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What A Federal Home Loan Bank Is And How It Benefits Everyone

The Federal Home Loan Banks (FHLB) are the largest source of funding for mortgage lending, and have been for almost eighty years. Yet many consumers are still unfamiliar with the “man behind the curtain”.

FHLB was created by Congress, and it consists of twelve regional cooperative banks that other lending institutions can use to help finance economic development and housing in their local community. The banks are regionally focused and controlled, which gives each Federal Home Loan Bank the freedom to manage and adapt to its customer relationships in its district, while still being able to draw on the combined resources of its partner Federal Home Loan Banks, allowing them to obtain funding at the absolute lowest possible cost for its members.

Only financial institutions can belong to a Federal Home Loan Bank, but people across the nation benefit from them. About eighty percent of lending institutions in the United States rely on the FHLB for low-cost funds, and because the Federal Home Loan Banks are cooperatives, their low costs get passed on to consumers and communities. The FHLB are a deeply fundamental part of our country’s financial system, similar to the Federal Reserve.

Despite the variety and size of the lenders you see in business, it’s still highly likely they’re financing most of their community lending through the monies provided by a regional Home Loan Bank.

The Federal Home Loan Banks work to raise billions of dollars in the financial markets so that local lending institutions can get the affordable funds out into their communities, strengthening both the local housing market and the economy. Since they’re member-owned cooperatives, they don’t have any of the pressure for high returns that they would if their stocks were traded publicly. The returns they do make are channeled into replenishing the FHLB’s ability to keep a reliable source of funds flowing out to communities through local financial institutions.

For example, a small local bank wants to expand its lending capabilities. Therefore, it needs to borrow more funds to lend out. It contacts the Federal Home Loan Bank in its district and puts up collateral. When the Federal Home Loan Bank approves the loan, it advances the funds, which the lender can then use to support home mortgage lending or other community investments—agricultural and small business loans, for instance.

Ensuring that these low cost funds continue to flow into local communities is vital to the health of the nation’s economy, as our country continues to face ongoing challenges in its financial markets, making the role of the Federal Home Loan Banks more important than ever before.

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