Dave:

The Congressional Budget Office recently estimated that a whopping 7.3 billion of subsidies are going to something known as the Federal Home Loan Banking System. This is a little known part of the financial system, at least it’s not something that I knew about before starting to research this show. And with a budget like 7.3 billion, you would think that this should be having a huge impact on affordability and the housing market as a whole. But today we’re going to dig into whether that’s actually happening or not.

Hey everyone, and welcome to On the Market. I’m your host, Dave Meyer, and today we have an excellent guest joining us today. Her name is Sharon Cornelissen, who is the Director of Housing for the Consumer Federation of America. And with Sharon. Today we’re going to talk about the history of these subsidies that are going to the federal home loan banks and what’s going on with them today. And we’ll talk about how some proposed reforms that are going through Washington DC right now could impact affordable housing and housing inventory going forward. Alright, let’s bring on Sharon. Sharon, welcome to the show. Thanks for being here.

Sharon:

Yeah, thanks for having me.

Dave:

To start off, tell us a little bit about what it means to be the director of Housing for the Consumer Federation of America.

Sharon:

So the Consumer Federation of America is a national nonpartisan, pro-consumer organization that leads in research and advocacy on pro-consumer issues. So as a director of housing, I’m responsible for all our positions on housing and housing policy, and I do both research and advocacy on housing.

Dave:

And how did you come into this role and begin specializing in housing?

Sharon:

Yeah, it’s kind of a funny story I guess. So I first started to be interested in housing about a decade ago. I was doing my PhD in sociology and I moved to Detroit to try to better understand the city and what people were going through, living in an extremely depopulated neighborhood. So I moved to one of the most depopulated urban neighborhoods of the United States. And while I was there, homes were selling from $500, A lot of homes were vacant. Every other house in the neighborhood where I lived was vacant. So I actually ended up buying a house myself there in Detroit for $7,000. So maybe of interest to some of your listeners. So I had to of course, buy cash in these neighborhoods. All the normal institutions that normally support housing markets did not exist anymore, did not function anymore. So there were no mortgages, pretty much no real estate agents.

A lot of people did not have home insurance. So it was really challenging for a lot of Detroiters in particular to try to hold onto their home. A lot of people were losing their homes, both due to tax foreclosure, they were falling behind from their tax bills. And also because of home repairs that were kind of spiraling out of control. If you have no home equity and no insurance, it’s very expensive to maintain it. So I became really interested in housing, living there and seeing the charterers go through tax foreclosure and trying to organize to keep people in their homes. And I think if you live in a place where the housing market basically has collapsed, you understand how important it is really for housing stability for kids growing up in a stable home, but also for a neighborhood to kind of keep a community together. Housing is really important for that as well. So that’s kind of how I got into the fields.

Dave:

That’s an incredible story. I would imagine that would be very transformative in terms of your life and your career. Before we jump into some of your research, what year was that, that you moved there and bought the house?

Sharon:

Yeah, I moved there in 2015 and I bought the house in 2016.

Dave:

So even almost a decade after the collapse, that was still the situation.

Sharon:

It was sort of the secondary collapse. Detroit went through the foreclosure crisis bank, foreclosures first, and then about seven 80 years later, especially 20 15, 20 16, it went through a second crisis. The tax for closure crisis as home prices remained so low and people could not keep up on their tax bills.

Dave:

Well, let’s move on to your work at the Consumer Federation of America. I understand that you do a lot of work with housing subsidies. Can you just give us an overview of what subsidies are like in the United States and just a general landscape?

Sharon:

Yeah. Well, I think the subsidies that get a lot of attention, maybe subsidies paid to individuals. For example, you have section eight housing vouchers for people that are very low income and cannot afford to pay rents otherwise. But you have also subsidies housing subsidies that go to really large institutions that often get less attention, I think in the media perhaps because it’s less visible, they’re not that open about the subsidies that they receive. And it’s perhaps more technical people kind of check out as soon as we start talking about GSEs and housing finance reform, federal home loan banks. So these subsidies are less visible, I guess

Dave:

That’s true, but I think you’ll find a ready and willing audience here on the market. Our audience really likes learning about the intricacies of the housing market and how all works. So you mentioned there’s section eight, there’s also the GSEs. Do you have a number for the total amount of subsidies annually that are distributed for housing?

Sharon:

And this is not my number. This is a number from the Congressional Budget Office. They published their reports very recently to calculate how much federal loan banks this GSE receive every year. And they packed that number at 7.3 billion in 2024. So that’s quite a number right there.

Dave:

Okay. 7.3 billion. And that’s made up of both Section eight housing and some of the more bank side, or is that just section eight?

Sharon:

No, that’s just subsidy. That just goes to the federal home loan banks.

Dave:

Oh, okay. I see. This

Sharon:

Is a number that they receive.

Dave:

Okay. And this is taxpayer dollars that I assume are attributed by Congress?

Sharon:

No, they’re not appropriated by Congress. The subsidy kind of goes through a back door. It doesn’t show up in a budget for Congress, but it’s a subsidy nonetheless.

Dave:

How does that work?

Sharon:

How does that work? So they are a government sponsored enterprise, A GSE, and it means that they receive unique tax and regulatory benefits. They have a sort of unique status granted to them by Congress in exchange for providing unmet credit needs and public benefits. So they’re receiving the status in order to meet an unmet credit need. So this includes, for example, that there’s an implied federal guarantee on all the debts that they take out. So if you are an investor, you pick between different investment options, and in the case of A GSC, you know that if this federal home loan bank will fail, the government will step in to rescue it basically. So it lowers the risk profile. So therefore, the debt that the government is indirectly providing a subsidy on federal Hong loan bank’s debts in that way, they also have what’s called a super lien on their debts.

So that means if one of the banks that they’re lending money to, for example, a regional bank that they’re lending money to fails, the federal home loan banks have first dips basically on assets to kind of get their money back even before the FDIC. So even before taxpayers, they get first dips. So these are all features that make them more attractive for investors, and that creates this big discount that they get on their debts. So the government is basically giving them all these special benefits and statuses and tax-free status. And in total, that special status is worth 7.3 billion every year.

Dave:

Wow. Okay. So I’m going to try and summarize this to make sure I fully understand what’s going on. There are select banks, they’re called the acronym GSE applies to them that sensor government subsidized entities, is that right?

Sharon:

Government-sponsored enterprises,

Dave:

Government-sponsored enterprises. So there are certain banks, and we’ll get into which ones they are in just a minute. Let’s go step by step here.

Sharon:

So there are 11 federal home loan banks. So there are regional banks, kind of like the Federal Reserve system. So they are bank, I call them bank for banks. So they’re not like Bank of America or Chase themselves? No. This is an overarching bank for banks, basically. So banks can get cheap loans, a cheap source of liquidity from the federal home loan banks. So the role of federal home loan banks is to, they get a discount on their own debts because of their GSE status, and then they pass on that discount to their members, which are banks, credit unions, insurance, companie, all the like. So what they do is to basically give banks a cheap source of money, a cheap source of liquidity. And historically that money has been used to help banks provide mortgages, but today members are doing anything with that money. Many banks, as you know, are not even in the business of lending mortgages anymore. So they can use money for any purpose that they see fit. So it could be just for acute liquidity needs. In the very moment, Silicon Valley Bank was lending a lot of money right before it fails. Or if you are an insurance company, you could say, Hey, that’s great. That’s cheap money. Let’s borrow a bunch of cheap money and then I’ll vest it elsewhere and then I can keep the difference. I can make money that way.

Dave:

That sounds like a pretty good deal for those banks or an insurance company just being able to get cheap debt and basically do arbitrage and lend it out for a higher interest rate somewhere else, or invest it wherever they want. Yeah, exactly. So you said these are banks of banks. Have we heard of any of these banks or would normal people recognize the names of them?

Sharon:

Well, I mean, their names are the federal non Bank of Atlanta, the Federal Bank of Pittsburgh,

Dave:

San

Sharon:

Francisco. So that’s their names. I think everyday Americans have not heard of them because they don’t directly interact with you or me as consumers. They are the bank for banks. So they interact directly with big companies, not with everyday people.

Dave:

Okay, got it. Okay. We have to take a quick break, but stay with us more on housing subsidies right after this. Welcome back to On the Market. Let’s pick back up with Sharon Cornelison and housing subsidies. And so I assume that this policy and system was put in place in an effort, make home ownership more affordable.

Sharon:

So the system was founded in 1932. This was during what I call the greatest housing crisis of the last century. So this was during the Great Depression. There was really a struggle for people to own houses or to buy homes at all, but mortgages, mortgages are very expensive. Mortgage money wasn’t readily available at the time. If you are in the thirties, if you are a bank, you rely on deposits as your source of liquidity. And then depending on how many deposits you have, you can originate mortgages based on those deposits. So at the time they were like, well, wouldn’t it be great if there was a more reliable source of liquidity for mortgages? So Congress chartered the federal non bank system at the time so that they could make more liquidity available for mortgages. So mortgages would be more widely available and they would be cheaper. That was sort of the idea in the 1930s.

Dave:

And did it work back then, at least?

Sharon:

I mean, there were a lot of things that were innovated in the thirties. The Federal Housing Administration was also founded around that time, so they were in a big crisis. So crisis often is a good time for innovation and new opportunities. So I think at the time it did work. It was a good source for mortgage lending. The members at the time were engaged in mortgage lending, and this was a good way for them to get more liquidity.

Dave:

And now this is going to be a bit of a subjective question, but would you say it’s working today?

Sharon:

Well, clearly I believe it is not. I mean, I think your listeners will also understand the mortgage market has really changed over the last 90 years. So first of all, a lot of the people or a lot of the institutions that used to be engaged in mortgage lending are not anymore. A lot of the mortgage lending today is actually done by independent mortgage banks, such as Rocket Mortgage or those sort of online mortgage banks, and they are not members of federal banks at all. Right? So a lot of the mortgage lending has shifted, and a lot of traditional banks are no longer in the business anymore. And in the second big change that has happened since the 1980s, we saw the rise of securitization. So right now, if you’re a bank and you originate a mortgage, you turn around and then you sell that mortgage to Fannie or Freddie most likely, so you’re not keeping it on your books. So the capital that you need to originate a mortgage is very different from what it was in the thirties when there wasn’t that secondary markets yet.

Dave:

Well, I was a little bit joking when I asked if you liked it, because for our audience, Sharon is of the Coalition for Federal Home Loan Bank Reform. So obviously you’re looking to change this program. Can you tell us a little bit about the coalition?

Sharon:

Yeah. So this coalition started, we were sort of trying to find individuals and groups that were united around the idea that the status quo for federal owned banks is not acceptable. So right now we have 10 national organizations that includes civil rights organizations, housing, as well as a labor union as well. And together they represent thousands of smaller organizations across the country and well over 1 million local members. We also have an advisory board with a lot of GSE and financial regulation and banking experts on it. So the advisory board has been very helpful in giving us ideas for reform and just answering questions where needed, because some of these things can get pretty complex pretty quickly.

Dave:

Okay. So when you look at the state of the subsidies today, is the problem that the money’s just not going where it’s intended to? Or is it being used inefficiently? You already mentioned that banks can sort of take the money and lend it out not as mortgages. Is that the primary problem or what’s sort of the big issue?

Sharon:

So if you are A GSE, A government sponsored enterprise, there’s always sort of a tension. So GSEs, they were founded with a public mission. So there are some unmet credit needs that is not served by the private markets, so that’s why you need A GSC to begin with. Otherwise, the private market could take care of it. So you start a GSC with a public mission, but then it’s also kind of private at the same time. It’s a hybrid. So it’s also driven by maximizing profits. So over time, the profits motive has sort of eclipsed the public mission. So they’re really driven by just pursuing more volume and more profits and not by thinking carefully about, well, how can we make the biggest impact on housing? So I think that’s sort of an inherent tension that exists for federal loan banks.

Dave:

And I guess in your opinion at least, it seems that there wasn’t enough regulation put in place or specificity to the arrangement here that has allowing the GSEs to pursue profit over the public benefit that it’s intended for.

Sharon:

Yeah, I mean, as I said, the mortgage market has sort of shifted over time. So I think we’ve sort of lost track of this GS as the market market shifted, and they of course went about their business because I understand that they’re motivated by their own bottom line that is important for them to continue to exist in some ways. So the mortgage market evolved and yeah, I think they need more tight regulation to make sure that they’re fulfilling that mission for which they were founded and that we are getting the right public benefits from those subsidies. Why are we giving subsidies? Why are we giving the GSC to special status and tax benefits and subsidies if we’re not getting the equivalent in return? That doesn’t make any sense. If they are not doing that, perhaps they shouldn’t exist at all. We can’t just be handing out subsidies and not getting public benefits in return.

Dave:

Right. Yeah, there needs to be some mutual benefit. They can’t just get the benefit of subsidies without providing the public benefit. But as you said, it sounds like it just started so long ago and perhaps hasn’t evolved as quickly as it needs to in order to keep up with the current financial system. So Sharon, what are some of the regulations that you think should go into place or what needs to change in your mind?

Sharon:

Yeah, I think there’s two kind of big items that have to change. So the first one is around mission and making sure that we are really clear about what the mission is of the Federal hormone loan bank and say, well, they are there to provide liquidity for housing, affordable housing and community developments. And if that’s so, then everything else should flow from that mission. So I think clarifying the mission is sort of the first step. And the second one is membership. Who should be, if that’s the mission, and if the point is to really provide more liquidity to mortgages and to help more affordable housing developments, then who should be a member? Does it make sense that insurance companies are members of federal home loan banks when they’re not doing anything in housing anymore or they’re not originating a single mortgage? Why are they there? That doesn’t really make sense. Really making sure that the members that are part of the Federal Home Loan Bank system use it to advance affordable housing goals. So I think small bank community banks should reap the full benefits of Federal Home Bank membership, what’s called Community development financial institutions, which are CDFIs, really make sure that they can get full access to federal home bank expenses and use that money to build more housing. That’s sort of what we like to see.

Dave:

Okay. It is time for our last quick break, but when we come back, we’ll get Sharon’s take on how Federal home Loan bank reform could impact the affordability crisis in the us. Stay tuned. Welcome back, everyone. Let’s jump back in. And how is the reaction to these proposals? I know you work for a bipartisan foundation. Is this being received well by both parties in Congress and the banks themselves?

Sharon:

So yeah, we are seeing, seeing greater and greater reception of this in the administration and in Congress. So Joe Biden, in his state of the Union housing proposal, he flagged the need for Federal Home Loan Bank as one of the priorities of the administration and housing moving forward, specifically making sure that they’re devoting more money to affordable housing programs every year. Right now, they’re only required to devote 10% of their income to affordable housing programs, but the administration wants that to be at least 20% sort of a first step to make them more aligned. We see more and more support in Congress as well. So Senator Cortez Moto has been a big supporter of this. She’s in senate banking as well, and then Senator Elizabeth Warren recently came out to really supports the need for reform. But ultimately, I think it’s a bipartisan issue. I mean, I know for example, Cato Institute has written as well about the absurdity of a system as it currently exists. So we see both from progressive voices and more conservative voices that needs to really reform the system. So I’m hoping that moving forward there will be more and more people signing onto a bill and we can turn this into a bipartisan housing

Dave:

Bill. And should this pass one day, what would be the impact on the housing market?

Sharon:

Yeah, so just to give you an example, last year in 2023 was actually the most profitable year for the federal home known banks ever, I think in history. So based on that profit, they will be required to spend 752 million in affordable housing programs next year. So that 10% of their income, they’re required right now to spend on affordable housing programs. If our proposal passes and they, instead of 10% have to spend 30% on affordable housing programs every year, that would mean an additional 1.5 billion in investments going towards housing. That includes, they often spend these affordable housing dollars on gap financing for affordable housing developments like Litech developments, as well as on down payment assistance. So an additional 1.5 billion could really do a lot more in both addressing our issue of housing supply and addressing longstanding issues of and who has access to home buying in this market.

Dave:

Got it. Okay. Makes a lot of sense. For our audience of investors, if they are interested in creating affordable housing or being one of those developers, is there a way for them to get involved?

Sharon:

I think that they should look at the website of federal owned owned banks and see in what region they fall, and then from there, go look basically for that gap financing for affordable housing developments. I must say that from what I’ve heard from people, from developers, it is notoriously hard to get this type of money, and they say it’s often the last money in the first money out because it’s so complicated to qualify for it. So that’s another thing that we think should change. It should be more accessible, it should be used more logically. It shouldn’t be that complicated to qualify for this kind of financing on top of Litech or other credits. You nod. You’re saying it’s a common problem?

Dave:

Yeah, it does. We talk to a lot of developers on this show, a lot of people who represent government agencies or policy advocates like yourself, and it is just a common refrain we hear is although there is intent to create affordable housing or public-private partnerships, that they’re often quite complicated. Yeah. Well, Sharon, thank you so much for joining us today and educating us on this topic. I did not understand this at all before our conversation, and thank you for educating me and our audience. We really appreciate it.

Sharon:

Yeah, thank you so much. I was glad I could. I know it’s complicated. So happy to be a resource anytime, Dave.

Dave:

And for anyone who wants to learn more about Sharon or her work at the Consumer Federation of America, we’ll put all of her contact information in the show. Notes below on the Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.