The Home Loan banks may be facing stormy weather in 2027

• Key insight: In a contentious hearing in the House Financial Services Committee, congressional Democrats evinced serious skepticism about the Federal Home Loan Bank System. That could bode ill for the Home Loan banks should control of the House flip in November.
• Supporting data: Federal Home Loan bank chief executives make six times what their counterparts at the 12 Federal Reserve banks make.
• Forward look: With the 120th Congress just a few months away, the Federal Home Loan Banks System could be in for an existential awakening.

The long honeymoon the Federal Home Loan Banks have enjoyed with Congress is coming to an end.

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Nothing illustrates this better than a recent hearing convened by a subcommittee of the House Financial Services Committee. The formal title of the session was, “Oversight of the Federal Home Loan Bank System.” It should have been labeled: “What’s in store for the FHLBs.”

Comments and questions by minority committee members revealed a high degree of skepticism, even hostility, toward the Home Loan banks as currently operating. Members wondered out loud about the them disappearing entirely. And despite the Federal Home Loan banks warning of financial Armageddon, their demise would be a very positive development for consumers, for the economy, and for housing.  

The cast consisted of members of Congress, some of whom, primarily Republicans, are in awe of the fine job the Home Loan banks say they have done since 1932. Other members, primarily Democrats, were much more skeptical of their performance and see an opportunity for material improvement. Supporting roles were played by three Federal Home Loan bank cheerleaders, including Ryan Donovan, the organization’s chief lobbyist, and one sacrificial academic lamb the Republican majority allowed to testify as a matter of decorum.

First came the script. Without any sense of irony, Donovan boasted repeatedly that in its 94 years, the Home Loan banks have never suffered a credit loss. Imagine for a moment where the economy would be if all banks were this conservative. His claim was challenged later by Rep. Ritchie Torres.

Reading from his script, Donovan next claimed the banks operate “at no out-of-pocket cost to taxpayers.” This, despite the ranking member in his introductory remarks stating that the FHLBs receive an annual government subsidy of $7 billion according to the Congressional Budget Office. This claim was also challenged by Torres later in the hearing.

Several times, the script recited that the FHLBs are required by law to devote 10% of their net income to affordable housing. That number is sacrosanct, it was said. Any higher number, according to the script, would be “arbitrary” and should not be considered.

The remainder of the script included claims of the Home Loan banks’ contributions to the economy, to homeownership and to community banking. It wound up with the claim that without the Federal Home Loan Bank System, the U.S. banking system would resemble that of Canada or Europe. It was an astounding claim, given that for the U.S. to resemble either would require the closure of something like 5,000 community banks.

A more candid observation would be that, without the Home Loan banks, banks large and small would pay billions more to consumers and to businesses to attract and retain their deposits. And what are those opportunity costs for depositors?

In 2025 alone, the opportunity cost was $34.4 billion. That is the amount members paid to the Federal Home Loan Banks for advances rather than paying market rates to their customers for deposits. In 2024, that amount was $43.9 billion.

Of course, that would have raised the question, “So, our constituents are giving up roughly $40 billion a year, for what?” Congress would discover that every new dollar deposited in a bank is just as likely to be loaned out for housing as a dollar round-tripped through the FHLB machine … but a whole lot more efficiently.  

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Candor like this would result in one less lobbyist.
Next came the unscripted remarks delivered by members who were less credulous about the FHLBs. Mind you, unscripted does not mean “spontaneous.” These remarks reflected a clear understanding of the flaws that have been revealed in the FHLBs and their untapped potential to deliver results for housing as originally intended.

For starters, the claim that the FHLBs are not supported by the government was shut down immediately and emphatically. A member pointed out that it is the presumption that the good faith and credit of the government stands behind every dollar of Federal Home Loan bank debt that allows this government-sponsored enterprise to operate. A line of credit from the Treasury Department and the FHLBs’ exemption from taxes further enforce that presumption while enhancing the FHLBs’ earnings.

The same member clarified that indeed the FHLBs have made billions of sour loans over the decades. After all, no legitimate credit underwriting system is perfect.

However, the sour loans were made to failing banks such as Silicon Valley Bank, IndyMac, et al. In every instance, it was the taxpayer-supported FDIC, not the Home Loan banks, that suffered the losses.

And speaking of moral hazard, it was also pointed out that nothing disincentivizes an FHLB from lending its taxpayer-supported funds to failing banks. In fact, the FHLB reward system of rich dividends for members and lavish compensation for executives encourages it.

To this point, most of the almost 200 participants in the session learned for the first time from one member that FHLB chief executives make six times what their counterparts at the 12 Federal Reserve banks make. Note: The job of a Federal Reserve bank president is many times more challenging and consequential than that of an FHLB executive.

The often mentioned and revered 10% affordable housing quota was the subject of much skepticism. The Biden administration, not arbitrarily but after a thorough multiyear study, urged that the bar be raised to at least 20% of net income. Others have called for goals as high as 50%.

And why not, isn’t this $1.4 trillion enterprise a public-private partnership with members providing some of the equity and taxpayers bearing all the risk? So much for the sanctity of the 10% tithe.

Aficionados of the FHLBs will take comfort that the script was followed and that an FHLB wish list of legislation will be introduced in these waning days of the 119th Congress. The chances of congressional action in the near term are slim at best.

The 120th Congress, however, is just a few months away. If the exasperated declaration of one current minority (and perhaps soon-to-be majority) member is any indication, the FHLBs are in for an existential awakening: “The status quo just ain’t working, y’all!”