How the Federal Home Loan Bank System Increases Residential Mortgage Lending

A recent analysis of over two decades of data reveals that the Federal Home Loan Bank (FHLBank) System significantly boosts residential mortgage lending by providing low-cost wholesale liquidity to its member banks and credit unions. The study found that every $100 increase in FHLBank advances relative to assets corresponds to a $38 increase in residential mortgage lending post-2008, a correlation that has strengthened following the financial crisis. This liquidity mechanism is particularly vital for smaller institutions and supports lending to low- and moderate-income households, reinforcing the system's role as critical financial infrastructure for the U.S. housing market.

Established in 1932 as government-sponsored enterprises (GSEs), the FHLBanks operate as member-owned cooperatives designed to provide reliable liquidity to the mortgage market. By raising funds in capital markets at lower costs, the system passes savings to a diverse membership base—including commercial banks, credit unions, and community development financial institutions—through collateralized loans known as advances. While membership was initially restricted to insurance companies and thrifts, 1990s legislation expanded eligibility to any depository institution with at least 10 percent of assets in residential mortgages. Today, the system's role is so pervasive that nearly all depository institutions engaged in mortgage lending are FHLBank members.

Research covering the period from 2002 to 2024 demonstrates a clear correlation between FHLBank advances and increased lending activity, especially in the residential sector. On average, FHLBank advances are associated with an additional $75.6 billion in total lending annually, with approximately $35.2 billion of that dedicated specifically to residential mortgages. The data shows that for every $100 in advances relative to assets, member institutions increase residential mortgage lending by $22. This relationship grew stronger after the 2008 financial crisis; post-2008, a $100 advance is correlated with an additional $38 in residential mortgage lending, even as banks faced stricter capital requirements under Dodd-Frank and Basel III.

The impact of FHLBank liquidity is most pronounced among smaller banks, which often face greater liquidity constraints and have limited access to alternative wholesale funding markets compared to larger peers. For these smaller institutions, a $100 increase in advances relative to assets is associated with a $51 increase in mortgage lending, significantly higher than the $38 average for all banks post-2008. Furthermore, the system plays a key role in supporting affordable housing initiatives. The study estimates that a $100 increase in advances leads to a $7.80 increase in mortgages for low- and moderate-income borrowers, defined as those earning up to 80 percent of the area median income.