A Letter to the Community

The economic challenges of the past few years have led us to question the feasibility of our current housing finance system and to look for new, more sustainable solutions. Now we are beginning a national conversation that will help to define the future of housing finance in our country—asking ourselves the hard questions that will help to set the stage for change: What should be our goals for homeownership versus rental housing? How do we account for regional differences in crafting our housing policy? What should be the role of public versus private capital in housing finance? How can our housing finance system best support sound market practices?

As we begin this discussion, it’s important to consider the systems and programs that have worked—and that are working—to support sustainable homeownership and affordable rental housing across our country.

The Federal Home Loan Bank (FHLBank) System provides an excellent model because it brings housing and banking together in a way that works.

A Comprehensive Solution for Housing and Economic Development

The FHLBank System was created in response to another economic crisis—the Great Depression—to provide local lenders with access to funding to meet the housing finance needs of their communities. The concept was—and remains—unique: a group of independently owned and operated financial cooperatives that use their combined size and strength to obtain funding in the global markets at the lowest possible cost and lend it to their financial institution members.

These low-cost funds, in combination with funds from two FHLBank programs introduced in 1990—the Affordable Housing Program (AHP) and the Community Investment Program (CIP)—comprise a powerful force for housing affordability and the community economic development that helps to sustain it.

Through the AHP, each FHLBank contributes 10 percent of its annual net income for affordable housing—both rental and homeownership. The CIP offers reduced-rate loans for qualifying housing and community economic development projects. The program results speak for themselves.

The AHP is the largest single source of private-sector grants for housing and community development in our country. Over the past 20 years, it has contributed approximately $3.7 billion to create 675,000 units of affordable housing for individuals and families earning 80 percent or less of their area’s median income. The CIP has contributed another $56.0 billion in reduced-rate loans to create housing for individuals and families earning up to 115 percent of area median income. In addition, the FHLBanks provide reduced-rate loans for economic development, which helps to create the jobs that are so critical to a community’s long-term vitality.

During the same period of time, the Seattle Bank has awarded $141.6 million in AHP funds to create more than 27,400 units of affordable rental and owner-occupied housing and another $41.4 million in downpayment assistance for first-time homebuyers. Our CIP and Economic Development Fund (EDF) have provided $3.5 billion in reduced-rate loans to provide nearly 48,500 affordable homes and support for a range of community economic development activities. We encourage you to review the cumulative funding summary and state maps in this report to see the impact of these contributions across the Seattle Bank’s region.

Local Lenders Meeting Local Needs

The FHLBank model has succeeded, in part because it enables local lenders and their community partners—those who are closest to their communities—to meet local needs. The value of these community ties is no more evident than through the AHP and CIP, where FHLBank members work with community nonprofit and for-profit organizations to identify housing and economic development needs in their communities and to garner the resources to meet them.

The FHLBanks’ programs facilitate these partnerships in part because the funding they provide can be used to meet a broad range of community needs: the acquisition, rehabilitation, and development of affordable rental and owner-occupied housing; the financing of commercial, industrial, manufacturing, social service, public facility, or public and private infrastructure projects; and the provision of AAA-rated Standby Letters of Credit.

FHLBank funding also offers the flexibility to be used in combination with other public and private funds and often makes the critical difference in whether or not an affordable housing or community investment initiative can move forward.

The new Beartooth Hospital and Healthcare Center in Red Lodge, Montana, demonstrates the value of these community relationships and the flexibility of the FHLBanks’ community investment programs. It also offers a great example of the critical role that community lenders can play in ensuring the availability of critical community resources because of their knowledge of local needs and membership in a regional FHLBank.

Accountability Supports Sustainable Solutions

As a nation, if there’s one lesson we’ve learned over the past several years, it’s the need for accountability at all levels of our housing financing system. The FHLBanks’ programs work because they require accountability from everyone involved.

Our members are financially invested in the success of the initiatives they sponsor. They must underwrite the grants they sponsor to the standards they apply to their own lending. In addition, as members and owners of the cooperative, they must purchase stock in their FHLBank and pledge high-quality collateral to support their FHLBank borrowings.

The local housing organizations that our members partner with bring the knowledge and expertise to make effective use of those dollars and provide the financial counseling and social services that help their clients become successful renters or homeowners—for the long term. Programs like St. Vincent de Paul’s Vet LIFT Program in Eugene, Oregon, demonstrate the type of commitment and creative thinking that helps those who have been disenfranchised in one way or another get back on their feet to become self-sufficient and contributing members of the community.

The FHLBanks closely monitor the projects they fund for compliance with the terms of the grants and loans they provide. AHP projects are monitored for five years in the case of homeownership and 15 years in the case of rental projects. The FHLBanks’ emphasis on homebuyer education for those receiving AHP assistance has helped to ensure a foreclosure rate of less than one percent.

Working as Designed in All Economic Cycles

There’s no denying that FHLBanks have had their challenges as well. The Seattle Bank’s 2009 net loss means that there will be no AHP funding round or new funding for our Home$tart downpayment assistance program in 2010. Fortunately, the Seattle Bank—like all of the FHLBanks—offers more than a single solution for housing finance and community economic development, and our reduced-rate CIP loans and Standby Letters of Credit remain valuable tools for our members and their communities.

As a nation, we will continue to experience times of economic challenge and times of prosperity, and it’s appropriate to assess how our systems are working—or not—in all economic cycles. As we begin to debate the merits of various solutions for housing finance, we can look to the FHLBank System as a model that works.

We appreciate your support of the FHLBank System and the Seattle Bank.