Federal Housing Agency Aims to Overhaul Lending Mission as Home Prices Soar

The Federal Reserve's emergency lending facilities during the banking crisis complicated matters.
Federal Housing Agency Aims to Overhaul Lending Mission as Home Prices Soar
A For Sale sign displayed in front of a home on Feb. 22, 2023 in Miami. (Joe Raedle/Getty Images)
Andrew Moran
The Federal Housing Finance Agency (FHFA) says in a new report that it's time to update the Federal Home Loan Banks (FHLBanks) system to provide the public with a distinction between these banks and the Federal Reserve. The FHFA's comprehensive review comes as the United States is entrenched in a housing affordability crisis, from higher real estate prices to ballooning mortgage costs.

In its report, the FHFA explained that the purpose behind FHLBanks is to ensure a steady flow of liquidity to member institutions and support housing and community development.

However, the report's authors argued that there needs to be a better distinction between the Federal Reserve's emergency lending facilities for troubled banks and the FHLBanks' secured advances, noting that the system "does not have the functional capacity to serve as the lender of last resort for troubled members that could have significant borrowing needs over a short period of time.”

"Clarifying the mission of the FHLBanks and updating how FHFA evaluates their performance in achieving that mission is a central theme of the initiative," the report reads. "Over the 90 years of the System’s existence, its membership base, the types of collateral that can be pledged for advances, and the FHLBanks’ product offerings have expanded. As these shifts have occurred, the connection of the FHLBank System to housing and community development has become less direct."

Lawmakers welcomed the report.

Sen. Sherrod Brown (D-Ohio), chair of the Senate Banking Committee, said he pushed the FHFA to review FHLBanks following the largest bank failures in U.S. history this year. Mr. Brown confirmed that he'll work with the FHFA "to ensure that the system is fulfilling its housing mission and supporting financial stability as our housing system evolves."

Federal Reserve Lending

Sandra Thompson, FHFA director, told the Bipartisan Policy Center on Nov. 20 that there needs to be a process between FHLBanks and Federal Reserve banks when institutions are in trouble or the markets are in turmoil.

"There's lots of conversation that needs to take place," Ms. Thompson said. "We can make an informed decision for the system is, in my view, that the Home Loan Banks are a part of the housing finance ecosystem. That ecosystem includes banks and includes credit unions. It includes lots of different stakeholders."

The FHFA noted that the FHLBanks system has endured staunch criticism this year. In addition to soaring housing prices, the federal agency was hammered in the aftermath of the banking crisis earlier this year.

Following the collapse of Silicon Valley Bank and Signature Bank in March, the Fed launched the Bank Term Funding Program. This program offered loans of up to one year to prevent contagion in the financial sector. While the situation has ostensibly calmed, outstanding Fed loans to banks reached an all-time high of nearly $113 billion. This year, a total of five banks failed, including First Republic, Heartland Tri-State, and Citizens Bank.

Other FHFA proposals would require congressional action, such as updating its districts (they've seen few updates since 1932) and more funding to facilitate housing and community development.

America's Housing Market

At the end of 2022, the median sales price of homes sold in the United States reached a record high of $479,500. Prices have slowed since, easing by 10 percent to $431,000. But that's still 31 percent higher than before the COVID-19 pandemic.
A recent National Association of Realtors (NAR) report found that home prices surged in more than 80 percent of metro areas year-over-year in the third quarter. Housing affordability also deteriorated in the July-to-September span, with the typical monthly mortgage payment (plus 20 percent down payment) for an existing single-family home surging at an annualized pace of 19.2 percent to $2,192.

According to Freddie Mac's Primary Mortgage Market Survey, the average 30-year fixed-rate mortgage is 7.44 percent, up from a crisis-era low of 2.65 percent.

“For the third straight week, mortgage rates trended down, as new data indicates that inflationary pressures are receding,” Sam Khater, chief economist at housing giant Freddie Mac, said in a statement. "The combination of continued economic strength, lower inflation, and lower mortgage rates should likely bring more potential homebuyers into the market."

But while there has been a slowdown in price growth and a drop in mortgage rates, industry experts say finding a residential property continues to be challenging for prospective homebuyers.

In September, existing home sales tumbled by 2 percent to 3.96 million units. At the same time, new home sales surged by 12.3 percent and pending home sales jumped by 1.1 percent.

 Homes await buyers in Irvine, Calif., on Sept. 21, 2020. (John Fredricks/The Epoch Times)
Homes await buyers in Irvine, Calif., on Sept. 21, 2020. (John Fredricks/The Epoch Times)

Market analysts assert that homeowners who acquired a residential property during the latest housing boom are unlikely to sell their properties because they locked in historically low interest rates. If households erected For Sale signs on their front lawn and relocated somewhere else, they would endure higher home prices and borrowing costs.

Looking ahead to 2024, NAR economists anticipate that home prices will climb by as much as 4 percent.

"Lack of inventory is providing the support for high prices, but it's also making it super difficult for first-time buyers to enter the housing market," NAR Chief Economist Lawrence Yun said at the Residential Economic Issues and Trends Forum on Nov. 14, noting that rates have likely peaked.

"The question is when are rates going to come down?"

Mr. Yun believes that the 30-year mortgage rate will dip to between 6 and 7 percent during the typically busy spring buying season.

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."