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About Federal Home Loan Bank
If you are looking to purchase a house with a mortgage, you have many options in terms of lenders or banks you can choose from.
However, what happens if banks need finance to give out more mortgages to their potential clients?
One of the options to secure finance for banks is through the federal home loan banks system. In this post, we will learn what the federal home loan bank system is in detail.
What Is A Federal Home Loan Bank (FHLB) System?
The Federal Home Loan Bank System (FHLB) is a government-sponsored corporation that ensures that sufficient capital is available for qualified home loans.
It is a group of 11 banks that work together to provide reliable and safe credit capital to thousands of member financial institutions as a unit.
The FHLB system was founded in 1932 post The Great Depression and it is managed by FHFA.
The FHLB system includes eleven banks spread across US major cities and around eighty percent of US lending institutions depend on the FHLB system.
How Does The FHLB Works?
Each FHLB provides loans to financial institutions that give home loans and are members of FHLB.
Thanks to the low-cost loans provided by these regional banks, member banks and lenders can provide customers with cheaper mortgage loans than would be the case without this source of financing.
In return, and as a condition of membership, institutions buy shares of FHLBanks in their region.
These “lenders for banks” are government-backed entities like Freddie Mac and Fannie Mae. But unlike agencies, the FHLB system does not guarantee or insure mortgages.
Instead, it aims to keep a cheap source of capital for banks and credit unions so they can continue to issue mortgages and not have working capital problems.
For example, if a local lender in Dallas purchases stock in Dallas FHLB and later receives a higher-than-normal number of loan applications from qualified applicants, they can request a “back-up” from the FHLB as a type of loan.
FHLB rates are usually lower so that the lenders can cover the costs of these mortgage loans and stay in business while providing more mortgages to qualified borrowers.
The lender then uses these housing mortgages as a form of guarantee for the loan taken from FHL Bank of Dallas.
In Which Cities Are The FHLB Located?
The 11 banks of the FHLB System are located in different cities around the country.
Each bank services multiple states based on its geographical location. The 11 Banks included in the FHLB system are:
- FHLB of San Francisco
- FHLB of Atlanta
- FHLB of Topeka
- FHLB of Indianapolis
- FHLB of Pittsburgh
- FHLB of Des Moines
- FHLB of New York
- FHLB of Dallas
- FHLB of Boston
- FHLB of Chicago
- FHLB of Cincinnati
How Does The FHLB System Work?
The FHLB system can remain independent of tax money through shares purchased by member institutions.
These banks also provide a type of debt security known as “consolidated obligation” in the capital markets. These loan programs generate revenue to maintain the FHLB system and keep it afloat.
Banks are located in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, and Topeka.
Although they are each separate entities with separate BODs, they function as a system to fulfill their consolidated obligations.
The reason why these FHL banks are so useful is that they allow local banks and lenders to extend credit to underserved potential borrowers that they may not have the financial perks to provide.
Both the FHLBs themselves and the FHFA in general see better access to mortgage capital associated with increased home ownership for people who were previously underserved for mortgages.
Conclusion
The Federal Bank Home loan system is a great option for local lenders and credit unions to provide low-cost loans to potential loan applicants.
This system uses the member institution’s stock and shares capital to provide these low-interest loans to local lenders and banks that are members of the FHLB.
Unfortunately, this low-cost loan option is only available to financial institutions and not directly to individuals.
