insured share deposits; 2) insurance companies that are regulated by state insurance regulators; 3) community development financial institutions (CDFIs) which are certified by the Department of the Treasury’s (Treasury’s) CDFI Fund; and 4) non federally insured credit unions (NFICU) that meet certain statutory criteria (Getter, 2020). HOW FHLB RAISES FUNDS Moran 9 FHLB receives no tax dollars. It raises funds by issuing, in the capital markets, bonds, discount notes, and other forms of term debt. These funds are known as consolidated obligations. While each debt instrument is issued individually by each bank, it is backed collectively by all banks in the FHLB system. Thus to capital market investors, the FHLB consolidated obligations are appealing because they are lower risk investment instruments (FHLBanks Office of Finance, n.d.). FHLB CASH ADVANCES AND COLLATERAL RECEIVED FOR THEM FHLB offers members cash advances, i.e. loans, for mortgage loans. To FHLB members, the funds raised by FHLB, and the subsequent cash advances provided to members, typically carry a lesser interest rate than FHLB members could obtain on their own. This enables member financial institutions to provide lower cost mortgage credit to homebuyers and housing agencies (FHLBanks Office of Finance, n.d.). FHLB requires that borrowing members receiving cash advances pledge collateral in the form of mortgages and mortgage backed securities (Getter 2020). The cash advances are valued for less than the value of the collateral pledged, thereby protecting the lending FHLB against financial loss if the borrowing member defaults on the cash advance. FHLBs do not allow members to pledge loans that violate any federal, state, or local anti predatory lending laws (Getter, 2020). FHLB PROFIT DISTRIBUTION AND LOSS MITIGATION The profits earned by FHLB member institutions are distributed back to each member in the form of favorable rates for cash advances. The distribution of earned profits also increased the value of the stock shares owned by the FHLB member institutions (Getter, 2020). Moran 10 Regarding consolidated obligations issued, FHLB members are individually and jointly responsible for repaying the principal and interest on the percentage of consolidated obligations issued on its behalf. The same individual and joint liability applies to loans on which member institutions have defaulted (Getter, 2020). V. THE FHLB TODAY FHLB’s purpose has remained the same since 1932 - to provide members with a reliable source of funding for housing finance, community lendings, and asset-liability as well as liquidity for members in the short-run. FHLB helps member institutions meet their credit needs for their specific communities through all economic and business cycles (FHLBanks, n.d., FHLBanks Mission). FHLB also serves to provide money for affordable housing. The Affordable Housing Program (AHP) is a part of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989. Each FHLB is required to create its own AHP and contribute 10% of its earnings to it (Federal Housing Finance Agency, n.d., Affordable Housing Program). In 2021, FHLBanks contributed nearly $400 million towards affordable housing needs (Federal Housing Finance Agency, n.d., Affordable Housing Program). VI. CURRENT MEMBERSHIP AND ASSET TOTALS As of December 2021, FHLB currently has 6,577 members among the eleven regional centers (Federal Housing Finance Agency, 2021, Federal Home Loan Bank Membership Data). As of September 30, 2021, FHLB’s assets totaled $712.1 billion. In addition, FHLB member institutions provided a total of $350 billion dollars of mortgages. The New York FHLB offered almost $71 billion in mortgages (FHLBanks Office of Moran 11 Finance, 2021, Office of Finance Announces Third Quarter 2021 Combined Operating Highlights for the Federal Home Loan Banks). The Chicago FHLB offered almost $46 billion in mortgages. The Des Moines FHLB, which includes the Midwest and U.S. territories, offered $44 billion in mortgages (FHLBanks Office of Finance, 2021, Office of Finance Announces Third Quarter 2021 Combined Operating Highlights for the Federal Home Loan Banks). During the same time frame, no FHLB member institutions were in default. VII. FHLB MEMBERSHIP CHANGES “Since 1932, Congress has expanded the list of institutions eligible for FHLBank membership three times, adding federally insured commercial banks and credit unions in 1989, non-depository Community Development Financial Institutions (CDFIs) in 2008, and NFICUs in 2015. Any entity that does not fall within one of the categories enumerated in the statute is ineligible for FHLBank membership.” (FHFA Division of Federal Home Loan Bank Regulation, 2020). VIII. 1989 MEMBERSHIP CHANGES Inflation rates and interest rates both rose dramatically in the late 1970s and early 1980s. This produced two problems for S&Ls, which had a high concentration of lending for home mortgages in their portfolios. First, the government through banking regulation set interest rates for S&L deposits lower than interest rates at other banking institutions. This led depositors to withdraw their funds and deposit them elsewhere where higher interest rates were available. Many S&Ls became insolvent following the deposit runoff, in part because of the cash withdrawals by depositors. Second, S&Ls primarily made Moran 12 long-term fixed-rate mortgages. When interest rates rose, these mortgage assets lost much of their value, which ultimately reduced the S&L industry’s net worth (Robinson, 2013). In response to the S&L crisis, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (Getter, 2020). FIRREA opened FHLB membership to all depository institutions holding more than 10 percent of their assets in residential mortgage-related assets (Gissler & Narajabad, 2017). As a result, many commercial banks and credit unions joined the FHLB system. IX. 2010 MEMBERSHIP CHANGES The crux of the 2007-2009 financial crisis involved subprime high risk mortgages, sloppy underwriting, homeowners borrowing mortgages they could not afford, and new financial instruments to repackage the mortgages as securities sold to Wall St. investors (Corporate Finance Institute, n.d.). Risk was passed along to each new entity purchasing the mortgages and mortgage-backed securities. As the balloon due dates on many mortgages approached, some borrowers could not handle the new costs, and a percentage of borrowers defaulted on their loans (Corporate Finance Institute, n.d.). These defaults ultimately caused a cascade effect, quickly leading to evictions and foreclosures. The stock market began to plummet because the bundled mortgage backed securities were less valuable than originally estimated. Major businesses worldwide began to fail, losing millions. This led to widespread layoffs and extended periods of unemployment. Less credit was available and investments slowed due to failing confidence in global financial stability (Corporate Finance Institute, n.d.). Eventually the U.S. government responded by passing the American Recovery and Reinvestment Act of Moran 13 2009, which used an expansionary monetary policy, facilitated bank bailouts and mergers, and worked towards stimulating economic growth. During this time frame the FHFA considered opening FHLB membership to CDFIs, which provide housing loans in underserved areas and to underserved populations. This aligned with FHLB’s goals as well as the goals of the Recovery Act. In 2010 the FHFA issued a regulation permitting membership to CDFIs that have been certified by the U.S. Treasury Dept.’s CDFI Fund. (FHFA Federal Register, 2010). X. 2016 MEMBERSHIP CHANGES Captive insurance companies had been FHLB members for many years, relying on the original wording in the 1932 Act permitting insurance companies. However, some member captive insurance companies were essentially serving as conduits, obtaining FHLB cash advances for their non-housing finance parent companies. Other members of FHLB objected to this behavior since it at best subverted FHLB’s purpose and at worst negatively impacted the housing finance industry by diverting funds intended for mortgages to other uses (FHFA Public Affairs, 2016). After consideration, FHFA in 2016 ejected captive insurance companies from FHLB (FHFA Public Affairs, 2016). FHFA executed this through a regulatory ruling and not with Congressional action. XI. CURRENT FHLB MEMBERSHIP POLICY DEBATE In light of the ability of FHLB, through Congressional action, to expand its membership requirements in order to adapt to the country’s changing mortgage market, policy debates have arisen at FHLB. Some debate that FHLB must continue to expand its membership requirements in order to fully facilitate mortgage market liquidity for community based financial institutions. Some argue that various institutions, particularly Moran 14 captive insurers and non banking mortgage lenders, do not have the proper assets or capital to sustain their FHLB membership and therefore pose additional risks to FHLB. It is clear from the 1989, 2010 and 2016 changes to FHLB membership that flexibility and adaptability exists at FHLB and by extension, Congress. Some of the membership changes led to including institutions wherein mortgage lending is not their primary business. In contrast, some of FHLB’s membership changes have excluded institutions which primarily hold mortgages and mortgage related assets. XII. Request for Information (RFI) dated February 2020 In response to the current policy debate surrounding additional members, FHFA released a Request For Information (RFI) in February 2020. The FHFA is responsible for ensuring that the FHLBanks operate in a financially safe and sound fashion, remain adequately capitalized and able to raise funds in the capital markets, and operate in a manner consistent with their housing finance goals (FHFA: Federal Home Loan Bank System, n.d.). The primary purpose of the February 2020 RFI was to ascertain opinions regarding expanding FHLB membership to non bank mortgage lenders and other non traditional mortgage lenders. The FHFA acknowledged the benefits their advances provide such as their low-cost advances and other financial products and services to members that FHLB provides. They also reiterated the importance of the eligibility requirements in order to sustain the FHLB purpose of providing liquidity for housing finance and furthering affordable housing and community development. The RFI sought input to “ensure (i) the System remains safe and sound and able to provide liquidity to members “through the cycle” and (ii) the advancement of the FHLBanks’ housing Moran 15 finance and community development mission.” (FHFA Division of Federal Home Loan Bank Regulation, 2020). The RFI also sought information on questions relating to current member regulation. This paper will not address these questions. CHART OF RESPONSES TO 2020 RFI (43 TOTAL AS OF FEBRUARY 2022) For Approval Against Approval Neither for or against CRE Finance Council Potomac Law Group, PLLC CrossState Credit Union Association Guild Mortgage Company Mississippi Valley Company/U.S. Bancorp Credit Union National Association Annaly Capital Management PA Bankers Association Independent Bankers Assoc. of NYS United Wholesale Mortgage Flagstar Bank, FSB Federal Home Loan Banks Quicken Loans Altra Federal Credit Union Cinnaire CDFI Nareit Ohio Bankers League Simpson Thacher & Bartlett LLP (Starwood) Independent Community Bankers of America National Council of State Housing Agencies New Jersey Bankers Association National Association of Realtors Ohio Credit Union League Mortgage Bankers Association NAFCU Steve Kinion Individually New York Bankers Association Community Bankers Association of Illinois American Council of Life Insurers SL Green Realty Corp. Roxboro Savings Bank, SSB Wisconsin Credit Union Moran 16 League Heartland Credit Union Association Tennessee Bankers Association FHLB of San Francisco Kentucky Bankers Association Thrive Mortgage, LLC Urban Institute (FHFA Request for Information Submissions, n.d.) In nearly all the RFI responses, respondents emphasize the ultimate decision maker is Congress, not the FHLB or the FHFA. Respondents hold this position whether or not they support, do not support, or are indifferent to extending membership benefits to other entities. 20 of the 43 responses approve expanding current FHLB membership. 5 of the respondents were opposed to expanding membership. 13 respondents were neither for or against expanding membership. The remaining 5 did not address membership matters. REASONS FOR APPROVAL Although individual reasons vary, all approving respondents generally agree that many non-bank mortgage lenders have a nexus to housing and community development and are therefore aligned with FHLB’s mission. In addition, many of the respondents argue for the reinstatement of captive insurers, disapproving of FHLB’s 2016 decision to dismiss captive insurers from the membership rolls. Approving respondents argue that the following institutions meet FHLB’s membership criteria: captive insurers, independent Moran 17 mortgage banks (IMB), real estate investment trusts (REIT), mortgage real estate investment trust (mREIT), housing finance agencies (HFA), and credit union service organizations (CUSOs). For example, the Commercial Real Estate (CRE) Finance Council is a trade association which represents both commercial and multifamily real estate investors, lenders, and service providers. Its market share is valued at $6.3 trillion. CRE, as a representative of captive insurers, argues that captive insurers should not have been eliminated from the FHLB membership pool in 2016 (Pendergast, 2020). CRE argues that captive insurers and their parent companies provide quality credit to the mortgage and affordable housing market, and pose no more safety and soundness risk to FHLB than current members pose. CRE’s proposal for captive insurers membership requires that 1) they must meet FHLB’s statutory requirements; 2) their goals must align with the FHLB mission of housing finance and community development; 3) they must meet specific financial thresholds regarding risk-based capital and leverage ratios; 4) they must provide transparency to FHLB; and 5) they must comply with other FHLB compliance requirements (Pendergast, 2020). In another example, Starwood Property Trust, represented by Simpson Thacher & Bartlett Simpson Thacher & Bartlett, stated in its RFI response that the FHFA, which was the final 2016 decision maker in excluding captive insurers, did not have the legal authority to do so. Therefore, the FHFA should repeal the Captive Exclusion Rule. Simpson Thacher then argues that FHFA should either restore FHLB membership eligibility based on “any…insurance company” wording in the original Act, or Moran 18 alternatively permanently grandfather captive insurance companies that were in good standing at the time of the 2016 exclusion (Norekia, 2020). Quicken Loans Vice Chairman Bill Emerson states his company is the nation’s largest mortgage lender. Emerson’s company’s business model is built around sustainably and responsibly promoting access to homeownership for millions of people. Quicken’s goals are to provide clear, transparent access to home loan financing to any and all eligible borrowers. He states that Quicken’s exposure in the market promotes affordable housing and community development (Emerson, 2020). Emerson provides data from the Home Mortgage Disclosure Act (HMDA) that between the years 2008 to 2017 the IMB market share of single-family origination loans increased from 25% to 54% (Emerson, 2020). Emerson adds that according to an Urban institute report, the share of IMB increased to 70% as of March 2020 (Emerson, 2020). Emerson advises that in 2018, IMBs provided mortgage financing to 64% of minority homebuyers, and originated more than 60% of home loans for low to moderate income borrowers (Emerson, 2020). Guild Mortgage Company states that IMB liquidity in FHLB membership will allow IMBs to improve their own safety and soundness but also improve the safety and soundness of “the entire housing finance system. Business cycle downturns, when typical IMB liquidity sources such as warehouse lines may be restricted or canceled, a lack of access to liquidity could cause profitable firms to reduce operations or fail, impacting the safety of the housing industry, reducing competition in the market, and leading to higher costs for mortgage borrowers.” (Smidt, 2020). Moran 19 Two credit union associations, the Wisconsin Credit Union League and the Heartland Credit Union Association, state that “CUSOs meet the subject to inspection and regulation prerequisite for FHLBank membership – at least indirectly. We firmly believe that accepting CUSOs for membership would pose no greater risk to the FHLBank System than credit unions themselves do….Other non-depository financial service providers are not subject to the same degree of supervision as CUSOs. They would pose heightened risks to the FHLBanks.” (Guttormsson, 2020). REASONS FOR DENIAL Some respondents strongly argue that FHLB should not extend membership to non banking mortgage entities. The most common reasons offered are that Congress intentionally Limited FHLB Membership, nonbanks are not subject to prudent regulation and soundness reviews, non banks liquidity risks would increase FHLB’s risks, and Congress not the FHFA is the only body authorized to make membership changes. Some, such as the Mississippi Valley Company (MVC), argue that extending membership beyond Congress’ original intent in passing the Act will deflect FHLB’s mission (Boyers, 2020). This does not include captive insurers as MVC is the captive insurer for one of the largest banks in the nation, U.S. Bancorp. MVC also suggests that creating broad based eligibility requirements could have the “unintended consequence of terminating the membership of entities such as MVC that support the FHLB System’s mission and pose minimal risk.” (Boyers, 2020). The PA Bankers Association specifically responded to the matter of captive insurers, and urged FHFA to rely on statutory Congressional intent (Campbell, 2020). It also recommends that FHFA prudently spend its energies analyzing each captive insurer’s Moran 20 potential to impair safety and soundness by considering its parent company’s level of prudential regulation and supervision (Campbell, 2020). It suggests that logically, a captive insurer owned by a regulated, supervised depository institution presents a lower safety and soundness risk potential than a captive insurer owned by an entity not subject to bank capital and regulatory standards. REASONS FOR NEUTRALITY The respondents that appeared neutral almost universally reminded the FHFA that Congress and not the FHFA has the final authority to make membership changes to FHLB. They also almost universally recommended that any potential new members are reviewed for their potential to increase the risk profile of FHLB. They encouraged that candidates for membership should be prudentially regulated and should have a clear nexus to FHLB’s housing finance and community development purpose. XIII. POLICY RECOMMENDATION Although there are reasonable concerns over safety and soundness, nonbank mortgage lenders should be extended FHLB membership because of their prominence in the mortgage market and their mission alignment. FHLB membership has changed three times in the last thirty years to adapt to the evolving mortgage market. In 1989, Congress passed FIRREA, opening FHLB membership to all depository institutions holding more than 10% of their assets in residential mortgage-related assets. In 2010, the FHFA expanded membership to CDFIs. In 2016, the FHFA ruled to bar captive insurers from continuing to FHLB membership. These examples show that the FHLB system has had membership changes before in order to keep up with the changing mortgage market. Therefore, any new membership changes Moran 21 or additions will be a continuation of FHLB’s mission and flexibility to respond to the changing housing financial market. The argument most commonly used in the RFI responses to disallow membership is that this decision is up to Congress and not for the FHLB or FHFA to decide. Expanding membership is a question for Congress, but has nothing to do with the merit of the policy debate on whether or not nonbanks should become FHLB members. Furthermore, FHFA’s decision to ban captive insurance companies was a regulatory decision, and not decided by Congress. Since Congress or the Supreme Court have not determined that FHFA has no authority to make such rulings, they are free to continue. The RFI responses also allows Congress, should it choose, to examine the industry position on the current membership debate. The FHLB system is appealing due to its consistent adherence to safety, soundness, and stability. This does not exclude the possibility that any member or non member can pose a safety and soundness risk if it is not properly examined. There is nothing in the current debate to suggest that FHLB would utilize different standards in examining the safety and soundness of non bank mortgage lenders. Nonbank mortgage lenders are eligible to become members of other GSEs such as Fannie Mae, Freddie Mac, and Ginne Mae (Kaul & Goodman, 2020, Should Nonbank Mortgage Companies Be Permitted to Become Federal Home Loan Bank Members). The FHFA already has regulatory oversight for these GSEs, as well as over FHLB. The FHFA could leverage a regulatory framework for nonbanks membership across all three of these GSEs as well as FHLB. The Federal Reserve could also regulate nonbanks in a similar Moran 22 fashion to the way they regulate commercial banks. Proper regulation of nonbanks to become FHLB members is practical, possible, and has precedent. Nonbanks rely heavily on third parties such as GSEs for liquidity compared to other lenders. They also take on little credit risk because they sell most of their products to various entities (Kaul & Goodman, 2020, Improving the Safety and Soundness of Nonbank Mortgage Servicers Will Require More Than Prudential Regulation). The risk they pose is a timing delay between the payment of delinquent principal, interests, taxes, and insurance to the relevant parties and reimbursement of the advances they receive from GSEs such as Fannie Mae and Freddie Mac (Kaul & Goodman, 2020, Improving the Safety and Soundness of Nonbank Mortgage Servicers Will Require More Than Prudential Regulation). In times of large increases in unforeseen delinquencies, there is a squeeze on non banks liquidity. FHLB can provide advances to increase liquidity to nonbanks helping to alleviate the biggest risk they face, especially during economic downturns. FHLB and nonbank lenders have very similar missions: to support housing finance and community development. Nonbanks comprise the majority of mortgage lenders in today’s mortgage market. Nonbank mortgage lenders, such as Rocket Mortgage, LoanDepot, and Freedom Mortgage are all non banks and are atop the ten largest mortgage originators in 2021 (Loan Patterns, 2022, as cited in Ostrowski, 2022). To ignore and prevent nonbanks from gaining access to FHLB would defy FHLB’s own goals. Nonbanks dominate the mortgage lending market by a large margin and their prominence cannot be ignored by FHLB. Nonbanks have originated the majority of housing finance Moran 23 in recent years following the pull back of banks lending mortgages to people with low credit following the 2007-2009 financial crisis. In 2020, nonbank mortgage lenders in the United States issued 68.1% of all mortgages originated in 2020, a 9.2% increase from 2019 (Inside Mortgage Finance, n.d., as cited in McCaffery, 2021). As of February 2022, that percentage has increased to 75.1% (Urban Institute, 2022). In February 2022, 92.7% of Ginne Mae backed new mortgages were originated by nonbanks and Fannie Mae had 70.7% shares and Freddie Mac had 69.0% shares of new mortgages originated by nonbanks (Urban Institute, 2022). Rocket Mortgage, the largest nonbank mortgage lender, originated 1,237,033 mortgages in 2021 (Loan Patterns, 2022, as cited in Ostrowski, 2022). That is 582,842 more mortgages than the next highest mortgage originator. XIV. CONCLUSION The Federal Home Loan Bank Act of 1932 created the FHLB system of regional banks which provide liquidity to the housing finance system and promote community development. FHLB’s membership has changed throughout its existence to adapt to the mortgage market’s changing needs. The mortgage market has changed significantly since the 2007-2009 crisis, increasing the prominence of nonbank mortgage lenders and leading them to dominate the mortgage market. FHFA released an RFI in Febuary 2020 asking for input on FHLB membership and nonbank mortgage lenders. The overwhelming majority of responses support the expansion of FHLB membership to nonbanks because they have a large nexus to housing financing and community development. The main reasons offered for disallowing FHLB membership to nonbanks are safety and soundness concerns. These concerns are Moran 24 reasonable, but can be addressed by examination and regulation and should therefore not stand in the way of opening FHLB’s doors to nonbanks. Nonbanks dominate the current mortgage market and appear to have a permanent seat at the mortgage finance table. For these reasons, FHLB membership should be expanded to include nonbanks. Moran 25 XV. REFERENCES: Campbell, J. D. (2020, June 23). 2020-06-23 to FHFA re FHLB Mbrsp RFI. Retrieved from https://www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=1130 This is the PA Bankers Association submission to the FHFA RFI arguing that membership should not be expanded past the institutions currently stated in the statutory. As it pertains to this paper, the PA Bankers Association is an example of a submission not in favor of expanding FHLB membership. Corporate Finance Institute. (n.d.). 2008-2009 Global Financial Crisis. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/2008-2009-global-fina ncial-crisis/ Corporate Finance Institute's article explains the 2008-2009 financial crisis, or the "Great Recession". It explains how it began with the housing bubble, the reckless lending of institutes, and the efforts to revive the economy. The article is a thorough but short summary. As it pertains to this paper, the summary of the 08 financial crisis helps explain what was happening at the time that led to FHLB membership expansion during this crisis. Boyers, Z. (2020, June 23). USBancorp Response to RFI on FHLB Membership 6.23.20 Final . Retrieved from https://www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=1138 Moran 26 U.S. Bancorp, on behalf of Mississippi Valley Company (Mississippi Valley or MVC) comments on the FHFA allowing captives to continue membership, while being hesitant on expanding membership to any other entity not listed in the statute. As it pertains to this paper, this is an example of an institution disapproving of expanding membership to non banks. Emerson, B. (2020, June 23). Federal Home Loan Bank Membership Request for Input. Quicken Loans. Retrieved from https://www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=1139 The Vice Chairmen of Quicken Loans Bill Emerson wrote this letter in response to the FHFA RFI in 2020. Quicken Loans is the largest single family mortgage lender in the United States. This letter argues for IMB membership to the FHLB because of IMB mission, the equality that would be achieved in the market, and the quality of collateral that would be provided to the FHLB. This letter is a main argument for IMBs to become FHLB members. The significance and impact of Quicken Loans being the largest single family mortgage lender in the United States brings a strong voice to the policy debate. FHFA Federal Register Federal Home Loan Bank Membership for Community Development Financial Institutions. (2010, January 5). Retrieved from https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Federal-Home-Loan-Bank-Me mbership-for-Community-Development-Financial-Institutions.aspx This is the FHFA's Federal Registers notice on the expansion of Community Development Financial Institutions into the FHLBs. These CDFIs must be certified by the U.S. Treasury Dept.’s CDFI Fund. As it pertains to this paper, the FHFA's notice explains which CDFIs are included in the new FHLB membership of 2010. Moran 27 FHFA: Federal Home Loan Bank System. (n.d.). FEDERAL HOME LOAN BANK SYSTEM. Retrieved from https://www.fhfa.gov/SupervisionRegulation/FederalHomeLoanBanks#:~:text=FHFA%2 0is%20responsible%20for%20ensuring,with%20their%20housing%20finance%20missio n This explains the regulatory and supervisory roles that the FHFA has over the FHLBs. Moreover, it explains the risk-based safety and soundness approach of the FHFA that assess the FHLBs condition, performance, and varying risks. As it pertains to this paper, the FHFAs regulatory and supervisory role is important when looking at why the are having a RFI and what they can do with that information. It is important that this paper explains how the FHFA assesses FHLB risk. Federal Housing Finance Agency. (2013, March). Federal Home Loan Bank Membership. Retrieved from https://www.fhfa.gov/SupervisionRegulation/Documents/Federal_Home_Loan_Bank_Me mbership_Module_Final_Version_1.0_508.pdf This document from the Federal Housing Finance Agency covers the membership requirements for the Federal Home Loan Banks. It also goes over several changes to the original statutorial definition of membership for the Federal Home Loan Banks. This paper uses Federal Housing Finance Agency documents to cite the specific members eligible to be considered FHLB members. Federal Housing Finance Agency. (2021, December 31). FEDERAL HOME LOAN BANK MEMBERSHIP DATA. Retrieved from Moran 28 https://www.fhfa.gov/DataTools/Downloads/Pages/Federal-Home-Loan-Bank-Member-D ata.aspx This link brings you to the FHFA's website with another link to a Microsoft Excel Sheet of all of the FHLBank members as of December 31, 2021. As it pertains to this paper, the raw number of members is influential when looking at the scope of the system. Federal Housing Finance Agency. (n.d.). Affordable Housing Program . AFFORDABLE HOUSING AND COMMUNITY INVESTMENT. Retrieved from https://www.fhfa.gov/PolicyProgramsResearch/Programs/AffordableHousing/Pages/Affo rdable-Housing-Home-Loan-Banks.aspx This FHFA website article explains the FHLBs affordable housing programs. It states FHLBs must set aside 10& of their assets for affordable housing. As it pertains to this paper, the information was used to elaborate the mission and duties of the FHLBanks. FHFA Division of Federal Home Loan Bank Regulation. (2020, February). FEDERAL HOME LOAN BANK MEMBERSHIP REQUEST FOR INPUT. Retrieved from https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/RFI-on-FHLBank-M embership.pdf This is the FHFA's Request for Input (RFI) on Federal Home Loan Bank membership. The FHFA cites the recent discussion on if new members should be allowed membership to the FHLBank System. It covers the overview of current requirements, adherence to safety and soundness, the FHLBanks mission, and the use of conduits to gain access into the system. As it pertains to this paper, the RFI is one of the most important primary Moran 29 sources to this paper. The RFI allows for the follow up policy debate on changing FHLB membership. The RFI also poses other questions for current FHLBank members. This paper does not cover that. FHFA Public Affairs. (2016, January 12). FHFA Issues Final Rule on Federal Home Loan Bank Membership. Retrieved from https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Issues-Final-Rule-on-Federal-Ho me-Loan-Bank-Membership.aspx This is the news release from the FHFA on eliminating captive insurers as FHLB members in 2016. The ruling came out of a proposed rule in 2014. It explains why they believe captive insurers shouldn't be FHLB members. The reason being they act as conduits for larger institutions not involved in housing finance to access FHLB advances. As it pertains to this paper, the ruling strengthens the argument that the FHFA has regulatory power over FHLB membership and that changed have been made to membership before. It also provides context and reasoning for the change. FHFA Request for Information Submissions. (n.d.). Retrieved from https://www.fhfa.gov/AboutUs/Contact/Pages/input-submissions.aspx To find the submissions click on the URL, on the right next to "Request for Information Submissions" there is a drop down box, click that and select "FHLBank Membership". FHLBanks. (n.d.). FHLBanks’ Mission . FHLBanks: A Nation of Local Lenders. Retrieved from https://fhlbanks.com/mission/ Moran 30 The mission of the FHLBanks is to provide liquidity to in the housing finance market, increase community development, and created better access to affordable housing. As it relates to this paper, the mission statement provided was key to showing nonbank alignment with the FHLBanks mission. FHLBanks Office of Finance. (2021, October 29). Office of Finance Announces Third Quarter 2021 Combined Operating Highlights for the Federal Home Loan Banks. https://www.fhlb-of.com/ofweb_userWeb/resources/2021Q3FHLBCombinedOperatingHi ghlights.pdf This is the account statement for the FHLBank System and each individual banks statement from the third quarter of 2021. It covers all assets, both combined and individually. As well as the amount of advances given by each individual bank. As it pertains to this paper, the total assets and amount of money lent for mortgages, as well as the three largest FHLBanks were used to provide data on the FHLBanks. FHLBanks Office of Finance. (n.d.). About Debt Securities. Retrieved from https://www.fhlb-of.com/ofweb_userWeb/pageBuilder/debt-securities-21 The FHLBanks Office of Finance is responsible for the assets and debts of the entire FHLB System. This document by the FHLBanks Office of Finance explains how the FHLBs raise money, by selling debt securities in the global capital market. These are know as consolidated obligations. Each FHLB issues their own, but are backed collectively by the entire system. This document serves the purpose of giving the information on how the FHLBs fund themselves and the way that is structured. Moran 31 Gaberlavage, G. J. (2017, June). The Federal Home Loan Bank System: A Chronological Review and Discussion of Key Issues. Consumer Federation of America. Retrieved from https://consumerfed.org/wp-content/uploads/2017/06/6-14-17-FHLB_Report.pdf This paper provides the history and key changes of the Federal Home Loan Bank. Specifically, how changes in law have affected the systems mission and execution of mortgage liquidity. The paper also discusses the future of the Federal Home Loan Banks. This paper provides key information for the perilous changes to FHLB membership. My thesis analyses three different times the membership to the FHLBs changed and this paper touches on all three of those. Getter, D. E. (2020, August 27). The Federal Home Loan Bank (FHLB) System and Selected Policy Issues. Congressional Research Service. Retrieved from https://crsreports.congress.gov/product/pdf/R/R46499 This paper analyzes the origin, structure and mission, and policy issues currently surrounding the Federal Home Loan Banks. In the paper there is a comprehensive outline of how the FHLBanks work with their member banks to create liquidity in the housing market. This paper provides much of the information in my thesis for the structure and policy procedures the FHLBanks use to work with their members to complete their mission. It also brings up the current policy debate in which my thesis is structured around. Gissler, S., & Narajabad, B. (2017, October 18). The Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 1: Background1. Federal Reserve. Retrieved from https://www.federalreserve.gov/econres/notes/feds-notes/the-increased-role-of-the-federal Moran 32 -home-loan-bank-system-in-funding-markets-part-1-background-20171018.htm#:~:text= The%20Federal%20Home%20Loan%20Bank%20(FHLB)%20system%20was%20found ed%20in,commercial%20banks%20and%20insurance%20companies This work provides a detailed history and analysis of the Federal Home Loan Banks. Starting from its background and creation to analyzing the key characteristics it has and its role in the economy. Guttormsson, P. (2020, June 23). 2020 0623 FHLB RFI comment letter. Retrieved from https://www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=1122 Paul Guttormsson, the Senior Vice President & General Counsel for The Wisconsin Credit Union League argues for CUSOs to become members of the FHLB. Guttormsson argues that CUSOs are already subject to the standard of regulation the FHLB requires and that they will pose no greater risk to the system than any other institution. As it pertains to this paper, the argument held give a voice to CUSO membership. Hoover, H. (1932, July 22). Statement About Signing the Federal Home Loan Bank Act. The American Presidency Project. Retrieved from https://www.presidency.ucsb.edu/documents/statement-about-signing-the-federal-home-l oan-bank-act Herbert Hoover speaks on the signing of the Federal Home Loan Bank. Hoover explains and breaks down the structure of the Banks, having 8 to 12 banks and that each individual member banks will be owners of the FHLBanks. Kaul, K., & Goodman, L. (2020, June). Should Nonbank Mortgage Companies Be Permitted to Become Federal Home Loan Bank Members? Urban Institute. Retrieved from Moran 33 https://www.urban.org/sites/default/files/publication/102400/should-nonbank-mortgage-c ompanies-be-permitted-to-become-federal-home-loan-bank-members.pdf This Urban Institute paper is a reaction to the Federal Housing Financial Agency (FHFA) request for information (RFI) on Federal Home Loan Bank membership. This paper was initially the comment the RFI from 2015 on captive insurance companies becoming members. The paper addresses most of the key questions following new membership such as mission alignment, safety and soundness risk, and regulation. This paper provides the key arguments for nonbank mortgage companies gaining FHLB membership. It provides answers to questions on alignment, safety and soundness, regulation, and other issues involved in expanding membership. Kaul, K., & Goodman, L. (2020, December). Improving the Safety and Soundness of Nonbank Mortgage Servicers Will Require More Than Prudential Regulation. Retrieved from https://www.urban.org/sites/default/files/publication/103415/improving-the-safety-and-so undness-of-nonbank-mortgage-servicers-will-require-more-than-prudential-regulation_1. pdf This is a quality report on the current regulation of non banks and how that impacts their safety and soundness, as well as how it can be improved. It provides a strong argument that regulatory action alone will not improve safety and soundness but that increasing access to liquidity can. As it pertains to this paper, this report provides data on the current regulatory status of nonbank. It also supports the argument of improving safety and soundness for nonbank by giving better access to liquidity when that becomes scarce. Moran 34 McCaffrey, O. (2021, Jun 22). Nonbank lenders are dominating the mortgage market; nonbanks issued more than two-thirds of mortgages in 2020, their highest market share on record. Wall Street Journal (Online)https://go.openathens.net/redirector/calu.edu?url=https://www.proquest.com/new spapers/nonbank-lenders-are-dominating-mortgage-market/docview/2543719463/se-2?ac countid=26980 This article provides data from Inside Mortgage Finance. It provides statistics on the number of mortgages originated by non banks in 2019 and 2020. As it pertains to this paper, the evidence strengths the argument of the overwhelming influence of non banks in the mortgage market. Noreika, K. (2020, June 23). FHLB Membership RFI Response (Starwood) . Retrieved from https://www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=1134 Keith Noreika is speaking on behalf of Simpson Thacher & Bartlett LLP and Starwood. Norekia argues that the FHFA did not have the regularity authority to exclude captive insurers from the FHLB System. Norekia believes they should repeal their ruling and go back to the original meaning in the statute for insurers including captives. This submission provide the angle of arguing that the FHFA reached out of their regulatory powers to ban captive insurers and reinstate them to the FHLB. Ostrowski, J. (2020, April 5). Top 10 mortgage lenders of 2021. Retrieved from https://www.bankrate.com/mortgages/top-10-mortgage-lenders-of-2021/ Moran 35 Lending Patterns data on the 10 largest mortgage originators in 2021 puts into prospective how dominant Rocket Mortgage and other nonbank are in the housing finance system. As it pertains to this paper, the data presented here futherters the argument that nonbank are prominent and dominating the mortgage finance market. To exclude them from an institution that's sole focus is housing finance is a slap in the face to nonbanks. Pendergast, L. (2020, June 23). CREFC - FHLB Membership RFI Comment Letter. Retrieved from https://www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=1143 This is CRE Finance Council's input on FHLB Membership. CRE Finance Council advocates for the reinstatement of captive insurers to the FHLB System. They argue both the captive insurer and parent company are both dealing with housing finance. They offer 5 points for expanding membership: 1) they must meet FHLB’s statutory requirements; 2) their goals must align with the FHLB mission of housing finance and community development; 3) they must meet specific financial thresholds regarding risk-based capital and leverage ratios; 4) they must provide transparency to FHLB; and 5) they must comply with other FHLB compliance requirements. As it pertains to this paper, CRE's response provides the voice for the argument of captive insurers rejoining the FHLB System. Robinson, K. J. (2013, November 22). Savings and Loan Crisis. Federal Reserve History. Retrieved from https://www.federalreservehistory.org/essays/savings-and-loan-crisis Moran 36 This article from Kenneth Robison of the Federal Reserve Bank of Dallas explains what S&L's are, the S&L crisis, and how it was resolved. Robison does an excellent job of explaining the S&L crisis and providing statistics to back it. As it pertains to this paper, the information on the S&L crisis is relevant to the FHLB membership change in 1989. This change occurred due in part because of the S&L crisis. Schmidt, T. (2020, June 23). Guild Mortgage FHLB RFI. Retrieved from https://www.fhfa.gov//AboutUs/Contact/Pages/input-submission-detail.aspx?RFIId=1142 Terry Schmidt speaking on behalf of Guild Mortgage argues in the RFI response for IMBs to become eligible for FHLB membership. The points are that IMBs safety and soundness would be strengthened by becoming members of the FHLB because of the increased access to liquidity. As it pertains to this paper, the perspective of an IMB is important in this conversation because they dominate the housing finance market. The argument holds true that safety and soundness would be helped by membership because of an increase in access to liquidity.