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LIBRARY
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THE
FEDERAL
HOME LOAN BANK
SYSTEM
Edited By
Cecilia M. Gerloff, Acting Director
Office of International Home Finance
The Federal Home Loan Bank Board
1971
Library of Congress Card Catalogue Number:
72-187328
This edition is dedicated to
Robert V. Pollard
and
his erudite writings
Forward
This book has been prepared to meet the need for a
comprehensive, basic account of a system of specialized
housing financial institutions: The Federal Home Loan Bank
System and its affiliated corporations. By issuing it, the Federal Home Loan Banks hope to improve public understanding of the System and provide useful information for their
member savings and loan associations, the millions of savers insured by the Federal Savings and Loan Insurance Corporation, housing occupants who are the members' clientele, educators, students, and investors in the consolidated
obligations of the Federal Home Loan Banks.
This is the story of the origin of the Federal Home Loan
Bank System which is now rounding out forty years of existence. Here is set forth the public purposes and functions of
the System, and its benefits to savers, home buyers, and the
building and real estate industry. It describes the operations
of the Federal Home Loan Banks, under the direction of the
Federal Home Loan Bank Board, indicating how and where
they obtain and use their funds. It further describes how the
Federal Home Loan Banks, together with their member institutions and the Federal Home Loan Mortgage Corporation, are organized to advance savings and improve housing
standards of the nation.
This edition supplants earlier versions issued in 1952
and 1960 with timely data and information.
V
Table Of Contents
Chapter I: Overall View of the System ........................... 1
The Member Institutions ........................................ 2
The Federal Home Loan Banks .................................. 5
The Federal Home Loan Bank Board .......................... 8
Arrangements for Consultations ................................ 10
Functions of the System ............................................. 11
Chapter II: Historical Background ..................................
Early Growth of Savings and Loan Associations .........
Savings Banks and Life Insurance Companies ............
Emerging Needs for a Credit Facility ........................
Meeting the Needs: The 1932 Act ...............................
Meeting the Needs: Action of the
Federal Government ............. '. ................................
The Federal Savings and
Loan Insurance Corporation ................. .................
The Federal Home Loan Mortgage Corporation ..........
Summary
.....................................................................
12
12
14
15
16
17
18
20
21
Chapter III: Sources of Federal Home Loan Bank Funds
Capital Stock .............................................................
Consolidated Obligations ............................................
Marketing of Obligations .............................................
Members' Deposits .....................................................
Retained Earnings ........ ..............................................
23
23
24
27
28
30
Chapter IV: Uses of Federal Home Loan Bank Funds ......
Cash and Investments ............ ....................................
Federal Home Loan Bank Advances ............................
Uses of Advances .....................................................
Importance of Advances ............................................
National Mobilization Disaster Program .................
Foreign Assistance ....................................................
Title I Funds ....................................................................
31
31
33
34
37
38
38
39
vii
Chapter V: Lending Procedures .......................................
Types and Terms of Advances ...................................
Maturities
................................................................
Security ....................................................................
Interest Rate ............................................................
Members' Borrowing Capacity ..................................
General Rules ..............................................................
41
Chapter VI: Management and Supervision .......................
Examination and Supervision of Savings and Loans ..
Examination and Supervision of the Federal
Home Loan Banks .................................................
Board of Directors of the Banks .................................
Officers and Staff of the Banks ..................................
Stockholders' Meetings ...............................................
Services to Members ................................................
50
50
Chapter VII: Conclusion
42
43
44
46
48
49
53
54
55
56
57
.................................................. 59
viii
Chapter I
Overall View of the System
private financial institutions have develOveropedtheinyears,
this country that could specifically facilitate
saving and residential financing. Before 1932, these institutions had to rely almost entirely on their own resources to
satisfy local demands for mortgage funds. They had no access to a reserve of credit whenever supplemental funds
might be needed to meet either withdrawals of savings or
increases in the demand for home mortgage loans.
In 1932, the Congress established the Federal Home
Loan Bank Board and the Federal Home Loan Banks to mitigate these problems. This was the first major action of the
Federal Government to improve and strengthen the services
of savings and loan institutions and to modernize methods
of residential financing.
The Federal Home Loan Bank System consists of three
parts: (1) the member institutions, (2) the 12 Federal Home
Loan Banks, and (3) the Federal Home Loan Bank Board.
The member institutions of the Federal Home Loan Bank
System perform the two vital functions for the general public and the national economy of holding deposits of savers
and making residential mortgages. The Federal Home Loan
Banks serve the member institutions as permanent and dependable sources of supplementary funds. The Federal
Home Loan Bank Board is the federal governmental agency
established to direct and supervise the operations of the
Bank System.
The Member Institutions
Under the Federal Home Loan Bank Act, three kinds of
financial institutions are eligible for membership in the Sys-
1
THE FEDERAL HOME LOAN BANK SYSTEM
tern: savings and loan associations\ savings banks, and
insurance companies. To be eligible for membership, an
institution must make long- term mortgages. It must be duly
organized under the laws of any state 2 or of the United
States and must also be subject to inspection and regulation
under the banking laws, or similar laws, of any state or the
United States. The Federal Home Loan Bank Act states that
no institution is eligible for membership if, in the judgment
of the Board, its financial condition is such that advances
may not safely be made to it, or the character of its management or its residential financing policy is not sound or
economical.
Over the years, the members of the Bank System have
accounted for a large and generally increasing share of the
public's savings in financial institutions. No large urban
community in the United States is without a savings and
loan office. Of the total number of savings and loan associations at the end of 1970, 80 percent were members of the
Bank System. Savings held by the System's members at the
end of 1970 was approximately $155 billion in 47 million
savings accounts. This amount was about one-third of all the
funds in time and savings accounts at associations, commercial banks, and credit unions.
The members of the System have supplied a large and
growing share of the funds for residential financing. Member institutions held over 42 per cent of the dollar volume
of all residential mortgage loans outstanding at year-end
1970, and over 45 per cent of all home mortgage loans. This
is an increase from 35 per cent respectively a decade earlier. The mortgage loans which were held by member institutions at the close of 1970 totaled about $156 million. Of
this, about 92 percent was on residential properties, with
82 percent on 1-to-4 family homes.
lThe Federal Home Loan Bank Act uses the term "building and loan association", "homestead association", and "cooperative banks" in addition
to the term "savings and loan association".
2By definition the Federal Home Loan Bank Act includes as "states" the
District of Columbia, Guam, Puerto Rico, and the Virgin Islands of the
United States.
2
OVERALL VIEW OF THE SYSTEM
TABLE 1
NUMBER OF ASSETS ($ MILLIONS)
OF MEMBER INSTITUTIONS
1940
1950
1960
1970
Total number of members
Assets
3,864
$5,035
3,930
$16,245
4,716
$69,945
4,649
$183,691
Total number of savings
and loan associations
Assets
3,824
$4,417
3,894
$15,516
4,694
$69,525
4,601
$171,986
Total number of federally
chartered assoc.
Assets
1,437
$1,871
1,526
$ 8,457
1,873
$38,511
2,067
$ 96,264
Total number of state
chartered, FSLIC-insured
associations
Assets
840
$1,056
1,332
$ 5,224
2,225
$28,919
2,298
$ 74,274
Total number of state
chartered, non-FSLIC
insured associations
Assets
1,547
$1,490
1,036
$ 1,835
596
$ 2,095
236
$ 1,448
Total number of mutual
savings banks
Assets
11
$ 212
$
29
640
$
22
409
47
$ 11,000
Total number of
insurance companies
Assets
29
$ 406
$
7
89
$
3
0
$
1
26
THE FEDERAL HOME LOAN BANK SYSTEM
Thus, the members' relative importance in the market
for home mortgage loans is even greater than their relative
importance as savings media. This is explained by the fact
that most of the members are savings and loan associations
which specialize in lending on homes, while other types of
savings institutions engage in other investments as well.
The Federal Home Loan Banks
The 12 Federal Home Loan Banks are financial institutions that operate in a geographic district which is defined
by the Federal Home Loan Bank Board. These districts together cover all of the United States, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands.
CHART 1
NUMBER AND ASSETS OF
FEDERAL HOME LOAN BANKS' MEMBERS
190
Billions of Dollars
Thousands 10
........
...
...
...
...
.,it'❖""
170
150
130
NUMBER
(Right Scale)~
110
90
-
.:Ji::r ASSETS
50
10
8
7
6
5
ro
30
9
.::i=::1'". (Left Scale)
•❖ •:•:• :❖• :•:~: '.:❖•❖;•·❖-·•'.•'.•'.•.• -· · ·---:: •• ::::·
4
3
2
0
1932
1940
1950
Years
4
1960
1970
OVERALL VIEW OF THE SYSTEM
The areas served by each of the 12 Banks are as follows:
Region 1: Federal Home Loan Bank of Boston
Connecticut, Maine, Massachusetts, New Hampshire,
Rhode Island, Vermont
Region 2: Federal Home Loan Bank of New York
New Jersey, New York, Perto Rico, Virgin Islands
Region 3: Federal Home Loan Bank of Pittsburgh
Delaware, Pennsylvania, West Virginia
Region 4: Federal Home Loan Bank of Greensboro
Alabama, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia
Region 5: Federal Home Loan Bank of Cincinnati
Kentucky, Ohio, Tennessee
Region 6: Federal Home Loan Bank of Indianapolis
Indiana, Michigan
Region 7: Federal Home Loan Bank of Chicago
Illinois, Wisconsin
Region 8: Federal Home Loan Bank of Des Moines
Iowa, Minnesota, Missouri, North Dakota, South Dakota
Region 9: Federal Home Loan Bank of Little Rock
Arkansas, Louisiana, Mississippi, New Mexico, Texas
Region 10: Federal Home Loan Bank of Topeka
Colorado, Kansas, Nebraska, Oklahoma
Region 11: Federal Home Loan Bank of San Francisco
Arizona, California, Nevada
Region 12: Federal Home Loan Bank of Seattle
Alaska, Hawaii, Idaho, Montana, Nevada, Oregon, Utah,
Washington, Wyoming, Guam
The Federal Home Loan Banks are corporations established by the Federal Government. Their capital is owned
entirely by their member institutions. Although it is not the
main purpose of the Banks to make a profit, dividends on
capital stock have been paid consistently out of earnings. In
other words, the Banks are wholly self-supporting.
The main function of the Banks is to supply their member institutions with credit to meet unexpected savings with-
5
Seattle
FEDERAL HOME LOAN BANK DISTRICTS
8
•
Chicago
•
7
Son Francisco
0)
11
10
Topeka •
--i
::c
6
~es
Moines
•
Boston
Indianapolis
12
tll
'-r:l
tll
3
e......New York
\ ~
0
tll
::c,
>
I:"'
P;ttsburgh
Cincinnati
::c
0
s::
tll
I:"'
0
>
•
Little Rock
9
"'Greensboro
z
C,
z>
,0:
r;/)
-<
r;/)
--i
tll
s::
Dot indicotes location of each regional Bonk.
Puerto Rico and the Virgin Islands ore in District 2:
Alaska, Hawaii and Guam ore in District 1 2.
Source: Federal Home Loan Bank Board.
OVERALL VIEW OF THE SYSTEM
CHART 2
CONSOLIDATED ASSETS OF THE
FEDERAL HOME LOAN BANKS
15
Billions of Dollars
(14.7)
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
-===,.___.,____.___.___,.__,.__.__-'--'--'----'----'--'--_._---'----'----'---'----'
1932
1940
1950
1960
1970
Years
drawals from member institutions and to increase the supply of mortgage funds. Ancillary services of the Banks include providing member institutions with a facility for
depositing excess funds in time and demand deposit accounts.
The Federal Home Loan Banks obtain funds for their
operations from three main sources. First is from the sale
of capital stock to members, augmented over the years by
retained earnings of the Banks. Second, the Banks receive
deposits from their member institutions. Third, and in many
ways the most important source of funds, is from the sale of
the Banks' consolidated obligations in the capital market.
7
THE FEDERAL HOME LOAN BANK SYSTEM
At the end of 1970, the Bank's capital, composed of paid-instock and retained earnings, stood at $1.87 billion. Members' deposits approximated $2.3 billion. Consolidated obligations outstanding totaled nearly $10.2 billion.
At the end of 1970, the total assets of the Federal Home
Loan Banks on a consolidated basis totaled $14.7 billion. Of
this $10.6 billion was invested in advances to members and
$4.0 billion in cash and government securities. A large portion of the assets is at all times held in short term obligations of the U.S. Treasury so the Banks can promptly meet
the credit needs of its members.
The Federal Home Loan Bank Board
The original Federal Home Loan Bank Act established
a Federal Home Loan Bank Board of five members appointed by the President with the advice and consent of the
Senate. Not more than three of the members were to be of
the same political party. This Board was to supervise the
Federal Home Loan Banks and to perform the other f unctions placed in it by that act.
In the next year, with the enactment of the Home Owners' Loan Act of 1933, Congress placed in the same board
the function of chartering and regulating Federal savings
and loan associations. It also provided that the members of
that board should constitute the board of directors of the
Home Owners' Loan Corporation, which was established
pursuant to the act as an emergency agency for the refinancing of home mortgages. This Corporation has long
since been liquidated and dissolved. In 1934, the Federal
Savings and Loan Insurance Corporation was created by
Title IV of the National Housing Act to provide insurance
of accounts in savings and loan associations. Congress provided that the members of the Federal Home Loan Bank
Board should constitute its board of trustees.
With Executive reorganization, in 1947 these three
boards were abolished and their functions transferred to a
Home Loan Bank Board composed of three members ap-
8
OVERALL VIEW OF THE SYSTEM
pointed by the President with the advice and consent of the
Senate. Not more than two were to be members of the same
political party. This reorganization plan made the new
Board a constituent agency of the Housing and Home Finance. Agency established by the plan. In 1955 an amendment to the Federal Home Loan Bank Act provided that the
Board should be an independent agency in the Executive
Branch of the Government and changed its name to the Federal Home Loan Bank Board. This consolidation of functions relating to savings institutions and residential financing in the present Federal Home Loan Bank Board has
facilitated the effective, economical performance of those
functions.
The expenses of the Board are defrayed in a self-supporting way, mainly through assessments on the Federal
Home Loan Banks, examination fees paid by the institutions
examined, and payments made to the Board by the Federal
Savings and Loan Insurance Corporation. There are, however, annual limitations on the amount of certain expenses
of the Board and the Insurance Corporation which are imposed by the Congress.
Even though the Board is an executive agency, it reports
to Congress on the operations of the Federal Home Loan
Bank System. The Board assists both the Congress and the
Executive Banch of the Government in legislative matters
pertaining to savings institutions and residential finance. It
further co-ordinates with other government departments
and agencies in the development of policies affecting the activities under its jurisdiction. It also prepares statistical reports and analyses of the operations under the Board's
supervision and of general developments in the savings and
residential financing field.
Arrangements For Consultation
The Federal Home Loan Bank Act provides for a statutory advisory body to the Board known as the Federal Savings and Loan Advisory Council. The Council is composed
9
THE FEDERAL HOME LOAN BANK SYSTEM
of 18 members. The board of directors of each of the 12
Banks elects one member. The remaining six are appointed
annually by the Federal Home Loan Bank Board. The statute provides that this group shall meet in Washington, D.C.,
at least twice a year and more often, if requested by the
Board. It has statutory power to confer with the Board on
general business conditions and on special conditions affecting the Banks and their members and the Federal Savings and Loan Insurance Corporation. It also can request
information and make recommendations with respect to
matters within the jurisdiction of the Board.
A Bank Presidents' Conference meets regularly in
Washington, with each Bank represented by its president or
on occasion by some other officer of the Bank. It provides
an organized medium for review of matters concerning the
Banks and their members, and the Board's activities. It further assures policy coordination that is consistent with the
decentralized character of the Federal Home Loan Bank
System. Depending on conditions, subject items may include mortgage market policy, supervisory activities, interest and dividend policies of the Banks, developments in the
capital market which bear on the issuance of consolidated
obligations of the Banks, proposed legislation, and similar
matters. Co-ordination for such matters is provided by the
Office of Bank Management in Washington.
Still another form of consultation was initiated in 1959
when the Federal Home Loan Bank Board arranged for its
first joint meeting with the chairman of the boards of directors of the 12 Banks. All these arrangements, together with
the statistical and examination reports prepared by the
member institutions, the Banks, and the Bank Board, serve
the vital purpose of providing the economic intelligence required for effective operation of the Bank System.
Functions of the System
The FHLB System operates on the principle that savings
by the public are the basic source of funds for the building
and purchasing of housing. H therefore directs its activities
10
OVERALL VIEW OF THE SYSTEM
toward strengthening the capacity of its member institutions
to serve the public both as savings media and mortgage
lenders. Most of its efforts are concentrated in cultivating
the habit of saving by providing guidelines and facilities for
the sound and efficient use of funds.
During periods of high levels of housing activity, the
coinciding flow of savings may not be sufficient to meet the
mortgage demand. The Bank System smooths this flow of
credit into the home building and purchasing areas by providing supplemental funds, not only for meeting a seasonal
demand, but also for meeting the demands of rapidly growing communities.
For many reasons, the demand for mortgage loans is
not often matched geographically with the amount of savings available for mortgage investment. The Bank System,
therefore, facilitates the flow of funds for home mortgage
investment from the capital surplus areas to the capital
deficit areas. This is done in part through issuing consolidated obligations in the national capital markets. The bulk
of such instruments is likely to be sold in the East where
these markets are concentrated even though a substantial
portion of the proceeds is apt to be used by member institutions in the West or South where local savings are insufficient to meet the demand for capital. Thus, through these
instruments, investors who prefer to invest in either large
blocks of high-grade marketable securities, rather than in
individual mortgages or savings accounts, or those who
merely wish to diversify their portfolio, can more easily
participate in the mortgage market.
11
Chapter II
Historical Background
A glimpse into the history of savings and residential financing institutions in this country will lend perspective to the origin of the Federal Home Loan Bank System,
its purposes and its growth.
The story begins with the early development of towns
and cities as the United States changed progressively from
an agricultural to an urbanized nation. In the first few decades of the 19th century. when increasing numbers of people flocked into urban settlements, they needed credit to
buy homes. At the same time, they needed facilities where
they could accumulate small savings with safety and profit.
At this time, mortgage loans had traditionally been
made by individuals. On the other side of the market, commercial banks did not cater to small savers since there were
higher profits to be made dealing in trade and agriculture.
Thus, the three types of financial intermediaries which are
eligible for membership in the Federal Home Loan Bank
System developed in response to public needs. The first
mutual savings banks were established in 1816 and the first
savings and loan association, in 1831. In the same period,
life insurance companies. dating back to Colonial America
grew in number and assets. While their purpose and mode
of operation differ materially, the three types of institutions
have had common characteristics of savings media and
mortgage lenders.
Early Growth of Savings and Loan Associations
It is believed that the first savings and loan association
in the United States was the Oxford Provident Building Association of Philadelphia County. It was founded as an un12
HISTORICAL BACKGROUND
incorporated association at Frankford, Pennsylvania, in
1831. Its founders had modeled it after the building societies
which had already found a foothold in England.
Additional savings and loan associations were founded
in rapid succession in Philadelphia and other cities under
various names, as building associations, loan or land associations, cooperative banks, building and loan associations,
and homestead associations. In 1893, a survey by the United
States Commissioner of Labor showed not less than 5,838
institutions with nearly 1,750,000 shareholders and more
than 450,000 borrowing shareholders. At this time their
assets totaled about $529 million.
The temporary self-help club that was exemplified by
the Oxford Provident Building Association eventually gave
way to the concept of a permanent financial institution. A
clearer separation evolved between the mortgage lending
activity and the acceptance of savings, whether the transactions were with prospective home purchasers or not. In
response to this unrestrained growth, increasing numbers
of states enacted laws for chartering and supervising savings
and loan associations.
While plans of operation matured, certain basic f ealures remained constant. One was the use of long-term,
fully amortized mortgages. Savings and loan associations
pioneered this type of mortgage long before it was accepted
by other kinds of lenders. Another outstanding feature was
the mutual ownership of each institution by its shareholders, even though stock savings and loan associations
had begun to develop. Still another was the cultivation of
small long-term savings. Even today, the average home
mortgage loan made by a savings and loan association requires funds from four to five average savings accounts.
Despite occasional growing pains, savings and loan
associations have enjoyed an almost continuous increase in
assets. By the end of World War I, when legislation for a
Federal Home Loan Bank System was first considered,
7,500 associations with close to $1.9 billion in assets were
estimated to be in operation. By 1932, when such legislation
13
THE FEDERAL HOME LOAN BANK SYSTEM
came to fruition, their estimated number had grown to
11,442 and their assets to $8.4 billion.
Savings Banks and Life Insurance Companies
The first two mutual savings banks to begin operations
in this country opened their doors in Philadelphia and Boston in 1816. Since then Mutual Savings Banks have remained
concentrated in the Northeast. They were the forerunners
of a long tradition of safety for small savings and of home
financing later in the century. In contrast to savings and
loan associations which have always concentrated on home
financing, savings banks have invested in mortgages on all
types of real estate, as well as in corporate and government
bonds. Thus, the share of real estate loans in the total assets
of savings banks has materially changed from time to time,
yet has always been substantial.
Life insurance companies from the outset have also
been mixed-portfolio institutions investing in many types of
securities, as well as mortgages on all kinds of property.
Their interest in home financing is a more recent phenomenon. In contrast to the locally orientated savings and loan
associations and savings banks that have a limited geographic coverage, most of the large life insurance companies have made mortgage loans throughout the nation. As in
the case of savings banks, their participation in home financing has varied from time to time, depending upon
yields on alternative investments and the desire for a "balanced" investment portfolio.
Thus, these three types of institutions have some common purposes, but their investment powers and preferences
differ substantially. These differences, among other things,
influenced the degree of interest of savings and loan associations, mutual savings banks, and life insurance companies in the legislative proposals which led to the enactment
of the Federal Home Loan Bank Act.
14
HISTORICAL BACKGROUND
Emerging Needs for a Central Credit Facility
While the financial system rapidly adapted itself to the
growing demand for home mortgage funds, some obvious
problems were emerging. The means for transferring funds
for home financing from capital-deficit areas were highly
inadequate. There was no institutional credit facility for enabling mortgage lending institutions to meet seasonal or
other anticipated changes in mortgage loan demands or in
savings withdrawals. Local institutions did not have access
to the national capital markets when their service to the
community required additional funds to supplement available local savings. Occasional borrowings Iha I the savings
and loan associations arranged from the commercial banks
did little to ease these problems.
The problems of this kind were not limited to home
financing institutions. Similar difficulties in commercial
banking led to the establishment of the Federal Reserve
System in 1913, although this innovation had many other
purposes as well. It was not until the deficiencies in the
agricultural credit sector prompted legislation in 1916, that
the Federal Land Bank System for farm mortgage lending
was created.
In 1914 in New York, a statewide credit facility for
savings and loan associations was created. First called the
Land Bank of the State of New York, and later the Savings
and Loan Bank, it ceased operation in the late 1960's. Its
main purpose was to issue debentures secured by first mortgages that were pledged by its members. Its capital stock
was subscribed by the member associations. Similar attempts were made between 1914 and 1932 in a few other
states, but most of the institutions never reached operational status or were liquidated.
The first proposals for a nationwide facility to enable
savings and loan associations to use their mortgage holdings as a basis for credit were made in 1918. The housing
shortage immediately after World War I was largely attributed to the lack of funds for housing in relation to the demand. Also, after the war the Department of Labor was
15
----
THE FEDERAL HOME LOAN BANK SYSTEM
concerned with stimulating construction activity and employment in the building trades. Since these activities depended on the supply of mortgage loans, the government
turned to savings and loan associations to help solve this
problem. Bills were introduced in 1919 in both the House
and the Senate. Hearings were held in that year before the
Senate Committee on Banking and Currency and a subcommittee of the corresponding House committee. However, no
legislation was enacted.
Meeting the Needs: The 1932 Act
The prosperity of the twenties obscured the basic problems in home finance. However, in the early 1930's, the
deepening depression brought them into the limelight.
In 1931 President Hoover called the President's Conference on Home Building and Home Ownership in an effort
to find solutions for these problems. On November 13 of
that year he stated that he would propose to Congress the
establishment of a system of home loan discount banks.
These banks would relieve the financial strains on sound
building and loan associations and strengthen such institutions in the promotion of home ownership.
The Conference, on December 4, 1931, adopted a resolution endorsing the plan of the President. Four days later,
in his message to Congress on the state of the Union, the
President recommended the establishment of such a system.
It was called the necessary companion in our financial
structure of the Federal reserve banks and our Federal
land banks'.
Bills were introduced in both Houses, and hearings
were held by. subcommittees of the respective Committees
on Banking a:nd Currency. Witnesses representing the savings and loan industry, as well as the Secretary of Commerce and other official and private witnesses, strongly
urged the enactment of legislation to establish a system of
Federal Home Loan Banks. Strenuous objections were presented by opposing witnesses, including witnesses appear-
16
HISTORICAL BACKGROUND
ing for various life insurance companies. Statements submitted on behalf of the national organization of mutual
savings banks took the position that those banks had no
need for relief through such.legislation.
After extensive consideration on the floors of the
House and Senate, the Federal Home Loan Bank Act became law by the signature of the President on July 22, 1932.
Meeting the Needs: Action of the Federal Government
Within two years after the Federal Home Loan Bank
System was created, further legislative steps were taken to
bolster the nation's residential financing structure. As part
of the Home Owners' Loan Act of 1933, Congress made provision for the chartering of Federal savings and loan associations by the Federal Home Loan Bank Board. The basic
purpose was to meet the need in many communities
throughout the country for more adequate thrift and home
financing facilities.
Federal mutual savings and loan associations could be
established through the granting of new charters to local
groups organizing a mutual institution of this type. They
could also be established by converting existing institutions
from state to federal charter. Upon its incorporation as a
federal association, each savings and loan becomes a Federal Home Loan Bank member. Federal savings and loan
associations are an exceedingly important segment of the
Bank System's membership. At the end of 1970, 2,067 of the
4,609 member associations were of this type. Further, these
federally chartered associations held 56 per cent of the
$172 billion of assets held by all member institutions.
In 1933, 40 per cent of the $20 billion home mortgage
debt was in default. The monthly rate of foreclosures was
approximately 26,000-an average of 1,000 per day. In the
face of such crises, the Home Owners' Loan Corporation
was created. During the early 1930's, investment by ...Bd.
J @ . ~ the Home Owners' Loan Corporation were authorized to assist in the development of the Federal Home Loan
Bank System.
17
THE FEDERAL HOME LOAN BANK SYSTEM
Over its three year lending life, June 1933 through June
1936, the Home Owners' Loan Corporation refinanced $2.75
billion worth of home mortgages. Ultimately, it processed
over 1.8 million loans amounting to $6.2 billion. This was
quite impressive in that billion dollar budgets were not
common place during this period.
The operation of this program was that lenders turned
over delinquent mortgages in return for bonds of the Home
Owners' Loan Corporation. The loans were then refinanced
by the Corporation on more liberal terms. Thus, the borrowers debt was direct to the government. Under this process, savings and loans transferred 13 per cent of their total
mortgage portfolio to the Home Owners' Loan Corporation.
The $770 million of Home Owners' Loan Corporation bonds
they received in exchange was quite a boost to their financial situation.
The remarkable characteristic of the Home Owners'
Loan Corporation was that its enacting legislation stated a
procedure for automatic liquidation. The termination of its
activity was on schedule as its job was completed. In the
final analysis there was no loss to the tax payer. It had
taken advantage of subsidies in the use of government credit, but had returned a small profit to the Treasury. The liquidation of the Home Owners Loan Corporation was speeded
up by the repurchase of its remaining mortgages in large
blocks by savings and loan associations and other lenders
in the late 1940's and early 1950's. In 1951 it officially went
out of business.
Federal Savings and Loan Insurance Corporation
In 1934 in the National Housing Act, Congress established the Federal Savings and Loan Insurance Corporation.
The purpose was to insure the safety of savings placed with
savings and loan associa lions. This action followed the creation of the Federal Deposit Isurance Corporation for
similar protection of bank deposits. Presently, the Federal
Savings and Loan Isurance Corporation is under the direction of the Federal Home Loan Bank Board.
18
HISTORICAL BACKGROUND
The statute made insurance mandatory for Federal savings and loan associations and optional for state-chartered
institutions. The maximum limit on insurance for any one
saver or investor in any given insured institution was originally fixed at $5,000. This figure was increased to $10,000 in
1950. Later increases to $15,000 and to $20,000 were made in
1966 and 1969, respectively.
The capital stock of the Federal Savings and Loan Insurance Corporation, in the amount of $100 million, was
originally subscribed by the Home Owners Loan Corporation, whose capital stock was wholly owned by the United
States. In 1950, legislation was enacted by which the capital
stock of the Federal Savings and Loan Insurance Corporation, which meanwhile had been transferred to the Secretary of the Treasury, was to be retired through annual
(payment) of an amount equal to 50 percent of its net income for the fiscal year. There were further provisions for
the payment of annual returns on the outstanding amount of
the stock. Retirement of the stock was completed in 1958.
Although the Federal Savings and Loan Insurance Corporation is authorized to borrow from the Treasury in
amounts not exceeding $750 million outstanding at any
one time, the Corporation has never utilized this power.
The premiums collected from insured associations and
earnings on its investments in U.S. Government securities
have enabled the Federal Savings and Loan Insurance Corporation to meet all of its expenses for services rendered
by the Federal Home Loan Bank Board and for building a
reserve for future contingencies. At the end of 1970, the
Corporation's statutory reserve and unallocated income
totaled $2.9 billion.
Seventy-six per cent of all operating savings associations and ninety-five per cent of savings and loan members
of the Federal Home Loan Bank System are insured by the
FSLIC. At the close of 1970, savings and loan associations
with $170 billion in assets were covered by this protection.
More important, the savings deposits in these institutions
totaled nearly $142 billion.
From the beginning of operations to the end of 1960.
19
THE FEDERAL HOME LOAN BANK SYSTEM
the Corporation has had 40 cases in which it was necessary
to give financial assistance in order to protect the interests
of insured savers. Between 1960 and 1970, 51 such cases
emerged. In its almost 36 years of operation, the Corporation has had a total of 12 insurance payment cases and only
five since 1941-one in 1965, two in 1966, and two in 1968.
The Federal Home Loan Mortgage Corporation
Understanding the needs of both the housing market
and the capital markets, the Congress in 1970 passed the
Emergency Home Finance Act and created the Federal
Home Loan Mortgage Corporation. This entity has the power to buy whole mortgages and participations in mortgages.
These purchases can be from members of the Federal Home
Loan Bank System and from financial institutions whose
deposits or accounts are guaranteed or insured by an agency of the Federal Government. The capital stock of the Federal Home Loan Mortgage Corporation of $100 million was
acquired by the twelve Federal Home Loan Banks. This is
non-voting stock with a no-call provision.
Even though the Federal Home Loan Mortgage Corporation is a private corporation, it is closely associated
with the Federal Home Loan Bank System. The three directors of the Federal Home Loan Bank Board also serve as
the directors of the Federal Home Loan Mortgage Corporation. It works very closely with the 12 regional Federal
Home Loan Banks. In almost all cases, the regional offices
of the Federal Home Loan Mortgage Corporation are located in the same building as the Bank.
The Federal Home Loan Mortgage Corporation is an
instrument that attracts new funds for housing. These new
funds come from large institutional investors as pension
funds, insurance companies, and trust departments of
banks. The programs that the Federal Home Loan Mortgage
Corporation offers will reduce aversions to investing in
mortgages because of the involvement with the general
processing requirements.
20
HISTORICAL BACKGROUND
The Federal Home Loan Mortgage Corporation has two
operational programs to buy mortgages. One is to buy, usually with advance commitments, mortgages insured by the
Federal Housing Administration or guaranteed by the Veterans Administration. In the other, the Conventional Loan
Participation Program, the Federal Home Loan Mortgage
Corporation may acquire up to 85 per cent interest in a
group of loans at a specified rate. This specified rate of the
participation is usually less than the average yield of the
underlying loan.
It is important to note that the Federal Home Loan
Mortgage Corporation has a unique characteristic in that it
can borrow from the Federal Home Loan Bank System
whose net worth is about $2.5 billion. Additionally the Federal Home Loan Bank System has an emergency line of
credit with the Treasury Department for an additional $4
billion. Accordingly, the financial bases can be described
as one in excess of $6 billion.
Summary
Through the Federal Home Loan Bank System-the
Federal Home Loan Banks, the member institutions, the
Federal Savings and Loan Insurance Corporation, and the
Federal Home Loan Mortgage Corporation-the structure of
savings and residential financing facilities in this country
has been greatly strengthened. Savers now enjoy protection
directly through the insurance of their accounts and indirectly through more improved operating principles and
practices of large numbers of local institutions. On the other
hand, home purchasers and builders now have available a
vast network of local lenders for sound and economical
residential financing.
By placing the responsibility for administering the entire Bank System in the Federal Home Loan Bank Board,
the Congress has. created an agency with capabilities of
attaining the national objectives of fostering soundly financed housing and of promoting savings by the public-the
21
THE FEDERAL HOME LOAN BANK SYSTEM
ultimate source of residential financing. The progress in
attaining these goals is illustrated in the fact that savings at
the System's member institutions has risen from $7 billion
at the end of World War II to nearly $156 billion at the end
of 1970, while the mortgage portfolio increased from $5
billion to more than $155 billion over the same period.
22
Chapter III
Sources of Federal
Home Loan Bank Funds
Federal Home Loan Banks obtain funds from three
T heprincipal
sources. They issue capital stock to members, sell their own obligations in the capital markets, and
accept deposits from members.
Capital Stock
The capital stock of the Banks serves several purposes.
It supplies funds for making advances to members or for
obtaining other earning assets. To the extent that it is used
for advances to members, the capital stock outstanding redistributes funds within each Bank district. More importantly though, capital stock supports and enhances the credit
standing of Bank obligations in the money and capital
markets.
In the initial years of the Federal Home Loan Bank
System, nearly $125 million of capital stock was provided
by the Federal Government. However, by the end of 1948,
member owned stock exceeded the Federal investment. At
that time, the Banks began to retire the Treasury-held stock
as required by law. In July of 1951, the members owned all
of the capital stock.
Net purchases of capital stock by member institutions
were a major source of system funds in the 1950's. But in
later years there has been a trend towards a decrease in
their importance. This is mainly due to a reduction in 1962
in the stock ownership requirements for members from 2
percent to 1 percent of residential mortgage holdings.
Each member institution must purchase enough Bank
stock each year to bring holdings equal to 1 per cent of their
23
THE FEDERAL HOME LOAN BANK SYSTEM
CHART 3
CAPITAL STOCK OF THE
FEDERAL HOME LOAN BANKS
,
Millions of Dollars
1 600
1,400
1,200
1,000
800
600
400
200
o ___,..._.._~--L-_,__............'---'-__.__
1932
1940
1950
I
_,__.L.....J'---'--......--L--'---'--''
1960
1970
Years
residential mortgage portfolio at the end of the preceding
year. The amount of stock held by a member institution
imposes some limits on its capacity to borrow from its Federal Home Loan Bank. This is so because regulations stipulate that the indebtedness of a member to its District Bank
can not exceed 12 times its total holdings of stock. Members may purchase additional stock should their needs for
funds be greater. This has been done, particularly in 1966
and 1969. A considerable amount of stock purchases that
were made for this purpose in 1966 were retired in 1967
when borrowings were repaid and the extra stock holdings
became unnecessary for borrowing.
Consolidated Obligations
As originally legislated, each Federal Home Loan Bank
was given the power to issue bonds and debentures. These
24
SOURCES OF FEDERAL HOME LOAN BANK FUNDS
obligations of the Federal Home Loan Banks are neither obligations of the United States; nor are they guaranteed by
the United States. These instruments were to be the joint
and several liabilities of all the Banks. They were secured
by obligations of the borrowing members to the issuing
Bank and the home mortgages securing those obligations.
No bonds or debentures were issued under those provisions. In 1934 these provisions were amended to provide
that each Bank shall have the power to borrow, to give
security, and to issue debentures, bonds, or other obligations on such terms and conditions as the Board may approve. Further, the revision provided that the Board may
issue consolidated Federal Home Loan Bank debentures
and bonds. These consolidated financial instruments were
to be the joint and several obligations of all the Banks.
Consolidated debentures may be issued only under circumstances and within limitations prescribed in the
amended act. No debentures are outstanding under the act.
In order to refund all outstanding consolidated debentures
issued under the original section of the act, the Board may
issue consolidated Federal Home Loan Bank bonds. Consolidated obligations issued prior to the first issue of consolidated bonds in 1946 were consolidated debentures. Beginning with that issue, all have been consolidated bonds.
Obligations of the Federal Home Loan Banks are lawful investments and may be accepted as security for all
fiduciary, trust, and public funds of which the investment
or deposit is under the authority or control of the United
States. In many states, obligations of the Banks are legal
investments for savings banks, insurance companies, and
other financial institutions, and for executors, administrators, and other fiduciaries.
Under the existing practice, consolidated Federal Home
Loan Bank bonds are issued on an unsecured rather than a
secured basis. But, the regulations contain protective measures providing that the Federal Home Loan Bank Board
shall not issue such bonds in excess of 12 times the total
paid-in capital stock and the reserves of all the Banks. The
Banks must at all times maintain assets of the following
25
THE FEDERAL HOME LOAN BANK SYSTEM
types, free from any lien or pledge, in a total amount at
least equal to the amount of consolidated bonds outstanding: (a) cash, (b) obligations of or obligations guaranteed by
the United States, (c) secured advances, and (d) mortgages
as to which one or more of the Banks have any guaranty or
insurance, or commitment thereon, by the United States or
any agency thereof. Another measure which has never been
utilized is that the Secretary of the Treasury may purchase
the consolidated obligations of the Banks up to a statuatory
limit of $4 billion . With such safeguards, the securities
enjoy a highly favorable regard in the security markets.
Marketing
of Obligations
The Federal Home Loan Bank Board acts as co-ordinator and issues the consolidated obligations. Whenever re-
11
Billions of Dollars
10
9
8
7
6
5
4
3
2
1
0
1932
1940
1950
Years
26
1960
1970
SOURCES OF FEDERAL HOME LOAN BANK FUNDS
ports or other contacts between the Board and the Banks
indicate that a new issue is necessary, each Bank is canvassed to obtain the amount of its participation. The Board,
in conjunction with the U.S. Treasury Department, then
determines the appropriate maturity, rate, and other terms
of the issue. Until 1970, when 3 issues were marketed
through an underwriting group, all consolidated obligations
had been sold through the Fiscal Agent of the Banks with
the assistance of a nationwide selling group of security
dealers and dealer banks.
Federal Home Loan Bank obligations enjoy wide market acceptance. This is evidenced by overscriptions on offerings and a cost of borrowing which is generally only
slightly higher than that which is applicable to comparable
Treasury issues. At the end of 1970, $10.2 billion of obligations were outstanding, consisting of 28 separate issues.
Major institutional holders were commercial banks, savings
and loan associations, state and local governments, and
mutual savings banks.
Consolidated obligations are issued in a variety of denominations to meet the needs of different investors. Currently, the smallest denomination is $10,000, having been
increased from $5,000 in 1970. Normally, consolidated obligations are sold to the general public. On occasion, though,
they have been sold directly to government investment
accounts in order to facilitate the debt management operations of the U.S. Treasury.
While many holders of obligations also acquire and
hold mortgage loans, it is unlikely that the funds invested in
consolidated obligations represent a reduction in the supply of funds available for mortgage investment. This is the
case because of the short- and intermediate-term of the System's obligations, which do make them a better substitute
for their long-term investments in accumulating a diversified portfolio.
Although the Banks are privately owned institutions,
they are subject to the Government Corporation Control
Act. This requires the Secretary of the Treasury to approve ,
bonds, notes, debentures, and similar obligations that are
27
THE FEDERAL HOME LOAN BANK SYSTEM
issued by any wholly owned or mixed ownership Government corporation and offered to the public. Thus, the Board
must inform the Secretary of the Treasury of each issue
for the purpose of obtaining his approval of the amount,
terms, and timing of the issue.
An earlier procedure for co-ordinating purchases and
sales of Bank securities with operations of the Federal Reserve Open Market Committee was formalized indirectly by
the Government Corporation Control Act of 1945. Since
1966, the Open Market Committee has bought and sold securities that are issued or fully guaranteed as to principal
and interest by any agency of the U.S. Government. The
purpose of this was to facilitate better market acceptability
of Federal agencies' obligations and to provide a potential
backstop for financing needs. Actual use of this authority
by the Federal Reserve has remained very limited, but it
does have considerable potential use.
Member Deposits
Deposits of the members of the Federal Home Loan
Banks provide the third major source of funds. The Banks
accept both demand and time deposits. The time deposits
earn interest at a rate set by each Bank according to regional requirements for funds, but within the limits prescribed by the Federal Home Loan Bank Board. The actual
rates paid have varied widely in recent years. Such reflects
fluctuations in short term market interest rates on instruments that are alternative liquid investments for members.
In mid-1967, for example, when short-term· interest rates
were relatively low, the rates paid on time deposits by the
various Banks ranged from 3.50 - 4.00 per cent. In contrast,
in the spring of 1970, when market rates were high, the rates
paid by the Banks ranged between 6.50 and 7.00 per cent.
Since the early fifties, the amount of member deposits
at the Federal Home Loan Banks has fluctuated widely,
rising during periods of monetary ease and declining during during periods of restraint. For example, deposits rose
28
SOURCES OF FEDERAL HOME LOAN BANK FUNDS
from less than $.8 billion at the end of February 1970, to a
record $2.3 billion at yearen.d 1970, with time deposits alone
totaling $2.0 billion at the later date.
Members are not required to maintain cash balances
with the Federal Home Loan Banks. However, the time deposit facilities of the Banks enable members with excess
funds to earn interest, hold liquid assets, and place funds
in the System for redistribution through advances. Only
25 per cent of all member deposits may be used by the
Banks for making advances. This means that 75 per cent of
the deposits must be held in a liquidity reserve. Mainly,
since time deposits with the Banks earn interest, the volume
of this type of member deposits has exceeded the amount of
demand deposits placed with the Banks.
The Federal Home Loan Bank deposits can be used by
members to meet the liquidity requirements established by
CHART 5
FEDERAL HOME LOAN BANKS'
MEMBERS' DEPOSITS
Millions of Dollars
,
2 200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
o l!!!!!!!!i-!!l!!!!!l~!!!i!!!~_j_J_J_J__j__LJ_l_Ll_J
1932
1940
1950
Years
29
1960
1970
THE FEDERAL HOME LOAN BANK SYSTEM
the Board for the member institutions. Under existing legislation,· the Bank Board sets minimum holdings of assets
suitable for liquidity purposes within a range of 4 - 10 per
cent of savings and short-term borrowings of individual
members. This is subject to a fine for non-compliance. In
addition to Federal Home Loan Bank deposits, eligible liquid assets include the U.S. Government securities, Federal
agencies' securities with a maturity of five years or less,
demand deposits and certain time deposits at commercial
banks, certain state and local government securities, and
bankers acceptances. The liquidity ratio in effect at yearend 1970 was 5.5 per cent.
Retained Earnings
Every year since the System's inception, the Home
Loan Banks have trans£ erred a part of their income to capital accounts. The total volume of retained earnings, or
earned surplus, increased 175 per cent in the decade of the
fifties. By year end 1970, retained earnings were more than
triple the 1960 year end figure of $83 million, reaching $260
million.
Retained earnings of the Banks are placed in two accounts: undivided profits, and a legal reserve. Each Federal
Home Loan Bank must trans£ er 20 per cent of its net earnings to the legal reserve semiannually until the account
equals 100 per cent of paid-in capital. Thereafter, 5 per cent
of its net earnings must be allocated for this purpose. Actual
additions to reserves and undivided prof its have exceeded
the legal requirements. However, the capital stock of the
Home Loa_n Banks has grown so rapidly that earnings are
still being allocated at the 20 per cent rate. At the end of
1960, the ratio of both legal and other reserves and undivided profits to total paid-in capital was 8.4 per cent. By
year end 1970, this ratio had risen to 16.2 per cent.
30
Chapter IV
Uses of Federal
Home Loan Bank Funds
major uses of Federal Hme Loan Bank funds are
T headvances
to member institutions and holdings of cash
and investments. These uses are closely allied to the role of
the Federal Home Loan Bank System as a credit reservoir
for its members. Advances are singularly important because
they represent the principal function of the Banks. The cash
and investments which are held by the Banks are vital to
the credit of the reserve system in that they represent the
liquidity position of the Banks.
Cash and Investments
The cash and deposit balances and security investments
of the Banks represent their operating funds and liquidity
reserves. The liquidity reserves provide funds to members
that draw down their deposit balances at the Banks. Reserves also are used to meet the demand of members for advances. Even though most of the funds for advances are
raised through the periodic sale of consolidated obligations,
liquidity reserves are needed to provide for demands for
credit between sales of obligations. This permits flexibility
in the size and timing of such market financing.
The volume of liquidity carried by the Banks has varied
mainly in accordance with the volume of member deposits.
The amount of liquidity has also varied with the judgment
of probable cost of future obligations. It should reflect the
hypothesized future market conditions that might make it
difficult to sell obligations in sufficient volume. With these
considerations, the actual level of cash and security holdings of the Banks has varied widely in recent years. During
31
THE FEDERAL HOME LOAN BANK SYSTEM
CHART 6
FEDERAL HOME LOAN BANKS'
CASH AND INVESTMENTS
4
(4,004)
,ooo Millions of Dollars
(3,758)
3,800
3,600
3 ,400
3,200
3,000
2,800
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1 ,200
1,000
800
600
~CASH
400
20
LLLLLLL~t:±:::t:~'.l::r:~~:::r:~~j
:
1932
1940
1950
1960
1970
Years
the 5-year period 1966-1970, it ranged from nearly $4.1 billion at the end of May 1967 following a period of large repayments of advances, to $1.3 billion in April 1966, following a larger unanticipated demand for advances. At year
end 1970, cash and investments totaled just under $4.0
billion.
Only a small part of Federal Home Loan Bank liquidity
is maintained in the form of cash on deposit in commercial
32
USES OF FEDERAL HOME LOAN BANK FUNDS
banks or with the U.S. Treasury. By far, the more important
source of liquidity has been the investment in marketable
Government obligations which also provide the Banks with
earning assets. Under the law, the Federal Home Loan
Banks can only invest in obligations of the United States,
the Federal National Mortgage Association, the Government National Mortgage Association, and in other such securities that are eligible for investment by fiduciary and
trust funds under the laws of the state in which the Bank is
located. As a practical matter, however, the Banks are primarily limited in their investment holdings to obligations
of the United States and its agencies.
Since investments largely serve the purpose of providing liquidity, a vast amount of them have always been maintained in relative short-term obligations in order to minimize the risk inherent in fluctuating security prices in the
open market. At the end of 1970, more than 90 per cent of
the security holdings had a maturity of 13 months or less.
Thus, the management of the Banks' security portfolio involves numerous investment decisions and transactions
each year. In 1969 alone, Bank purchases of securities were
in excess of $7.1 billion while securities with a value of $7.7
billion were sold or matured.
Federal Home Loan Bank Advances
A major purpose of the Federal Home Loan Bank System is to serve as an emergency source of liquidity for its
members. The basic function of member institutions is to
obtain funds from various savers by issuing short term liabilities (deposits) and to utilize these funds to acquire longterm mortgages. As a consequence, it is neither economically feasible nor desirable for these institutions to carry liquid assets sufficient to guard against all contingencies.
Thus, the Federal Home Loan Banks provide the funds
that are necessary to meet contingencies when the liquid
assets carried for this purpose are insufficient. Such a need
for funds can arise because of a reduction in savings re-
33
THE FEDERAL HOME LOAN BANK SYSTEM
ceipts to a volume inconsistent with the level of forward
lending commitments. Adverse savings experience of this
type can arise at individual institutions when deposit rates
become out of line with those offered by competing institutions. It also can occur when yields on marketable secl!_!'ities rise to levels above those payable on deposits by savings institutions, as was the case in 1966 and 1966. In addition, adverse savings flow can occur as the result of a surge
in consumer spending, as occurred in the Korean War, irrespective of interest rates.
Ad.vances are used by the residential financing institutions that are members of the System for purposes ·that are
consistent with the legislation establishing the Syst~m. Advances primarily serve as an emergency source or' funds.
They are intended to smooth imbalances in savings receipts
and mortgage loan disbursements. During periods of rapid
economic expansion, cyclical shortages 9f mortgage credit
can occur. This is because the interest rates of marketable
securities frequently rise above those of savings deposits
in member institutions. Advances can also be used to meet
the seasonal credit needs of member institutions. This arises
from the fact that the summer peak in demand for mortgage
credit occurs during the period of seasonally low savings
inflow. Further, advances can provide credit to capital-short
areas. Very important, also, is the fact that advances can
be utilized on a long-term basis to supplement savings as a
basis for meeting national housing goals.
Uses
of Advances
In the early years of the System's existence, the growth
in Federal Home Loan Bank credit was quite modest. Advances outstanding did not reach $200 million until 1937. At
that time, however, this represented about 5.5 percent of the
assets of member associations. Such relative importance
was not again achieved until 1969. Advances outstanding
remained relatively stable from the end of 1937 until World
War II when they began to decline.
34
USES OF FEDERAL HOME LOAN BANK FUNDS
CHART 7
FEDERAL HOME LOAN BANKS'
ADVANCES OUTSTANDING
11
8iaboll8 of
oottars
11
•
I
T
I
• •
..
I
I
1
1m
1840
1950
1990
After World War II, growth in Bank credit resumed. By
the end of 1970 advances outstanding totaled a record $10.6
billion, as compared to less than $0.2 billion twenty-five
years earlier. At the recent level, advances comprised about
6.1 per cent of the total resources of member associations
and equaled 7.3 per cent of the savings held by them.
Advances rose in all but six of the last twenty-five
years. The most rapid growth occurred in certain years-the
early post war period; 1950, 1955, and 1959; the early 1960's;
and in 1969. Except for 1969, these were all periods of sharply rising residential construction activity. The rapid growth
in advances in the 1950's occurred in years of economic recovery when the growth in savings inflow decreased. In the
recession of 1957, there were increases in savings flows to
member institutions. This trend thus stimulated a rise in
commitment and lending activity. The sharp rise in Bank
credit in 1969 reflected an effort by members to partially
maintain lending activity in the face of savings withdrawals
35
THE FEDERAL HOME LOAN BANK SYSTEM
that were induced by the very high yields available on marketable securities.
All of the six annual declines in advances outstanding,
except for that which occurred in 1967 , were relatively
small. Most occurred immediately following years of rapid
increase in Bank credit and accompanied adjustments in
member lending activity to bring it into closer balance with
savings inflow. The drop in advances in 1951 and 1956 probably reflected the delayed effect of efforts by the System to
restrain credit growth the preceding year. In 1967, repayment of advances was induced by a sharp increase in savings flow to associations. This sharp increase in savings
was associated with a weak demand for mortgage loans.
Such was mainly because of the slow recover y in housing
activity from the low volume caused by the earlier shortage
of mortgage funds. The repayment activity also reflected an
CHART 8
FEDERAL HOME LOAN BANKS'
ADVANCES MADE AND REPAYMENTS
10
9
8
7
6
5
4
3
2
1
Billions of Dollars
0
1932
ADVANCES
REPAID
ADVANCES
1940
1950
Years
36
1960
1970
USES OF FEDERAL HOME LOAN BANK FUNDS
effort by members to improve earnings by repaying highcost borrowings.
Importance
of Advances
A basic premise of the Federal Home Loan Bank System is that System credit should supplement, not supplant,
the saver as the major source of funds for member institutions. Over the long run, and in the aggregate, this has been
the case. As noted earlier, at the end of 1970, advances to
member associations comprised only slightly more than 6
per cent of member's resources. Over the quarter century
since the end of World War II, growth in System credit outstanding has provided funds for only about 7 per cent of
association mortgage portfolio expansion.
In certain periods, however, there has been substantial
need for Federal Home Loan Bank credit to offset adverse
savings flow and to stabilize the availability of mortgage
funds. In 1950, for example, when savings flows were adversely affected by the Korean War, System credit provided savings and loan associations with funds for 20 per
cent of their net mortgage lending. Similarly, in 1969, when
savings flows were adversely affected by "disintermediation", expansion in System credit accounted for two-fifths
of net mortgage lending by associations.
Over time there has also been a substantial variation
in the proportion of Bank System members utilizing Bank
credit. During the past twenty years, the proportion of
member institutions borrowing at year-end has ranged from
a low of 42 per cent at the end of 1967 to a high of 58 per
cent at the end of 1969.
The importance of System credit to individual institutions and individual regions varies considerably. At the end
of 1970, for example, while nearly 50 per cent of all member
institutions were making no use of System credit, 6 per cent
of the membership had advances outstanding equal to 15
per cent or more of savings held. Similarly, the ratio of advances outstanding to savings held by member associations
37
THE FEDERAL HOME LOAN BANK SYSTEM
at the end of 1970 ranged from 3 per cent for the members
of the Indianapolis Federal Home Loan Bank to 16 per cent
for the members of the San Francisco Federal Home Loan
Bank.
National Mobilization Disaster Programs
In attempts to develop national security preparedness
measures, the Bank Board co-operates with the Federal Reserve Board and the Treasury Department in order to insure
co-ordination of savings and loan credit policies with other
financial agencies under conditions of mobilization. The
Board's emergency preparedness planning also includes
preparation for natural disasters. Upon declaration by the
President of a major disaster area, the Federal Home Loan
Bank Board can approve measures to provide liberalized
credit for member institutions in the Federal Home Loan
Bank Districts affected.
An earthquake in the state of Alaska in March of 1964
caused considerable destruction which led to the state being
officially declared a major disaster area. Responding to the
anticipated need for funds for reconstruction and restoration of property, the Board extended the lending territory
of all insured institutions in the 12th Federal Home Loan
Bank District to the state of Alaska. Also, the Board authorized any member of the Federal Home Loan Bank System to
obtain advances for the acquisition of mortgages in Alaska
up to 35 percent of savings instead of the 17.5 per cent limit
generally applying. Both of these authorizations were granted for six months and extended an additional six months.
Thus, the System has shown that it can adapt to emergencies
when necessary.
Foreign Assistance
Under the Housing and Urban Development Act of
1968, the Federal Home Loan Banks were given the power
38
USES OF FEDERAL HOME LOAN BANK FUNDS
to invest in loans guaranteed by the Agency for International Development. Their authority extended to acquiring,
holding, or disposing of such loans, or interests therein.
Regulations under these provisions were adopted in November of 1968 with respect to both Federal associations
and the Federal Home Loan Banks. These regulations permitted acquisitions by the Banks for the primary purpose of
selling participation interests to Federal associations and
other members authorized to make investments in these obligations. At all times, these are subject to Board approval.
Presently, the Board has delegated its authority to approve
such acquisitions to the Banks up to an aggregate limit of
$30 million for each Bank. Although the regulations authorized all of the twelve Banks to engage in the program, transactions for all member institutions have been handled by
the New York and Boston Banks. At the end of 1970, 85 associations had participated in 15 such loans for a total of
$73.6 million committed or under contract.
Title I Funds
In accordance with The Emergency Home Finance Act
of 1970, the Congress authorized $250 million for use by the
Federal Home Loan Bank System. This was the first Congressional appropriation since the original one in 1932.
The first program that evolved to utilize this appropriation was coined the Housing Opportunity Allowance Program (HOAP). It was designed to assist the prospective
home buyers whose annual income was (1) too high to allow him to obtain home purchase assistance under various
subsidy programs of the Department of Housing and Urban
Development and other agencies, but (2) insufficient to permit him to obtain a mortgage loan from a private lender on
either a conventional or a federally guaranteed or federally
insured, unsubsidized basis.
HOAP operates by providing a qualified buyer with a
direct monthly mortgage payment allowance for a period
of sixty months. This allowance is a $20.00 monthly credit
39
THE FEDERAL HOME LOAN BANK SYSTEM
that passes from the Federal Home Loan Bank to the home
buyer's mortgage account at a member savings and loan.
By statutory requirement, this subsidy payment must
be administered through the advances mechanism of the
Federal Home Loan Bank System. This is in the form of a
reduced interest payment on outstanding advances. The
lender reports to the Federal Home Loan Bank the amount
of the compensation which is due. The Bank then allows the
lender to deduct this amount from its monthly payment of
interest on outstanding Federal Home Loan Bank advances.
40
Chapter V
Lending Procedures
the limits set by the statute, the Federal Home
W ithin
Loan Banks off er advances on a variety of terms and
conditions. The amounts which a member institution may
borrow from its Bank are set by law and by the regulations
and policies of the Federal Home Loan Bank Board.
In August 1965 the Federal Home Loan Bank Board
adopted a general policy on advances. In addition to setting
forth certain types of advances which should not be made,
the statement stressed such factors as the stabilization of
residential financing, the discouragement of building
booms, and the prevention of distressed conditions in the
housing and mortgage markets. Other factors emphasized
were the overall effects of credit extension on economic
stability, the soundness of the borrowing institution and
the credit extended by it, and the effect of credit extensions
on the soundness of the mortgage and housing markets in
which the institution operates. In 1967 the statement was
placed in the regulations for the Federal Home Loan Bank
System und'er the heading of statements of policy.
In 1967, the Board adopted a revision to its regulation
governing extension of credit to member institutions by the
Banks. Prior to this time, the regulation had prescribed a
procedure for establishing and reviewing lines of credit for
each member institution at least every 15 months. This revision adjusted the provisions to require that each Bank
adopt and review every six months a policy governing the
extension of credit that would be consistent with the regulations.
Beginning in December of 1969, each of the Banks was
encouraged by the Federal Home Loan Bank Board to formulated a new advances policy which would be designed to
meet their local needs. The new policy is based on the following: (1) a firm differentiation between short-term and
long-term advances; (2) the use of firm commitments on a
41
THE FEDERAL HOME LOAN BANK SYSTEM
fee basis to the maximum extent possible and (3) the pricing
of advances at a fixed rate, as well as at a variable rate,
with emphasis on the fixed rate.
A key provision of the new advances policy is the maximum use of firm commitments for a fee. Firm commitments
are important both to member institutions and to the Federal Home Loan Banks for cash flow planning and are especially important in assuring the availability of credit at the
point of mortgage takedown. Eventually, members should
have a right to count a limited portion of firm commitments
in meeting liquidity requirements. The foundation of using
firm commitments is that no implied credit line, except on a
contingency-withdrawal basis, will be provided to those
not wishing to negotiate a commitment and pay a fee.
Types and Terms of Advances
Because Federal Home Loan Bank advances may serve
a number of different purposes in meeting the needs and
preferences of member institutions, several types of advances are currently authorized. Advances may be
(1) Short-term, with a maximum maturity of 12 months,
or long-term with a maximum maturity of 10 years.
(2) Secured by specific collateral or unsecured, except
that the Federal Home Loan Bank Board in any
event holds a lien against the Bank stock owned by
the borrowing member;
(3) Amortized or unamortized;
(4) Variable-rate or fixed rate.
This variety of arrangements makes it possible for
member institutions to adjust their borrowings from the
Home Loan Banks to changing conditions. Some of the
Banks permit members to shift all or part of their short
term borrowings into long term advances, convert unamortized into-amortized advances, or change unsecured loans to
collateralized loans, whichever is to their advantage.
Maturities
Before the System was established, savings and loan
associations and other mortgage lenders could at best ob-
42
LENDING PROCEDURES
tain short-term credit from commercial banks in the form of
regular business loans. This exclusive reliance on shortterm borrowing without assurance of renewal often placed
the institutions in a precarious position. Thus, the Bank
System was created to meet the hypothesis that institutions,
which make long-term loans and are exposed to the sometimes unpredictable behavior of the saving public, need
access to both long- and short-term credit.
Until 1970, there was little distinction between liquidity
advances and expansion advances. An advance taken by a
member association which faces decreases in savings can be
used either to rebuild liquidity or to make a mortgage loan.
The same is true for an advance taken by an association
experiencing an outflow of savings. As a result, the Federal
Home Loan Bank Board has come to the conclusion that the
most useful distinction is that between "short-term" and
"long-term" advances. "Short-term" advances should be
clearly defined at origination and should be made for purposes which are essentially self-liquidating. They should
be repaid in a year or less. "Long-term" advances should
be regarded as a supplement to savings where these are inadequate to meet the housing needs of the community. The
terms on which "long-term" advances are made should
clearly be such as to encourage their use by member institutions in capital importing areas.
The share of short- and long-term advances in the total
amount of credit extended by the Federal Home Loan
Banks varies from year to year and even from month to
month. These variations reflect the needs of the members
for supplemental funds to expand mortgage portfolios and
meet withdrawals. Also, the variations in credit policies reflect the different philosophies of the individual Banks on
regional conditions and management practices. At times,
some of the Banks had no long-term advances while others
had up to 95 per cent of their total outstanding in the form
of long-term loans.
Short-term advances are usually sought by member
institutions when they have temporary needs for funds, especially seasonal needs. Their maturity may range from a
43
THE FEDERAL HOME LOAN BANK SYSTEM
few days to a maximum of 12 months. Some of the Banks,
however, have limited their unsecured, short-term advances
to not more than six months. Short-term advances can usually be renewed if the member's financial condition warrants
such an extension.
In the middle of the 1960's, the trend was for a higher
percentage of the total dollar amount of advances to be of a
maturity of one year or less. Until 1966, there was no specific Board statement on the maturity of advances, except for
a regulation limiting maturity to ten years for secured,
amortized advances and one year for advances made on
non-amortized basis. However, Board regulations did require that all advances for a term of more than six months
contain a rate escalator clause. In 1966, the System's policy
was stated to limit advances to a one year term except when
consolidated obligations of debt were involved.
In 1969, the bulk of advances had an original maturity
of one year or less. However, in 1968 the percentage of such
advances declined to 91 per cent of the total outstanding
from 93 per cent. In 1969, Banks began offering fixed term,
fixed rate, non-amortized advances funded by special five
year consolidated obligations. Also in 1969, the Banks authorized special advances under the subsidy programs of
HUD. These could be for as long as ten years. Thus, there
have been changes in the attitudes of the System toward
increasing long-term advances in order to meet the needs
of the borrowing public.
Security
The type and minimum amount of collateral is specified
in the Federal Home Loan Bank Act and regulations. Generally, all long term advances must be secured by collateral.
The Banks may also require collateral for short term advances. On the whole, the management of each Bank exercises its own judgment in determining the type and volume
of collateral required for individual transactions.
The principal collateral consists of mortgage loans,
44
LENDING PROCEDURES
although Treasury securities may be counted. To be accepted as collateral, the mortgages must be first liens on
homes and in good standing. If loans furnished as collateral
become delinquent, the Bank can require the borrowing
institution to provide additional security or to replace them
with acceptable collateral. Home mortgage loans provided
as collateral must not have more than 30 years to maturity.
However, longer maturities are permitted for loans insured
by the Federal Housing Administration or guaranteed by
the Veterans Administration. The unpaid principal amount
of loans securing Bank advances can not exceed $40,000
each. At the end of 1970, 98 per cent of the dollar volume of
advances outstanding were secured by home mortgages or
U.S. Treasury securities.
The amount of advances made on the security of mortgage loans is limited by law to a stated percentage of the
unpaid balance of the loans. On amortized home loans with
an original maturity of six or more years, advances may be
for an amount not exceeding 65 per cent of the value of the
real estate. On other home mortgages, they can not exceed
50 per cent of the unpaid balance of the loans, nor 40 per
cent of the value of the real estate. In the case of Government underwritten FHA and VA loans, however, advances
may be made up to 90 per cent of the unpaid balance.
In addition to home mortgage loans, borrowing members can provide collateral in the form of direct obligations
of the United States or obligations which are fully guaranteed by the U.S. and other marketable securities.
These provisions, together with the protection afforded
even in the case of advances not secured by specific collateral, assure the maintenance of the highest standards of
credit performance. None of the Federal Home Loan Banks
have ever sustained losses on advances, although there have
been occasional delinquencies for periods of time. This
record has been an important factor in giving the consolidated Federal Home Loan Bank obligations high ratings in
the securities markets.
45
THE FEDERAL HOME LOAN BANK SYSTEM
Interest Rates
Interest rates of Federal Home Loan Bank advances are
established by the board of directors of each Bank according to conditions in the money market. Since the market is a
major source of funds for advances, conditions therein
determine the cost of the Federal Home Loan Banks consolidated obligations. The interest rates on advances should
bear a proper relationship to the rates paid by member
savings and loan associations to their shareholders, or by
other members on their funds. This helps to avoid excessive
use of Federal Home Loan Bank credit.
Interest rates on advances may vary at any given time
. from one Bank district to the next. Even the interest rates
charged by the same Bank on new borrowings may differ
depending on 1) the type and maturity of advances made, 2)
the extent to which they obtained funds from offerings of
consolidated Federal Home Loan Bank obligations, and/or
3) other conditions in their districts. For each type and
maturity, the members of each Bank are charged uniform
rates on new borrowings. Historically, however, the management of the Banks has reserved the right to increase the
interest rates on both new and outstanding advances.
Interest rates on advances have fluctuated widely over
time, between a low of one and a half per cent during World
War II to eight per cent in 1970. For many years prior to 1966,
the Board imposed a maximum of six per cent per annum on
advances to members. With certain exceptions this was increased to seven per cent in 1966, to eight per cent in 1969,
and to 10 per cent in 1970. In 1964, there was a widespread
desire throughout the Bank System to make the rate on ad. vances a more effective tool of credit policy. Thus, the
Board adopted new principles in regard to rates on advances. One of the basic elements was that rates on advances should be based on the average cost of all outstanding consolidated obligations. This was revised in 1965 so
that rates would be determined by weighted average cost of
the last four issues of consolidated obligations sold.
In 1966, the Presidents of the Federal Home Loan Banks
46
LENDING PROCEDURES
adopted a statement specifying that each Banks' average
rate should be determined by the weighted average cost of
the last four issues of consolidated obligations in which a
Bank participated, plus ¼ of 1 per cent rounded to the nearest 1/s of 1 per cent. This procedure was intended to prevent
radical fluctuations in rates on advances which would have
resulted from using the cost of only the most recent issue as
a basis for pricing. The shift from average to marginal cost
pricing of advances, however, was relatively short-lived,
due to the shortage of mortgage funds that developed in
1966 and the short fluctuations in market interest rates that
have occurred since then. System policy as a consequence
has been to fix advances rates as low as costs permit so as
to provide support for the mortgage market.
In December 1970, the Board implied that as the Banks
institute an improved system of charging for their services
and pricing their products, they will be better able to move
from variable-rate advances, which are difficult to budget,
to more fixed rate advances. The interest rate on variablerate advances should be priced at the current average cost
of funds, or at a higher rate where other factors indicate as
appropriate. The interest rate to be charged on fixed-rate
advances should be determined by the Bank within ranges
set by the Board. It should be based on consideration of the
spread between the current mortgage rates and the current
advances rate, the earning effects on the Bank, the effect
of the price on the demand for long-term advances, and the
adequacy of mortgage funds within the District.
With the variable-rate advances, members should continue to have the right of notice of intention to raise rates
and the right to repay without penalty. In the case of
fixed-rate advance, however, there is an interest rate risk
and a money cost involved. Thus, it is intended that these
advances should carry prepayment penalties.
Members' Borrowing Capacity
The amounts which a member institution can borrow
from its Federal Home Loan Bank are generally limited by
47
THE FEDERAL HOME LOAN BANK SYSTEM.
statute and regulation. Unlimited borrowing would not be
prudent. It would further be divergent from the f undamental principle that funds for residential financing should
come, for the most part, from the public's savings that have
been entrusted to primary mortgage lending institutions.
It would also be inconsistent with the need for keeping a
substantial portion of members' borrowing capacity, as well
as the Banks' lending capacity, in reserve for unforeseen
circumstances.
Restrictions on members' capacity to borrow were first
imposed in 1950 in connection with the Korean War mobilization. Late in 1955, as part of an effort to slow down booming economic activity, new advances were briefly limited
to those required to meet savings withdrawals. Late in the
year, this limit was relaxed to permit expansion borrowing
equal to 5 per cent of savings. This limit was subsequently
increased to 10 per cent in 1956, 15 per cent in February
CHART 9
FEDERAL HOME LOAN BANKS'
ADVANCES OUTSTANDING AS A PER CENT OF
ASSETS OF MEMBER INSTITUTIONS
6
Per Cent
5
4
3
2
1
0
1932
1940
1950
Years
48
1960
1970
LENDING PROCEDURES
1961, 17½ per cent in June 1961 and 25 per cent in March
1971. In addition, during the mid-1960's, particularly in 1966,
because of the need to conserve funds and to provide withdrawal advances, expansion borrowing was even more
sharply curbed. In recent years, the Board has also specified lower limits on expansion advances for member institutions with a substantially higher than average proportion
of substandard assets in their portfolio.
General Rules
Under the Federal Home Loan Bank Act, the aggregate
outstanding advances made by any Bank to any member
can not exceed 12 times the amount of the member's holdings of Federal Home Loan Bank stock. Under this provision, a member can increase its borrowing from the Bank
by augmenting its holdings of paid-in Bank stock. Regulations of the Federal Home Loan Bank Board have established somewhat more restrictive borrowing limits. Under
these regulations, no member can obtain advances in excess
of the lowest of the following: (1) the amount for which a
member can obligate itself under the above provision of the
Act, or (2) 50 per cent of the member's net assets, or (3) 50
per cent of the member's savings capital (share and deposit
liability). The regulatory limits on member borrowing
from the Banks, in turn, have at times been further reduced
by policy directives of the Federal Home Loan Bank Board.
49
Chapter VI
Management and Supervision
organization of the Federal Home Loan Banks is
T hekeyed
to the objective that a regional system should
provide credit and associated services to a widespread network of locally owned and operated financial institutions.
It blends the desirable latitude of each of the twelve Banks
in the conduct of its affairs, in the light of conditions in its
district, with the need for consistent policies and supervision. This need stems from the fact that the Federal Home
Loan Banks are creatures of federal law and vested with national public interest. The organization of the Banks reflects
also the great variety of services rendered to its members
and the delegation of certain functions of the Federal Home
Loan Bank Board to the Presidents of the Banks.
Examination and Supervision of Savings and Loan
Associations
The basic justification for regulation of savings and
loan associations is that they hold an extremely large portion of household savings. In this sense they are considered
public service companies. If a savings and loan were dishonestly or poorly managed, many people could be harmed
through the loss of their savings. Therefore, the Federal
Home Loan Bank Board steps in to assure the safekeeping
of such savings.
The Federal Home Loan Bank Board further regulates
to protect government funds. It must make sure that institutions insured by the Federal Savings and Loan Insurance •
Corporation are not mismanaged so that they default and
drain the Insurance Corporation's reserves. Also, the Fed50
MANAGEMENT AND SUPERVISION
era} Home Loan Bank advances might be endangered if
their members irrationally managed their portfolios.
There are three statutes that proved separate and distinct authority for savings and loan association regulation:
The Home Owners' Loan Act of 1933, the National Housing Act, and the Federal Home Loan Bank Act. The Home
Owners' Loan Act provides the Federal Home Loan Bank
Board with a broad range of powers over federally chartered savings and loans. The National Housing Act provides
for limited regulation of associations insured by the Federal
Savings and Loan Insurance Corporation. The Federal
Home Loan Bank Act authorizes regulations of the members
of the Federal Home Loan Banks.
Regulations can also be divided into three catagories:
Federal regulations, Insurance regulations, and Bank regulations. The Federal regulations are applicable only to federal
associations. The Insurance regulations are imposed on institutions insured by the Federal Savings and Loan Insurance Corporation. Members of the Federal Home Loan
Banks are subject to Bank regulations.
All federally chartered savings and loans must be
members of their region's Federal Home Loan Bank, as
well as insured by the Federal Savings and Loan Insurance
Corporation. All associations insured by the Insurance Corporation must also be bank members. Thus, there is a descending order in these regulations. The 2,067 federally chartered savings and loans are subject to all of these regulations. The 2,298 state chartered insured savings and loans
are subject to the Bank regulations and Insurance regulations. The 236 associations that are Bank members, but not
insured by the Insurance Corporation are subject only to
Bank regulations.
The Bank regulations deal with two primary areas: The
rate of return paid on savings accounts, and the member association's liquidity. The Federal Home Loan Banks can
also indirectly regulate other activities of their members
through its power to restrict advances. The Interest Rate
Control Act of 1966 delegated the Federal Home Loan Bank
Board the direct authority to set rate ceilings of savings ac51
THE FEDERAL HOME LOAN BANK SYSTEM
counts of members of the Federal Home Loan Banks. This
was a one year authorization, but has been renewed every
year since. In relating to liquidity requirements, the Federal
Home Loan Bank Board has statutory authority to set the
level of liquid assets of the Federal Home Loan Bank members between 4 and 10 per cent of its savings accounts. During periods of tight money, the Federal Home Loan Bank
Board has generally lowered the liquidity ratios in order
that savings and loans could cover more withdrawals with
their liquid reserves. At times, as in 1968, the ratio has also
been lowered to allow more funds to flow into the sluggish
mortgage market.
The Insurance regulations deal with certain areas of
savings and loan operations. These are loans made more
than 50 miles from a savings and loan association's home
office, advertising and sales plans, and reserves of an association. In regard to lending policies, insurance regulations
stipulate lending territory limits and utilization of "participation loans", which are loans made by more than one person. The advertising regulations, which are not frequently
exercised, state that ads must be accurate and follow the
Federal Home Loan Bank Board's outline of principles for
advertising. The regulation of the reserves of the members
insured by the Federal Savings and Loan Insurance Corporation is one of the more important functions of the Federal
Home Loan Bank Board. Each year a member savings and
loan must transfer a proportion of its income into a reserve
to cover sudden or unexpected loan losses. The regulations
stipulated how much is to be placed in reserve each year.
The Federal regulations are indicative of the broad
power the Federal Home Loan Bank Board has over the
federally chartered savings and loans. Since federally chartered associations must be insured by the Federal Savings
and Loan Insurance Corporation and must be members of a
Federal Home Loan Bank, they are subject to all of the
other types of regulations as well as those applying only to
federal associations. There are cases in which the Federal
Home Loan Bank Board has given federally chartered associations certain powers in the Federal regulations and then
52
MANAGEMENT AND SUPERVISION
has set tighter restrictions in the Insurance regulations
which practically negates the original powers. Federal regulations usually cover lending, borrowing, savings accounts,
investments, reserves, management practices, and accounting. In the most important area of lending, loans are regulated as to their security, purpose, method of repayment,
loan-to-value ratio, and maturity.
Examination and Supervision of the Federal Home Loan
Banks
While the operation of a Bank is conducted by its officers in accordance with policies adopted by its board of directors, supervision is exercised by the Federal Home Loan
Bank Board. The Board's supervisory power is derived from
its statutory responsibilities under the Federal Home Loan
Bank Act.
The act provides that at least annually the Federal
Home Loan Bank Board require examinations and reports
of the conditions of each Federal Home Loan Bank. Examinations are made for the purpose of ascertaining that
the Banks are being operated in compliance with the provisions of the Act, the regulations promulgated by the
Board, and the policies established by the Board. The examination provides a verification of the assets of a Bank
and a proof of its liabilities. It includes a detailed audit of
a Bank's accounts and presents all pertinent information
concerning its operations.
The Government Corporation Control Act provides that
the financial transactions of mixed-ownership Government
corporations as the Federal Home Loan Banks be audited
annually by the General Accounting Office. Such audits of
mixed-ownership Government corporations are for any
period in which Government capital has been invested
therein. However, an amendment made in 1950 to the Federal Home Loan Bank Act provides that audits by the General Accounting Office of the transactions of a Federal
Home Loan Bank shall not be limited to such periods.
53
THE FEDERAL HOME LOAN BANK SYSTEM
In addition to its periodic examination of each Bank,
the Federal Home Loan Bank Board performs a number of
specific supervisory functions. The law provides that appointments and salaries of officers and dividend declarations of the Banks are subject to the approval of the Board.
The regulations of the Board provide that budgets for the
Banks shall be submitted for approval to the Board. The
Board will either approve the budget as submitted or approve it with such adjustments. By regulations and policy
statements of the Board, supervision is also exercised over
the acquisition and disposition of certain investment securities. Purchases and sales of securities may be transacted
without prior approval of the Board or its designated representative only when the action is in conformity with established Board policies. Other functions exercised by the
Board include the establishment of maximum interest rates
chargeable on advances and payable on member deposits,
the determination of the amount and terms of consolidated
obligations to be issued, the determination of rules on minimum liquidity requirements, and the regulation of member's
borrowing limits.
Board
of Directors
The management of each of the Federal Home Loan
Banks is vested in a board of 12 directors. This board is
charged with administering its affairs fairly, impartially,
and without discrimination against any member. Any delegation of responsibilities of the Bank officers in order to
carry on the general operations must have the approval of
the Federal Home Loan Bank Board.
If a district is composed of five or more states, the
Board may increase the elected directors to not over 13 and
the appointed directors to not over half of the elective
directors. If the number of elective directors is not equal to
the number of states in the district, the Bank Board can exercise its authority to increase the elective directors to the
number of states.
54
MANAGEMENT AND SUPERVISION
All directors must be citizens of the United States and
bona fide residents of the Bank's district. There are two
classifications of these directors: appointed and elected.
There are generally four appointed by the Federal Home
Loan Bank Board and eight elected by members of the
individual bank. The appointed directors, or "public interest" directors, serve for terms of four years. The term of
the elective directorship is two years. Special provisions
are made in the case of Puerto Rico in that the Board may
add an additional elective directorship to the board of directors of any district in which the territory is included.
The Board is required to designate one of the directors
of each Bank to be chairman, and one to be vice-chairman,
of the board of directors of each Bank. In practice, the
Board makes these designations annually. Usually, the
chairman is one of the public interest directors and the
vice-chairman is an elected director. The directors meet
periodically, either monthly or bi-monthly. Typically there
is an executive committee composed of a smaller number of
directors, sometimes rotating, who meet more frequently
than the entire board.
Officers and Staff
The officers of a Home Loan Bank have normal responsibilities of corporate officials. The president is the chief
administrative officer. He is primarily responsible to the
board of directors for the active management of the Bank.
With the assistance of his staff, he formulates and develops
operating policies and presents them to the board of directors for approval. The president normally serves as secretary to the board of directors and the executive committee
of the board.
The president of each Bank is the agent of the Federal
Home Loan Bank Board and of the Federal Savings and
Loan Insurance Corporation. In this capacity, he supervises
Federal savings and loan associations in the Bank's district
and other institutions in the district which are insured by
55
THE FEDERAL HOME LOAN BANK SYSTEM
that corporation. These functions include advising and endeavoring to assist these associations and institutions to
conduct their operations in conformity with the statutes and
the rules and regulations governing them.
Officers and employees of a Bank, when designated by
the Federal Home Loan Bank Board, are also the agents of
the Board and the Insurance Corporation. Their functions
in this role are generally reviewing applications pertaining
to organization of federal savings and loan associations,
conversions to federally chartered associations, and insurance of accounts. Recently, the Bank presidents and agents
designated under these provisions were vested with important functions in considering, and hearing oral arguments
on applications for permission to organize Federal savings
and loan associations, and for insurance by the Federal Savings and Loan Insurance Corporation of the accounts of
other institutions.
The officers of a Bank also consider applications for
Federal Home Loan Bank membership. They then report
their recommendations to their board of directors or executive committee of the Bank. After obtaining such additional
information as it may desire, they transmit the application
to the Federal Home Loan Bank Board with its recommendation. During periods between meetings of the board
of directors or executive committee, the board of directors
can then authorize the Bank officers to transmit applications
to the Federal Home Loan Bank Board. Such actions must
be reported to the next meeting of the board of directors or
the executive committee, whichever occurs first.
Stockholders' Meetings
As is usual with corporations, each Bank holds an annual meeting of its stockholders, which in this case are its
member)nstitutions. The officers of the Banks customarily
make a full report of the financial condition of the Bank
and developments during the preceding year, and outline a
program for the succeeding year. The stockholders' meet-
56
MANAGEMENT AND SUPERVISION
ings provide an opportunity for a full discussion of the affairs of the Bank, of the myriad facets of members' operations, and of the general conditions in the district.
Services to Members
The two main services provided by the Banks, the acceptance of member deposits and the extension of credit,
have already been discussed. In addition, each of the Banks
makes available to its members a number of services which
facilitate their operations and thus contribute indirectly to
making the member institutions attractive repositories of
savings and effective media for home financing.
The extent of these additional services varies among
the Banks, but generally they include the safekeeping of
U.S. securities owned by members and the purchase and
sale of such securities on behalf of members. This activity
has increased greatly with the growth of members' assets
and with the accompanied rise of their security holdings to
meet primary liquidity requirements. Between 1950 and
1969, the amount of U.S. Government obligations held by
member savings and loan associations expanded from $1,320
million to $8,442 million. This sharp increase in security
investments has been associated with a rising volume of
purchases and sales of U.S. Government obligation by the
Banks on behalf of members.
Among the benefits accruing to the members through
the use of the Banks' safekeeping service are (1) the elimination of transportation costs; (2) the removal of the hazard
of loss or theft in transit; and (3) ready availability of securities in the major markets for sale on short notice. Custody
agreements are in effect with large commercial banks in financial centers, since members' securities are customarily
held in the city in which they were purchased. The income
on securities held in safekeeping is collected and either
credited to the member's demand deposit or time account,
or remitted to the member by the Bank's check. The principal on matured or called investments is handled in similar
57
THE FEDERAL HOME LOAN BANK SYSTEM
manner, or the proceeds reinvested in accordance with the
member's instructions. These safekeeping services are
available to members at no cost to them, as is the Banks'
service in executing orders on behalf of their members for
the purchase or sale of securities.
Other services to members are rendered in connection
with their deposits at the Federal Home Loan Banks. Demand deposits are withdrawable through the use of a draft
drawn against the Bank. This arrangement gives the member
a convenient means to immediately use the proceeds of an
advance, since it is credited to the demand deposit account.
Thus, the delay in mailing a check is eliminated. In some
cases facilities are available for members to issue money
orders and give drafts to the public by charging their demand deposit accounts. Further, there is an extension of this
type of service to permit drawing foreign drafts and foreign
payment orders on commercial banks abroad.
Finally, the Federal Home Loan Banks maintain a statistical and research program covering relevant conditions in
their districts. They disseminate data and other factual materials for use by their member institutions and act as clearing houses for information pertaining to the Bank System
and its membership.
58
Chapter VII
Conclusion
broadly defined, is the largest component of
Housing,
U.S. consumption expenditures. Americans spend over
$100 billion annually to buy, rent, operate, and maintain
their places of residence. About half goes for direct housing expenditures as rents or mortgage payments and the remaining for furniture, domestic help, and other household
items. In addition, residential structures and their sites constitute almost one-third of the national wealth. In fact, more
than one-quarter of new capital investments each year goes
into housing.
The importance of housing in the economy underscores
the need for efficient operations in all of the component
business enterprises. Traditionally, the housing industry has
been unique and complex. The methods of production that
have evolved are responsive to the public's demand for indi vi dual characteristics in its products. It is this variety of
production methods that has led to the fragmentation of the
industry into an elaborate complexity of interlocking producing units.
During the later 1960's, it became evident that the housing industry was moving toward increased scale of operations and more vertical integration between the various specialities. According to the report of the 1968 President's
Committee on Urban Housing, significant efficiencies of
scale can be achieved by increasing the volume of units produced per development. However, the existing institutional
environment is hardly conclusive to large scale operations.
Few home builders have the capabilities to produce several
hundred units per development. One of the greatest hindrances to this increased scale is the lack of access to comparable large amounts of funds. Often one developer must
59
THE FEDERAL HOME LOAN BANK SYSTEM
negotiate with several financiers for the permanent financing of its units merely because one can not supply sufficient
amounts of financing. Perhaps the scale and field of operations on the financing side should be adjusted in order to
meet this new type of demand.
It is this new housing market with its increased scale
and depth that the Federal Home Loan Bank System knows
it must serve in the 1970's. In order to be able to meet these
newly emerging needs, the Federal Home Loan Bank System has advocated the development of a more specialized
residential financing industry. This was clearly evident in
the proposed 1971 Housing Modernization Act which provided for federally chartered stock associations, increased
levels of investment in real property, broader investment
powers in urban renewal areas, and increased property improvement loans. Not only should associations concentrate
their efforts on diversification of lending on various types
of property, but they should also initiate trends for increased financing of housing related products, as home
furnishings.
Even though the System is being stimulated from within
to meet the needs that are being exerted on it, the Federal
Home Loan Bank Board still maintains its importance as the
regulatory agency for the savings and loan industry. The
Federal Home Loan Bank Board's regulations assure that
any change in this evolving industry is rational and legal.
Such is exemplified in the policy for mergers of associations, confirming that anti-trust implications should be
taken into account.
The U.S. financial system and its subsystems, as the savings institutions composing the Federal Home Loan Bank
System, must always strive to adapt themselves to changing
market conditions. The Federal Home Loan Bank System
has already proven its worth as an adaptable concern.
Created in the bleak days to the Great Depression as a permanent credit facility for savings and residential financing
institutions, it has met the challenges of recovery and the
post war era of great prosperity only with intermittent
minor setbacks. During these varying conditions, the System
60
CONCLUSION
has established and perfected the machinery for meeting
the credit needs of its members without resorting to government funds.
New challenges will unquestionably arise for both
present and future member institutions, for the Federal
Home Loan Banks, and for the Federal Home Loan Bank
Board. Meeting these challenges will require appropriate
management of private business and financial institutions,
as well as of governmental affairs. The Federal Home Loan
Bank System's record of performance justifies confidence
in its ability to undertake further adjustments when needed
and to strengthen its services to member institutions and
through them to the saving and home buying public. Yet,
even with this adaptability, the basic aim of the Federal
Home Loan Bank System will remain the same: To foster
savings by increasing the safety and attractiveness of the
savings placed by the public in member institutions and to
improve the public's access to funds for the sound and economical financing of housing.
61
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