Federal Home Loan Bank Act
What Is the Federal Home Loan Bank Act?
The Federal Home Loan Bank Act is a piece of legislation passed in 1932. It was designed to energize homeownership by giving a source of low-cost funds for member banks to be utilized for mortgages.
The primary in a series of bills that tried to make homeownership an achievable goal for additional Americans, it laid out the Federal Home Loan Bank Board (FHLBB) and Federal Home Loan Banks.
Starting points of the Federal Home Loan Bank Act
The Federal Home Loan Bank Act was endorsed by then-President Herbert Hoover on July 22, 1932. It planned "to lay out a series of discount banks for home mortgages, carrying out a role for homeowners fairly like that acted in the commercial field by the Federal Reserve Banks through their discount facilities," he announced on signing the bill into law. "The purpose of the system is both to meet the current emergency and to build up homeownership based on additional favorable conditions than exist today."
At the hour of the act's entry, the United States was in the Great Depression — the "present emergency" to which Hoover alluded — and the financial system was in particularly desperate waterways. In the wake of the stock market crash of 1929, a huge number of overreacted Americans discharged their savings and checking accounts, causing a series of bank runs that made numerous financial institutions collapse. Others were left short of lending capital.
Simultaneously, many mortgage holders who had lost their positions or had their savings cleared out in the crash were defaulting on their home loans. These defaults additionally diminished the money that banks and savings and loan associations had available to loan.
Federal Home Loan Bank Act Provisions
Draftsmen of the Federal Home Loan Bank Act expected it to infuse money into the banking system and make mortgage loans available to consumers, subsequently animating the housing and real estate markets.
In particular, the act laid out the Federal Home Loan Bank (FHLB) System. Demonstrated on the Federal Reserve System, it laid out a regulatory agency, the Federal Home Loan Bank Board (FHLBB), to make and supervise a network of member Federal Home Loan Banks (FHLBs or FHLBanks).
Institutions Created by the Federal Home Loan Bank Act
The act made both the Federal Home Loan Bank Board and Federal Home Loan Banks.
The Federal Home Loan Bank Board chartered and administered federal savings and loan banks and organizations.
The Federal Home Loan Banks were (nevertheless are) independent, regional wholesale banks (like the 12 regional Federal Reserve Banks) spread around the country. Albeit federally chartered, they were privately owned institutions — government-sponsored endeavors (GSEs).
Authorized to make eight to 12 FHLBs, the FHLBB ultimately settled twelve of these independent, regional wholesale banks, providing them with a total of $125 million in funding. The FHLBs were authorized to make those funds available to retail banking institutions, for example, savings banks, cooperative banks, insurance companies, building and loan associations, and community development organizations. The act authorized any eligible institution to turn into a member of a FHLBank.
11
The current number of Federal Home Loan Banks, down from the original 12. In 2015, the Federal Home Loan Bank of Seattle merged with the Federal Home Loan Bank of Des Moines. The institution is settled in Des Moines, Iowa, and keeps a western office in Seattle.
Impact of the Federal Home Loan Bank Act
The federal regulatory structure established by the Federal Home Loan Bank Act effectively fortified the endlessly housing lender industry, as well as the loan industry, and worked with homeownership. By financing lenders, the act had a key impact in expanding the number of Americans who had the option to bear the cost of homes, making homeownership a key feature of the American dream.
The Federal Home Loan Bank System laid out by the act is still in effect today. By ethicalness of their GSE status, the FHLBanks are able to borrow in the capital markets at favorable rates (they never again receive any direct federal funding). The FHLBanks then pass along that funding advantage to their members — and at last to consumers — by giving advances (as their secured loans are called) and other financial services at rates that the member financial institutions generally couldn't acquire somewhere else. That, thus, enables these banks to make financing more available to borrowers.
In short, the FHLBs act as "banks to banks." FHLBs additionally give secondary market outlets to members keen on selling mortgage loans, as well as specific awards and loans pointed toward expanding affordable housing and economic development.
Subsequent Alterations to the Federal Home Loan Bank Act
In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) was passed in response to the savings and loan crisis of the 1980s. During the crisis, almost one-third of the savings and loan institutions in the United States failed. FIRREA wiped out the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp. (FSLIC) and made the Office of Thrift Supervision (OTS) and the Resolution Trust Corp. (RTC) to give greater stability and responsibility among lenders.
The Housing and Economic Reform Act of 2008 laid out the Federal Housing Finance Agency (FHFA) and accused it of managing the FHLB system.
While the Federal Home Loan Banks stay in place, their member banks have changed. From the start, savings and loan associations overwhelmed the positions of member financial institutions. Their numbers started to lessen during the 1980s and '90s, after the savings and loan crisis. In the 21st century, commercial banks — which were allowed to join the system in 1989 — and insurance companies have come to contain the majority of the FHLB membership.
Advantages and disadvantages of the Federal Home Loan Bank Act
Proponents of the Federal Home Loan Bank Act contend that homeownership was essential to the economic recovery of the country during the Great Depression — and, given the crisis in the banking industry, that a strong federal stimulus was important. They additionally fight that the system it made adds stability to the housing and lending market and keeps on bringing about stronger neighborhood networks and higher overall quality of living.
Notwithstanding, pundits claim that this long practice of federal endowments for mortgage loans mutilated the housing market. This distortion, they fear, would come full circle in excessively careless lending standards and unnaturally high housing prices. Skeptics say that funding through the act prompts a residential real estate cycle with wide swings among crash and boom.
There are additionally worries that the growth of the Federal Home Loan Banks and increased dependence on FHLB funding, along with the interconnectedness of the financial system, could mean that any distress among FHLBs could be sent to different firms and markets.
The Bottom Line
The Federal Home Loan Bank Act set up a method for empowering homeownership by giving banks low-cost funds to be utilized for mortgages. That activity proceeds right up to the present day — along with other financed efforts, similar to awards and loans, pointed toward expanding affordable housing and economic development.
It additionally settled an important precedent, preparing for the government to lay out different organizations — along with the concept of federal oversight of and intervention in the U.S. economy and consumer financial affairs. This concept turned into a key fundamental of the New Deal in the administration of President Franklin D. Roosevelt, Hoover's replacement.
For instance, soon after the Federal Home Loan Bank Act's entry, Roosevelt endorsed into law the Banking Act of 1933 (otherwise called the Glass-Steagall Act). With an end goal to reestablish faith in the banking system, it laid out the Federal Deposit Insurance Corp. (FDIC), which insured individual bank deposits in case of an institution's disappointment.
Highlights
- It laid out the Federal Home Loan Bank Board (FHLBB) — presently replaced by the Federal Housing Finance Agency (FHFA) — and Federal Home Loan Banks.
- The 11 Federal Home Loan Banks actually operate today, giving low-premium loans, awards, and different endowments to financial institutions.
- The Federal Home Loan Bank Act brought stability and credibility to the loan industry, invigorated the housing industry, and laid out a precedent for federal oversight and regulation of economic issues.
- The 1932 Federal Home Loan Bank Act was designed to support homeownership by giving a source of low-cost funds for member banks to use in stretching out mortgage loans to consumers.
