How the Federal Housing Finance Agency hurts the poor

They certainly don’t feel at home in the too-big-to-fail banks that dominate the market today. Their loan applications are laughed off, and they can’t afford checking accounts with all the fees and penalties attached these days.

So they’ve turned in large numbers to consumer loan companies and check-cashing services. Only the government is hostile to those too. Through Operation Choke Point, it disrupts their sources of credit and leans on local government to harass them until they go out of business.

Now, government is training its fire on the few sources of mortgage credit available to low-income buyers.

The Federal Housing Finance Agency oversees two government-sponsored enterprises that provide liquidity — backup money, essentially — to banks for mortgage lending: Fannie Mae and Freddie Mac, which were created in the New Deal to provide credit to banks so they could dramatically and quickly increase home ownership rates, and the Federal Home Loan Banking system, which consists of 11 regional banks and their 7,300 member/owner banks located in all 50 states and all U.S. territories.

The agency plans to change the definition of “insurance company” with regard to the Federal Home Loan Banking system to exclude what are known as captive insurance companies — firms set up by mortgage companies and other outfits to, in essence, insure themselves.

These include REITs — Real Estate Investment Trusts — sources of capital, often retirement plans, which must invest at least 75 percent of their funds in real estate. They are a captive audience of sorts and a responsible player, and economists say their membership gives the Federal Home Loan Banks a more diverse, less risky profile.

Unlike Fannie, Freddie or Federal Home Loan Banking system banks, REITs can originate and acquire loans, which means they have an incentive to make and acquire the loans that serve entry-level borrowers.

The Federal Home Loan Banking system always has been the good kid in this family, but the bad kid has always gotten the spoils.

When Fannie and Freddie sunk the mortgage banking system, the Federal Housing Finance Administration rewarded it with multimillion-dollar pay packages for its executives — a move so out of step that legislation to roll it back was supported by veto-proof bipartisan majorities in both houses of Congress.

Even now, Freddie and Fannie remain in receivership and just posted a losing quarter despite the strongest housing market in years. Some in Washington have begun to wonder if Fannie and Freddie are ever going to get it.

Meanwhile, the FHLB system’s focus always has been the people who need help accessing credit markets.

Unlike Fannie and Freddie, the Federal Home Loan Banks have never suffered a credit loss on a loan, a remarkable achievement for an organization created during the Hoover administration.

It receives no taxpayer assistance and pays an assessment of 10 percent of annual earnings per year for affordable housing programs.

That money has gone to help build 22,000 homes through Habitat for Humanity. It has spent $220 million over the last 20 years, which Habitat has leveraged at a nearly 10:1 rate, generating $2.1 billion in investments for local communities.

Yet, it is the Federal Home Loan Bank system that finds itself in regulators’ crosshairs. The change in definition of “insurance company” will mean the system will have to kick out members who have operated efficiently, profitably and ethically for decades, even though its enabling legislation clearly says all “insurance companies” are allowed to join. Other changes — to asset requirements and to still other rules — would force still more members from the ranks of the Federal Home Loan Bank system.

This, in turn, will reverse more than 80 years of practices by an agency that has zero bad loans on its books and is deeply involved in its communities. It will drive business to Fannie and Freddie, which clearly can’t handle it. And, just as the economy tries to avoid recession, it will make it harder for lower- and middle-income borrowers to access mortgage credit.

There is legislation before Congress to call timeout on this rush to regulate. It would require the agency to hold off on imposing these new rules until the Government Accountability Office can inform all stakeholders about their potential impact on the Federal Home Loan Bank system’s members’ ability to provide liquidity to meet local housing needs.

Considering all Congress and regulators have done for the bad kid in this family, this seems like the least it can do for the good kid.

Brian McNicoll is a conservative columnist and freelance writer based in Alexandria, Va. He is a former senior writer for The Heritage Foundation and former director of communications for the House Committee on Oversight and Government Reform. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.