The Federal Home Loan Bank System (FHLBS) was created by Congress in 1932 to stimulate housing financing in the United States. Through its 12 regional Federal Home Loan Banks, the Federal Home Loan Bank System provides support to member financial institutions for residential mortgage lending by providing access to capital markets. In 2001, over 7,700 commercial banks, thrift institutions, credit unions, and insurance companies were members of the Federal Home Loan Bank System.
The Federal Housing Finance Board regulates the 12 Federal Home Loan Banks and has regulatory oversight for the Office of Finance, which supervises its members’ financial practices. The 12 Federal Home Loan Banks are privately capitalized, government-sponsored enterprises. Each member of the regional banks is a shareholder in the institution, which receives no direct funding from the federal government. The Federal Home Loan Bank System sells debt securities in capital markets, generating funds that are used by the regional FHL banks to provide mortgage credit to home buyers.
The Federal Home Loan Bank System, like the Federal Reserve System, serves as lender of last resort for its members, but it also provides long-term mortgage funds and provides advances to member institutions at competitive interest rates. In 1989 the mission of the Federal Home Loan Bank System was expanded to include lending for affordable housing and community development.
Most savings and loan associations (S&Ls;) are members of the Federal Home Loan Bank System. Unlike the Federal Reserve System, where loans are made for short periods of time at the discount rate, the Federal Home Loan Bank System provides long-term loans at rates lower than the S&L; would have paid in the open market. In this way the Federal Home Loan Bank System subsidize mortgage lending.
This system of government-sponsored, privately owned financial institutions supported growth in residential housing for almost 50 years. In the early 1980s, new financial products, negotiable order of withdrawal (NOW) accounts, money-market funds, junk bonds, and securitization threatened traditional business lending practices by commercial banks and S&Ls.; The Depository Institutions Deregulation and Monetary Control Act (1980) and the Depository Institutions (Garn-St. Germain) Act of 1982 allowed banks and S&Ls; to move into risky lending areas while still protecting depositors through the Federal Deposit Insurance
Corporation (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC) insurance.
S&L; managers increased investment in new areas of real estate lending beyond their traditional market, residential housing. Risks were either ignored or not understood by S&L; managers and regulators. A recession in 1981–82 combined with a collapse in oil prices resulted in huge defaults on S&L; loans, bankrupting many S&Ls.; The Federal Home Loan Bank Board and its deposit insurance subsidiary, FSLIC, failed to close insolvent institutions. Finally, in 1989 the George H. W. Bush administration proposed new legislation (the Financial Institutions Reform, Recovery, and Enforcement Act [FIRREA]) eliminating the FHLB Board and the FSLIC. The act created a new fund, the Savings Association Insurance Fund; and a new agency, the Resolution Trust Corporation, to manage and liquidate insolvent thrifts.
Bailout of S&Ls; cost an estimated $150 billion, with funding coming partly from Federal Home Loan Bank System member institutions but mostly from the sale of government debt securities. FIRREA imposed new restrictions on S&L; lending practices and new supervision of the thrift industry.