Reform the Federal Home Loan Banks to finance the housing America needs

The United States spends about $6.9 billion annually in implicit federal subsidies on a Depression-era banking cooperative that no longer serves its housing mission. It could more efficiently and effectively use that to directly finance hundreds of thousands of new homes each year.

The Federal Home Loan Bank (FHLB) system, a roughly $1.3 trillion government-sponsored enterprise originally created by President Hoover in the 1930s to support homeownership, now functions primarily as a vehicle for large commercial banks and insurance companies to borrow cheaply in short-term money markets and invest those funds as they like. Meanwhile, the American housing crisis continues to worsen.

We should refocus the FHLB system on fulfilling its historic mission. Specifically, a quarter of FHLB profits should be used to make direct, below-market construction loans to multi-family residential housing. With a limited set of requirements, including some mandatory affordability set-asides, the reimagined FHLBs can provide cheap, abundant housing finance with no additional cost to the United States taxpayer. International precedents from France, Germany, Canada, and the United Kingdom demonstrate the opportunity of an institution of this nature. This report lays out the case, the mechanism, and the implementation framework.

America’s housing shortage demands a supply-side financing institution

The United States faces a structural housing deficit estimated to be between four and five million units. The National Low Income Housing Coalition identifies a shortage of seven million rental units affordable and available to the lowest-income renters. Half of all renters, over 22 million households, spend over 30% of the household’s income on housing.

Multifamily construction has fallen from a cyclical peak of 547,000 starts in 2022 to just 355,000 in 2024, a 35% decline driven primarily by financing constraints. Construction loan rates have roughly doubled from the 3–4% range in 2020 to 7–10% today.¹ At the end of 2024, 58 percent of developers experiencing delayed starts cited economic feasibility as a cause, and 37 percent cited the availability of construction financing.² High borrowing costs make many projects mathematically impossible to build, exactly when we need more of them.

Regulation at all levels of government accounts for roughly 40 percent of multifamily development costs, with building codes, impact fees, permitting, and land-use rules the largest contributors. But construction does not only depend on smarter land use policy. Financing costs are the most volatile constraint and the primary driver of short-term cyclical swings. The 2020–2021 period of near-zero rates produced the largest multifamily boom in decades, and the 2022–2024 rate shock cratered it.

Meanwhile, the American housing system makes it relatively easy to build single family homes or duplexes and large-scale buildings, but few projects in between. Federal consumer-mortgage rules define a “dwelling” as one to four units, and mortgage underwriters similarly treat 1–4-unit properties as a distinct category. As a project moves to five or more units, regulations define it as “multifamily,” which makes loans and underwriting more complex and standardized financing more difficult. Projects in the 5–49-unit range are often too modest to enjoy the advantages of real scale because the cost of architects, lawyers, permits, fees, financing costs, and management overhead is difficult to spread over a small number of units. Investors and lenders see such deals as too small to justify the transaction. By contrast, once projects get large enough, they can better absorb fixed burdens, attract deeper pools of capital, and capture economies of scale.

The middle is where the market is thinnest, yet buildings of this scale are what many Americans want to line our main streets.

The problems with today’s FHLB system

The Federal Home Loan Bank system comprises 11 regional, cooperatively owned banks, regulated by the Federal Housing Finance Agency (FHFA), with about $1.3 trillion in total assets. The banks fund themselves by issuing consolidated obligations—bonds and discount notes carrying joint and several liability across all 11 banks—at spreads just above U.S. Treasuries.

Markets perceive an implicit federal guarantee of FHLBs despite no statutory backing, giving them the ability to borrow at rates about 40 basis points lower than equivalent private debt. The Congressional Budget Office, in a March 2024 report, estimated the value of this implicit federal guarantee at about $7 billion annually (the range cited was $5.3 to $8.5 billion).

Yet the FHLB system does little to spur housing development or construction. For a decade FHLB’s statutory funding contribution to affordable housing was around $300-$400 million annually before spiking to approximately $750 million in 2024 (see Figure 1). The 2024 spike is mechanical, not structural. Affordable housing contributions are set by statute at 10% of FHLB net income, and 2023 earnings hit a record as advances to member institutions surged above $1 trillion during the March banking stress. With advances now down by more than a third from that peak, net income has fallen and affordable housing contributions are on track to revert toward their historical range.

FHLB’s contributions to affordable housing are dwarfed by the profits they generate. The system paid $3.7 billion in dividends to member institutions in 2024, more than four times what was contributed to all affordable housing programming. Dividends are only one metric by which FHLBs generate profits. Total FHLB net income has skyrocketed since the banking turmoil of 2023, with the system generating net income in excess of $6 billion in 2023 and 2024 (see Figure 2). The profits have increasingly come from investments. Interest income from the FHLBs’ investment portfolio grew to $24 billion in 2024, a shift that indicates a reorientation toward an investment-spread strategy as advance volumes have fallen.

A third method FHLBs generate value for their members not captured in these figures is by reducing advance rates to allow their members to borrow more cheaply as described above. When FHLB banks decide to lower advance rates to reduce their profit, they are returning portions of the government subsidy back to borrowers, who are dispropriately the biggest banks.

After the collapse of the savings-and-loan industry, Congress made the Federal Home Loan Banks help pay part of the cleanup bill. For many years, they had to send money each year—and later a share of their profits—to cover the interest on bonds issued for that rescue. Those obligations expired in 2011. Despite the system’s major role as a liquidity provider to troubled mortgage lenders in the 2000s, Congress did not create any analogous new post-2008 levy on the FHLBs. That last point is a fair criticism and a reason to return to using the FHLB system to fund housing.

The system’s $737 billion in outstanding advances (2024 year-end) flow disproportionately to the largest financial institutions. While approximately half of FHLB members had some advances in 2024, just 126 borrowers (2% of members) held advances of $1 billion or more, representing 71% of all advances. Insurance companies increasingly use FHLB advances for spread-lending strategies entirely unrelated to housing. Over 40% of all member institutions do not even originate mortgages.

The “lender of next-to-last resort” problem

Failing banks often turn to the FHLB system as their problems worsen. The spring 2023 bank failures exposed this dangerous dynamic. Silicon Valley Bank (SVB) increased FHLB borrowings by 50% in the first days of March 2023, reaching $30 billion in advances from the FHLB of San Francisco before failing on March 10. Signature Bank held $11.2 billion in FHLB of New York advances at failure on March 12. First Republic Bank accumulated $28.1 billion from the FHLB of San Francisco before its May 1 seizure. All three banks held substantially more FHLB advances as a proportion of total assets than peer institutions. At year-end 2022 — roughly ten weeks before failure — SVB and First Republic were already the top two borrowers at the FHLB of San Francisco, with $15 billion and $14 billion in outstanding advances.

The problem of FHLB lending to failing banks is not unique to the 2023 bank failures. The first American bank to fail in 2026, Metropolitan Capital Bank & Trust, had about 16% of its assets funded by FHLB advances. Heartland Tri-State Bank in Kansas, whose CEO later pleaded guilty to embezzling roughly $47 million after falling victim to a pig-butchering crypto scam, went from no FHLB borrowing in the prior three years to about $21 million in the summer of 2023—roughly 15% of its last reported pre-failure assets.

The FHLBs were fully repaid in each resolution—their statutory “super-lien” (established by the Competitive Equality Banking Act of 1987) gives them priority over the FDIC and all other creditors in receivership. Former Federal Reserve Governor Daniel Tarullo, writing with Fed economists Stefan Gissler and Borghan Narajabad, argued in a 2023 paper that the FHLBs have effectively stopped housing finance and instead pose systemic financial stability risks through procyclical lending that amplifies stress. When you don’t have to worry about getting paid back, you tend to care less about whom you lend to.

Compensation

The system’s executives are compensated as though they run complex, risk-taking financial institutions, when in reality they manage a government-backed secured lending utility. In 2024, 31 FHLB executives earned over $1 million, with some bank presidents earning $3–4 million annually. Those levels meaningfully exceed the pay of Federal Reserve Bank presidents, who oversee vastly larger and more complex operations.³ They are particularly striking given that FHLBs bear almost no credit risk, derive their business model from a public subsidy they did not create and cannot lose, and oversee relatively small organizations. For example, the Boston FHLB has about 200 employees and a CEO who made over $2.2 million, compared to the Boston Fed which has over 1,200 employees and a president who makes $497,000.⁴

Because FHLBs are owned by their member-borrowers, the boards setting executive pay have little incentive to scrutinize costs that are effectively socialized across the membership and ultimately borne by the public through the implicit guarantee.

FHFA’s review and the stalled reform agenda

These concerns have created some legislative interest in recent years, but none of the proposals are sufficiently creative or bold. Senator Catherine Cortez Masto (D-NV) introduced legislation to require 30% of net earnings or a minimum of $200 million system-wide to flow to affordable housing programs, a proposal that echoed the 20% payments the FHLBs paid between 1999 and 2011. The bipartisan CURB Act, introduced in June 2025 by Senators Jim Banks (R-IN) and Cortez Masto (D-NV), would grant FHFA greater authority over executive compensation at FHLBs. Senator Elizabeth Warren (D-MA) has also pressed the case, noting at an April 2024 Banking Committee hearing that FHLBs receive “$7.3 billion in public subsidies” while spending only “$395 million on affordable housing programs.”

The FHLB lobby—representing around 6,400 member institutions touching every congressional district—increased spending to fight reform. FHLBs hire lobbyists, both internal staff and external multi-client firms. This is similar to what Fannie Mae and Freddie Mac did before conservatorship, although at odds with the Federal Reserve Regional Banks to which the FHLBs are modelled after. In 2025, the FHLB system spent $1.2 million hiring 32 external lobbyists across the political spectrum. With the change in FHFA leadership to Director Bill Pulte under the current administration, reform conversations have all but ended.

A new FHLB system

The FHLB system can be restored to its original mission—financing housing at scale—while keeping the 11 regional banks, the same cooperative ownership structure, and even the same capital markets funding mechanism. These no-cost legal changes would allow FHLBs to continue providing financing to the banking and insurance systems while ensuring a meaningful amount of their power would fund housing construction.

Funding mechanism. The FHLBs will continue their consolidated obligation framework, issuing government-agency bonds at near-Treasury rates. Congress should give an explicit government guarantee, potentially further reducing borrowing costs, and eliminating the ambiguity that currently allows the subsidy to be captured by intermediaries rather than directed to housing production. This would also reduce potential systemic risk. Under current law, should the FHLB system default, the collective liability of the entire membership, virtually the entire banking and insurance system, would face this liability, presumably at a time of financial systemic catastrophe.

Lending model. Each FHLB will be required to transition to a portfolio in which 25% of outstanding advances (as averaged over a five-year period) and other credit exposures are directed to housing-related lending by the end of a five-year transition period, with interim milestones (e.g., 5% at year two, 10% at year four). FHLBs will have five years to grow into the 25% requirement but will need to demonstrate increasing levels of portfolio commitment over the phase-in period. Loan terms will carry developer-friendly terms of approximately three years of construction finance, with up to 90% loan-to-cost ratios. The target lending rate would be FHLB cost of funds plus 50–75 basis points for operations and loss reserves, producing effective rates approximately 2 to 3% below current bank-led construction lending and up to 5% below nonbank construction lending.⁵ This proposal is in addition to, rather than supplanting, FHLB’s existing commitments to affordable housing but is in addition.

Affordability calibration. Any project receiving FHLB financing must meet the requirement of a minimum of 20% of units designated affordable (at or below 80% of the area median income).⁶ The 20% affordability requirement is deliberately set at a level that enables mixed-income development without requiring full subsidy. The remaining 80% market-rate units will cross-subsidize the project and ensure economic and social integration for low-income occupants. This approach avoids the concentrated poverty patterns that have plagued low-income-housing-only developments while dramatically expanding the production of dense, multi-family housing.

Missing middle. Within the housing portfolio, the FHLB’s lending will target “missing middle” housing, defined as multifamily rental and for-sale development in buildings of 5 to 49 units. Too small to attract institutional capital from agency lenders and large banks, yet too large and complex to finance through conventional single-family residential mortgages, these projects exist in a financing dead zone. That pushes development toward the two extremes the market already serves well—single-family subdivisions and large luxury apartment towers—while starving the mid-density building types that historically formed the backbone of American neighborhoods. A dedicated FHLB lending channel with streamlined underwriting for this segment would fill a gap that no existing federal program addresses.

Scale. The FHLB system’s existing balance sheet currently holds $1.3 trillion in assets, of which about $700 billion is made up of advances, i.e., collateralized loans to member institutions. The 25% requirement of total advances would mean a system-wide FHLB investment of about $175 billion in total construction lending. Construction loans would have approximately three years of duration, enabling the revolving fund to extend about $58 billion in new lending each year. At current average construction costs of $300,000 per unit, the financing would power the construction of 194,000 housing units per year. In 2025, total multifamily housing starts were estimated at 416,000. FHLB reform along these lines would increase multifamily housing starts by 47% per year.

This proposal realigns FHLBs with their historical mission on housing, with a focus on what is currently missing in America’s housing finance system: the missing middle. It does not address some structural problems, including being the “lender of next-to-last resort,” loose membership requirements that include institutions that do not meaningfully fund housing, or internal governance issues. While we have thoughts on those, we focus instead on solving the problem for which the FHLBs were created: a stronger housing finance system.

Policy and legal considerations

The most viable reform approach does not require dissolving, merging, or replacing the 11 Federal Home Loan Banks. Instead, Congress would amend the Federal Home Loan Bank Act of 1932 (12 U.S.C. Chapter 11) to redefine the mission, mandate a portfolio transition, and redirect lending authority while leaving the existing institutional structure, regional footprint, and cooperative ownership model intact. This is a recharter-in-place strategy, not an institutional transformation, and it offers decisive legal and political advantages over consolidation.

Direct lending authority. The most important new power Congress would grant is authorization for FHLBs to make direct loans to housing developers—both for-profit and nonprofit—in addition to their traditional advances to member financial institutions. Any project receiving direct FHLB financing would be required to designate the minimum of 20% of units as affordable (at or below 80% area median income (AMI). If a rental building, the rents would be restricted for a minimum of 30 years through recorded deed covenants. If for ownership, restrictions on resale to remain priced for 80% AMI would remain for 20 years. This direct lending channel would operate alongside, not instead of, the existing advance mechanism, but the portfolio transition mandate would ensure that even traditional member advances carry a housing purpose.

The 11-bank regional structure is a strength of the FHLB system that should be leveraged in its next iteration. Each FHLB can develop knowledge of local housing markets, construction cost environments, and developer ecosystems in its district. The FHLB of San Francisco will understand California entitlement timelines and seismic construction costs, and the FHLB of Dallas will understand Sunbelt land markets and the economics of rapid horizontal development. The FHLB of New York will understand the layered capital stacks required to build in some of the most expensive urban markets in the country.

Building underwriting capacity. The one genuinely new capability FHLBs would need to develop is project-level construction lending expertise. Current FHLB credit operations are designed for overcollateralized advances to regulated financial institutions, where lending risk is de minimis. Construction-to-permanent lending to developers is a fundamentally different underwriting problem requiring project feasibility analysis, risk assessment, and ongoing compliance monitoring—capabilities the FHLB system does not currently possess. This is a learnable skill set, already practiced by thousands of professionals at state housing finance agencies, community development financial institutions (Community Development Financial Institutions), FHA-approved lenders, and commercial banks. Each FHLB would need to hire or develop a project finance team, a meaningful but manageable investment for institutions that collectively earned $6.4 billion in net income in 2024. The five-year transition period provides adequate time to recruit, train, and scale these teams.

An alternative approach we considered was to require the FHLBs to meet this requirement not through direct lending but rather through subsidizing existing lenders in this space, predominantly banks, CDFIs, and other low-income affordable housing organizations. These groups have important expertise and could play important roles in the housing space.

Yet there are several reasons this institutional arrangement is not ideal. Most importantly, its logic leads to an expansion of existing FHLB grantmaking that does not bring about structural change in housing markets. Currently, statute requires FHLBs to contribute 10% of prior-year earnings to affordable housing programs, known as the Affordable Housing Program (AHP) set-aside. These funds often take the form of small grants with high overhead costs, providing modest relief to renters but no structural change. Similarly, the FHLBs provide a small amount of housing-specific lending though the Community Investment Program. Indirect and weakly targeted, it often functions more as a general-purpose funding subsidy than as a disciplined, supply-expanding housing finance tool.

Asking FHLBs to regrant funding would likely replicate the problems with these existing programs. It would not address the need for significant new financing for missing middle developments that the FHLB system’s uniquely flexible funding system is ideal to address.

Second, without direct FHLB funding, the missing middle funding market might not develop at the pace needed. Community banks, CDFIs, and other low-income housing organizations might struggle to identify developers, giving the FHLBs the ability to claim insufficient demand. Robust, direct financing from the FHLBs directly, required by statute, can uniquely provide the significant shift in funding supply that can spur development. Recent efforts in government finance illustrate that organizations like FHLB can be successful in direct lending.⁷

That said, if our goals of reforming the FHLB system to address our nation’s housing shortage are best accomplished through an indirect lending system or a hybrid combination, we would be supportive.

Capital adequacy and loss absorption. Construction lending carries higher credit risk than traditional FHLB advances, requiring larger capital buffers. FHFA would need to establish risk-based capital requirements for the new direct lending activities, calibrated to expected loss rates on well-underwritten multifamily construction portfolios. These costs are likely to be significantly higher than the near-zero losses on traditional advances but well within the system’s earnings and capital capacity. A dedicated loss reserve funded by a percentage of each FHLB’s retained earnings (e.g., an initial 5% set-aside, or approximately $1.5 billion system-wide) would provide additional protection without requiring congressional appropriation.

Legal pathway. Because the institutional structure remains intact—same 11 banks, same cooperative ownership, same consolidated obligations, same FHFA oversight—the reform avoids the most complex legal obstacles that would attend consolidation or dissolution. Member institutions retain their capital stock. The joint liability structure for consolidated obligations continues uninterrupted. No new entity needs to be chartered, capitalized, or staffed from scratch. The primary legal requirements are (i) statutory amendments to the Federal Home Loan Bank Act to redefine permissible activities and lending authorities; (ii) FHFA rulemaking establishing portfolio composition requirements, transition timelines, and enforcement mechanisms; and (iii) conforming amendments to ensure FHLBs can underwrite construction risk.

Political viability. A reform coalition could unite affordable housing advocates demanding more production, fiscal conservatives concerned about the $7 billion annual subsidy, financial stability hawks alarmed by the “lender of next-to-last resort” dynamic exposed in 2023, homebuilders and construction unions who would benefit from expanded below-market construction financing, and supply-side housing reformers in both parties. The bipartisan CURB Act of 2025 (Senators Banks and Cortez Masto) demonstrates that cross-party cooperation on FHLB reform is already possible. Because this is an effort to return FHLBs to their historical mandate rather than closing or replacing them, it stands to gain more widespread support than more radical proposals might.