Understanding the Federal Home Loan Banks and Their Role in Housing

A blog empowering Hispanic homeownership through advocacy and policy.

By Elizabeth Nimmons
December 3, 2024

When considering how the housing market works, we usually think of buyers, sellers, and lenders. But behind the scenes, there is another important player that helps keep everything running smoothly and money flowing to local lenders: the Federal Home Loan Banks (FHLBs). These 11 regional banks provide a critical source of funding for their member financial institutions, including banks, credit unions, and insurance companies.

The FHLBs’ main job is to offer their members a steady source of long- and short-term loans, called “advances.” These loans are backed by collateral and give lenders the cash they need to meet their financial responsibilities and fund a variety of loans, including mortgages, small business loans, car loans, and even credit card lines of credit. This reliable funding helps keep the financial system stable and ensures that lenders can continue serving their communities.

So, what are the Federal Home Loan Banks? How do they work? And, why do they matter to real estate professionals?

What are the Federal Home Loan Banks and how do they work?

The Federal Home Loan Banks, or FHLBs, are a group of 11 regional banks spread across the U.S. They were created in 1932 during the Great Depression to help lenders keep mortgages flowing during the economic crisis. These banks don’t work directly with homebuyers; instead, they support banks, credit unions, and other lenders by giving them access to low-cost loans to fund mortgages and other community investments. Despite their name, the FHLBs do more than just support home loans. They provide the financial backing that allows local lenders to continue doing business, especially during periods of uncertainty.

Think of the FHLBs as a team of banks working together to help their local communities. When a lender, like a small-town credit union, needs extra funds to offer more mortgages, they can turn to their regional FHLB for help. In return for access to the low-cost liquidity that comes as a benefit to members of the FHLBs, the lender (in this case, the credit union) must purchase shares in the bank, making them a part-owner of the cooperative.

Each of the 11 FHLBs operates independently, focusing on its specific region’s needs. However, when big challenges arise, like the 2008 financial crisis, they join forces to keep the entire system stable. During that crisis, the FHLBs lent billions of dollars to keep lenders afloat, helping to protect the housing market from further collapse.

What do the Federal Home Loan Banks do?

1. Keep Mortgage Money Flowing: One of the FHLBs’ most important jobs is to make sure there is always money available for mortgages, even during difficult times. For example, during the early days of the COVID-19 pandemic, when the economy faced uncertainty, the FHLBs helped lenders continue offering home loans by providing them with stable, low-cost funding.This steady flow of funds helps borrowers, too. Because the FHLBs are backing lenders, consumers can get the loans they need to buy homes or refinance their mortgages.
2. Make Homeownership More Accessible: Because they provide reliable funding, the FHLBs allow lenders to offer a wider variety of loan options. This is especially important for smaller community banks and credit unions that might not have the same resources as larger financial institutions. For example, a small-town bank might use FHLB funding to help first-time homebuyers in its area get mortgage rates that are affordable enough to compete with larger national lenders. Without the FHLBs’ support, these borrowers might struggle to find affordable options.
3. Help Underserved Communities: The FHLBs also play a role in creating opportunities for people who have historically faced barriers to homeownership, including Hispanic homebuyers, largely through the Banks’ Affordable Housing Program (AHP). The AHP has two arms: a competitive application program that supports the financing, construction, and rehabilitation of single and multifamily housing for rent and ownership, and the “set-aside” program, which allocates a portion of each Bank’s profits to assisting low- and moderate-income households, including first-time homebuyers, purchase or renovate their homes.

What’s new with the Federal Home Loan Banks?

At this moment, the Federal Home Loan Banks are playing a critical role in addressing the growing need for affordable housing and financial stability in uncertain economic times. As housing prices remain high and many Americans face barriers to homeownership, there is increasing conversation around expanding the Affordable Housing Program (AHP) set-aside. This would allow the FHLBs to allocate more resources to low- and moderate-income communities, furthering their mission to support underserved populations. By advocating for and leveraging these resources, real estate professionals and lenders can help ensure that more families have access to safe, affordable housing.

For anyone working in real estate or lending, understanding the FHLBs is key. These banks help keep the housing market stable, ensuring that lenders can continue offering mortgages even during economic downturns. They also help make homeownership more accessible by supporting affordable lending options and programs for underserved communities. This means more people have the chance to buy homes, which strengthens the housing market and benefits both consumers and the industry.