Mission Expansion in the Federal Home Loan Bank System

Mark K. Cassell, Susan M. Hoffmann

Description

During one of the worst recessions in United States history, the federal government undertook a series of sweeping changes related to the foreclosure crisis. These changes, in particular to the Federal Home Loan Bank System, have many implications. Mission Expansion in the Federal Home Loan Bank System draws attention to this growing program and argues that the program did not contribute to the foreclosure crisis, also offering a close anaysis of its functions and relationship with congress. Mission Expansion offers an intriguing analysis of a growing, relevant institution for those involved in public policy academically or professionally.
List of Figures and Tables
Preface
Acknowledgments

1. Growth and Mission Expansion in the Federal Home Loan Banks

2. Grounded Research and Competing Paradigms in Political Science

3. Housing Finance Mission

4. Housing and Community Development Mission

5. Supporting the Viability of Community Banks

6. Mission Expansion as a Behavioral Process

7. Structural Choices Moving Forward: Recommendations for Reform

Afterword

Federal Home Loan Banks and the Foreclosure Crisis of 2008

Notes
Works Cited
Index

Sujets

• Banking
• Bank
• Public administration
• Political economy
• Central
• National

Informations

• Publié par: State University of New York Press
• Date de parution: 01 octobre 2010
• Nombre de lectures: 0
• EAN13: 9781438433431
• Langue: English

Extrait

“The Wolf at the Door” by Gene Elderman, used by permission of the Washington Post .

MISSION EXPANSION IN THE FEDERAL HOME LOAN BANK SYSTEM
SUSAN M. HOFFMANN
and
MARK K. CASSELL
S TATE U NIVERSITY OF N EW Y ORK P RESS

Published by S TATE U NIVERSITY OF N EW Y ORK P RESS , A LBANY
© 2010 State University of New York
All rights reserved
Printed in the United States of America
No part of this book may be used or reproduced in any manner whatsoever without written permission. No part of this book may be stored in a retrieval system or transmitted in any form or by any means including electronic, electrostatic, magnetic tape, mechanical, photocopying, recording, or otherwise without the prior permission in writing of the publisher.
For information, contact State University of New York Press, Albany, NY www.sunypress.edu
Production, Laurie Searl Marketing, Anne M. Valentine
Library of Congress Cataloging-in-Publication Data
Hoffmann, Susan.
Mission expansion in the Federal Home Loan Bank System / Susan M. Hoffmann and
Mark K. Cassell.
p.cm.
Includes bibliographical references and index.
ISBN 978-1-4384-3341-7 (hardcover : alk. paper)
ISBN 978-1-4384-3342-4 (pbk. : alk. paper)
1. United States. Federal Home Loan Bank System. 2. Federal home loan banks— United States. 3. Housing—United States—Finance. I. Cassell, Mark K., 1964– II. Title.
 
HG2040.5.U5H643 2010
332.7'220973—dc22                                                                                                     2010004940
10 9 8 7 6 5 4 3 2 1

To Ilse and William Cassell and Shirley and Joseph Hoffmann

FIGURES AND TABLES

FIGURES 1.1 FHLBank districts 1.2 FHLBank system assets, 1989–2007 1.3 FHLBank consolidated obligations, 1989–2007 4.1 Percentage appointed directors with housing and community development or local government backgrounds 8.1 FHLBank System advances, 1998–2007 (in millions) 8.2 Mortgage purchases, 1998–2007 (in millions) 8.3 FHLBank System investments, 1998–2007 (in millions)

TABLES 1.1 FHLBank System balance sheet highlights, year end 2007 1.2 Interviewees' view of mission 4.1 Statutory provisions shaping affordable housing and community development mission 4.2 AHP project scoring criteria 4.3 Backgrounds of appointed FHLBank directors 5.1 Commercial banks as a share of FHLBank members, 2001 8.1 Foreclosures in the third quarter 2007 8.2 Percentage of total FHLBank System assets 8.3 Percent of MPP and MPF loans by region (December 31, 2007) 8.4 FHLBank System's mortgage-backed securities (December 31, 2007)

PREFACE

As this study goes to press in 2009, the ultimate severity and consequences of the financial crisis that took hold last year and the economic downturn it precipitated are not yet known. One outcome that is apparent, though, is renewed appreciation for the critical role of government in crafting and regulating a healthy financial sector that can support a vigorous real economy. Around the world and across the ideological spectrum governments are deploying public administrative capacity to rein in the financial crisis and address its fallout across industries. Policy makers are also debating how best to strengthen existing regulators and what new public agencies may be needed.
When we began this research ten years ago, U.S. policy makers’ attitude toward regulating financial companies and practices and toward public agencies charged with that responsibility was different. Regulation had been stepped back for two decades through major statutes, including the Depository Institutions Deregulation and Monetary Control Act of 1980, the Garn-St Germain Depository Institutions Act of 1982, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, and the Financial Services Modernization Act of 1999. In the debate over this last statute, prominent executive branch and congressional participants raised questions about the need for the Federal Home Loan Bank System and whether it served a public purpose anymore. These concerns caught our attention and sparked this study.
The Federal Home Loan Bank System was and remains arcane. Created in 1932 to channel resources systemically toward home ownership and to improve housing finance practices, the system grew noticeably in the middle and later 1990s. What accounted for the growth? Had the mission drifted? Were FHLBank managers or private partners in the system operating FHL-Bank mechanisms in their own interests?
By the fall of 2007 we were looking for a publisher for the first draft of this manuscript. Also by fall 2007, people who pay attention to housing finance had noticed an upward trend in home mortgage foreclosures. Assurances that there would not be a crisis were the order of the moment, but the studies began as foreclosures mounted. Poorly underwritten subprime and Alt-A mortgages emerged as the culprits. By fall 2008, people who pay attention also grasped that those loans had been securitized and were in the portfolios of every kind of major financial institution. The downward spiral was on. A U.S. senator publicly suggested that FHLBanks had played a role in the foreclosure crisis. Our manuscript was still under review, so we looked at that question and added the afterword.
This book is not about the financial crisis or about the whole of the U.S. administrative state. It is about why and how the mission expanded in one public instrumentality. We argue that FHLBanks grew in the 1990s and their mission expanded beyond home ownership finance because Congress chose to exploit their administrative capacity to address conditions perceived as public problems. Attention-driven expertise was a central behavioral mechanism in the dynamics that ensued. In the 2000s, problematic housing finance practices developed outside of the FHLBank System, while FHLBanks remained a key institution in supporting sustainable, affordable home ownership finance.
Can larger lessons be inferred for public policy and public administration? Public administrative capacity is valuable. Growth in the administrative state, in a democracy, may be legitimate. We do not suggest assuming legitimacy, but neither should it be assumed that mission expansion and agency growth serve particular interests. This is an empirical question in each case.

ACKNOWLEDGMENTS

We would like to thank the many senior managers and board members in Federal Home Loan Banks across the United States who provided the interviews at the heart of this study. Busy men and women were generous with their time. They tutored us in the mechanics of FHLBanks and FHL-Bank member institutions, shared insights about institutional challenges and opportunities, and responded thoughtfully to our central question about their views of the mission of their FHLBank and the FHLBank System. FHLBank staffs as a whole were responsive and helpful. We thank also the similarly generous community bankers, former federal regulators and congressional staff, and Affordable Housing Program partners whom we interviewed. Needless to say, this study could not have been done without the contributions of these people.
We are indebted to colleagues in academia as well. Kevin Corder and Anne Khademian read early papers reporting empirical findings of this research and responded with key insights that shaped the theoretical frame. Don Kettl has nudged both of us since graduate school to be careful empirically and to have the courage of our values; true to form, he encouraged us to follow through in this study with practical recommendations. Lawrence J. White and Mark Carl Rom read the entire first draft of the manuscript; each saved us from particular errors and offered valuable suggestions for revision. Scholarly colleagues have thus made this a better book, while shortcomings remain our own.
We also want to acknowledge the contributions of scholar/public servants at the Congressional Budget Office, Congressional Research Service, Government Accountability Office, Federal Housing Finance Board, and Department of Housing and Urban Development's Office of Policy Development and Research. Their reports are crucial to this study and countless others.
The Public Administration Review has maintained a welcome interest in this research. The “three missions” analysis that frames the empirical chapters first appeared in our 2002 article “What Are the Federal Home Loan Banks up To? Emerging Views of Purpose among Institutional Leadership,” PAR 62 (July/August 2002): 461–70. Chapter 5 is a revision of “Understanding Mission Expansion in FHLBs: A Return to Behavioral Choice Theory,” PAR 65 (Nov/Dec 2005): 677–89. The afterword includes a portion of “Not All Housing GSEs Are Alike: An Analysis of the Federal Home Loan Bank System and the Foreclosure Crisis,” PAR 69 (July/August 2009): 613–22, which we wrote for PAR 's symposium on the financial crisis of 2008.
Analyses in chapter 3 of policy process at FHLBank System origin, pp. 28–35, and of origin of HOLC and federal S&Ls, pp. 40–44, are from Hoffmann, Susan. Politic