Federal Home Loan Bank Act, passed in 1932, provides low-cost mortgage funds to member banks for the purpose of encouraging homeownership.
It established the Federal Home Loan Bank Board (FHLBB) and Federal Home Loan Banks to make homeownership more accessible to more Americans.
Federal Home Loan Bank Act origins
Then-President Herbert Hoover signed the Federal Home Loan Bank Act on July 22, 1932, stating its aim was to provide similar assistance for home mortgages as that offered by Federal Reserve Banks for commercial loans. This system sought to both remedy the current crisis and enable homeownership under more favorable terms than ever before.
At the time of the act’s passage, the United States was in the Great Depression—the “present emergency” Hoover referred to—and the financial system was in particularly dire straits. After the stock market crash of 1929, thousands of panicked Americans emptied their savings and checking accounts, resulting in bank runs that caused many financial institutions to collapse. Others were left with insufficient capital to lend.
Meanwhile, many mortgage holders who lost their jobs or lost their savings in the crash defaulted on their home loans, further reducing bank and savings, and loan availability.
Provisions of the Federal Home Loan Bank Act
In order to stimulate the housing and real estate markets, the Federal Home Loan Bank Act was designed to inject money into the banking system.
Based on the Federal Reserve System, the act established the Federal Home Loan Bank Board (FHLBB), which oversees a network of member Federal Home Loan Banks (FHLBs or FHLBanks).
Institutions Created by the Federal Home Loan Bank Act
As a result of the act, both the Federal Home Loan Bank Board and the Federal Home Loan Banks were created.
Federal savings and loan banks and organizations were chartered and supervised by the Federal Home Loan Bank Board.
Federal Home Loan Banks were and are independent, regional wholesale banks scattered around the country. Although federally chartered, they are privately owned.
With a total of $125 million in funding, the FHLBB established a dozen of these independent, regional wholesale banks, authorized to create eight to 12 FHLBs. As part of their authority, the FHLBs were authorized to provide these funds to retail banking institutions, including savings banks, cooperative banks, insurance companies, building and loan associations, and community development organizations. Any eligible institution could become a member of an FHLBank under the act.
Impact of the Federal Home Loan Bank Act
The federal regulatory framework established by the Federal Home Loan Bank Act successfully strengthened the housing and housing lender industry, as well as the loan industry, and promoted homeownership. By subsidizing lenders, the act played a key role in increasing the number of Americans who could afford residences, thus making homeownership a key component of the American dream.
The Federal Home Loan Bank System created by the act continues to operate today. As Government-Sponsored Enterprises (GSEs), the FHLBanks have access to capital markets at an advantageous rate—they do not receive federal funding directly. They pass this benefit on to their members, and ultimately to consumers, by offering advances and other financial services at rates usually unattainable elsewhere. This allows banks to provide more funds to borrowers.
They also provide secondary market outlets for members interested in selling mortgage loans, as well as specialized grants and loans to increase affordable housing and economic development.
Amendments to the Federal Home Loan Bank Act in the following years
In 1989, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in response to the savings and loan crisis of the 1980s which caused nearly a third of such institutions in the US to fail. FIRREA restructured the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corp., replacing them with the Office of Thrift Supervision (OTS) and Resolution Trust Corporation (RTC). This legislation aimed to create greater stability and responsibility among lenders.
FHLBs are regulated by the Federal Housing Finance Agency (FHFA) established by the Housing and Economic Reform Act of 2008.
Although the Federal Home Loan Banks remain in existence, their member institutions have changed. Savings and loan associations dominated at first, but their numbers dwindled after the savings and loan crisis in the 1980s and 1990s. Since 1989, commercial banks—which were permitted to join the FHLB in 1989—and insurance companies have become the majority of FHLB members.
The Federal Home Loan Bank Act: Advantages and Disadvantages
Those in favor of the Federal Home Loan Bank Act argue homeownership played an important role in the country’s recovery during the Great Depression—and a strong federal stimulus was needed, given the banking industry’s crisis. They also contend that the system it created adds stability to the housing and lending market and continues to result in stronger local communities and higher overall quality of life.
This long tradition of federal mortgage subsidies, however, has been criticized as distorting the housing market. Critics fear that the act will lead to overly lax lending standards and unnaturally high housing prices, leading to a residential real estate cycle with wide swings between boom and crash.
Additionally, due to the growth of Federal Home Loan Banks and the increased reliance on FHLB funding, as well as the interconnected nature of the financial system, any distress among FHLBs may affect other firms and markets.
In a nutshell
Banks were provided with low-cost funds for mortgages in order to encourage homeownership under the Federal Home Loan Bank Act. As well as other subsidized efforts to increase affordable housing and economic development, such as grants and loans, that activity continues to this day.
It also set an important precedent, paving the way for the government to establish other agencies—along with the concept of federal oversight and intervention in the U.S. economy and consumer finances. Under the administration of President Franklin D. Roosevelt, his successor, this concept became a key tenet of the New Deal.
Roosevelt, for example, signed into law the Banking Act of 1933 (also known as the Glass-Steagall Act) in the year following the Federal Home Loan Bank Act’s passage. In an effort to restore faith in the banking system, it established the Federal Deposit Insurance Corp. (FDIC), which insured individual bank deposits if an institution failed.
Key Takeaways
- In 1932, the Federal Home Loan Bank Act provided low-cost funds for member banks to extend mortgage loans to consumers as a means of encouraging homeownership.
- Federal Home Loan Bank Board (FHLBB) – now replaced by Federal Housing Finance Agency (FHFA) – and Federal Home Loan Banks were established under it.
- Federal Home Loan Banks continue to provide low-interest loans, grants, and other subsidies to financial institutions today.
- Federal Home Loan Bank Act established a precedent for federal oversight and regulation of economic matters, bringing stability and credibility to the loan industry.
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