Mortgage Lending Changed. The Federal Home Loan Bank System Hasn’t Kept Up

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The Federal Home Loan Bank System was created in 1932. I don’t bring up that date because there is anything inherently wrong with a 94-year-old institution. Some of the most important pieces of our housing-finance system have been around for generations.

I bring it up because the mortgage business the FHLBanks were built to support looks very different today.

Independent mortgage banks have become a major part of American mortgage origination. The Community Home Lenders of America, which represents IMBs and is advocating for their admission to the FHLBank System, estimates that IMBs originated 84.1% of U.S. single-family mortgages in 2025 and 90% of FHA loans.

Those are CHLA’s figures, and that distinction matters. I would not present an advocacy organization’s calculation as though it came directly from a federal regulator. But the larger change in the mortgage market is hardly controversial. Nonbank mortgage companies now play an enormous role in originating and servicing home loans, while the Federal Home Loan Bank membership structure continues to be organized around categories of financial institutions established in federal law.

Independent mortgage banks aren’t one of them.

I think Congress should take another look at that.

The market changed while the membership structure largely stayed put

FHFA says institutions eligible for FHLBank membership include commercial banks, thrifts, credit unions, community development financial institutions and insurance companies. An applicant has to satisfy statutory and regulatory requirements concerning its organization, regulation, housing-finance activity, financial condition and other factors. Members also have to invest in stock of their regional FHLBank.

That structure shouldn’t be dismissed as some historical accident. The FHLBanks provide secured advances to members and have to protect the safety and soundness of the System. Who gets admitted matters.

The problem is that corporate structure and mortgage-market activity are no longer aligned the way someone looking at the membership categories might assume.

An independent mortgage bank can originate thousands of home loans, sell loans into the secondary market and service mortgages for borrowers across the country without becoming eligible for FHLBank membership. A qualifying institution in one of the statutory membership categories can potentially join the System even if mortgage lending represents a much different part of its overall business.

FHFA has acknowledged part of this issue from the other direction. In discussing the future of the FHLBank System, the agency has said there has been a decreased focus on housing activities, including mortgage lending and servicing, among many institutions that are already members.

That ought to get our attention.

If the public purpose of the System includes providing stable and reliable liquidity in support of housing finance and community development, it is reasonable to periodically ask whether its membership rules still line up with the institutions actually doing that work.

This isn’t something FHFA can simply decide on its own

There is an important legal distinction in this debate that tends to get lost.

Current FHLBank membership eligibility comes from the Federal Home Loan Bank Act. FHFA administers and enforces those statutory requirements; it doesn’t have unlimited authority to invent a new category of eligible institution because the mortgage market changed.

FHFA made that point clearly when it changed its membership regulation in 2016.

At the time, some entities that were not independently eligible for FHLBank membership were using captive insurance companies as a route into the System. FHFA changed its rules to exclude captive insurers from the definition of an eligible insurance company, saying the arrangements were allowing otherwise-ineligible entities to obtain de facto access to FHLBank membership.

Then-FHFA Director Melvin Watt also made another point that remains relevant today: Congress had amended the Federal Home Loan Bank Act in the past to allow additional types of entities into the System and could do so again.

That is where I think this conversation belongs.

If independent mortgage banks are going to become eligible for FHLBank membership, Congress should authorize it directly and establish the framework for doing it. I would much rather see that debate occur openly than watch the industry search for a regulatory interpretation or corporate structure that tries to fit IMBs into a category Congress never created for them.

IMBs are different from banks, and any new framework has to recognize that

There are legitimate reasons to be cautious.

Independent mortgage banks don’t take insured deposits. Their funding model is different from a commercial bank or credit union. Mortgage production commonly relies on warehouse financing before loans are sold into the secondary market, and liquidity can become particularly important when mortgage markets are under stress.

Those differences shouldn’t be minimized just because someone supports broader FHLBank membership.

FHFA’s recent work on member credit risk is useful here. The agency has emphasized that collateral is not a substitute for determining whether a member is financially healthy enough to repay an advance. FHLBanks are expected to evaluate member creditworthiness and can limit or deny an advance when financial or managerial deficiencies call into question whether the advance can be made safely.

That principle should carry directly into any discussion about IMBs.

I would not support opening FHLBank membership to every company with a mortgage license. Congress would need to determine which IMBs are eligible, what regulatory oversight is sufficient and what financial standards they must meet. FHFA would then need a serious framework around capital, liquidity, financial reporting, collateral and ongoing creditworthiness.

An FHLBank should also retain the ability to reduce, restrict or deny access when an IMB’s financial condition deteriorates.

The objective isn’t to create an inexpensive funding source for mortgage companies that cannot otherwise finance themselves. It is to determine whether financially sound mortgage institutions that now perform a significant amount of America’s housing-finance activity should have a path into a housing-liquidity system from which they are currently excluded.

There is a public benefit here, but we shouldn’t exaggerate it

The easiest argument for the mortgage industry to make would be that FHLBank membership will lower funding costs for IMBs and therefore lower mortgage costs for consumers.

I wouldn’t make that promise.

FHLBank membership could provide qualified IMBs with another source of secured liquidity. Greater funding diversity could improve resilience and potentially make some lenders more competitive. Those are reasonable things for policymakers to study.

It is a much bigger leap to tell a borrower that admitting IMBs will automatically produce a cheaper mortgage.

Mortgage pricing depends on far more than the cost of one funding source, and companies make their own decisions about margins and pricing. If Congress expands FHLBank eligibility partly because it expects consumers or the housing market to benefit, it should establish a way to measure whether those benefits actually materialize.

That means looking at what happens after the policy changes. Did participating IMBs become more resilient during periods of market stress? Did the additional liquidity support continued mortgage production? Did smaller lenders gain meaningful access, or did the benefit mostly accrue to the largest companies? Did competition improve in ways that reached borrowers?

I don’t know the answers to those questions today, and I don’t think anyone should pretend otherwise.

They are exactly the questions Congress should be asking before it changes the law.

The FHLBank System itself is already being reconsidered

This isn’t happening in a vacuum.

FHFA has spent several years reviewing the future of the Federal Home Loan Bank System. Its FHLBank System at 100 initiative was the first comprehensive review of the System in decades and specifically examined its mission, membership eligibility, liquidity function, housing and community-development role, and structure.

The agency’s own conclusion was that the mortgage market, financial system and FHLBanks have changed significantly since the System was created. FHFA has continued working on membership standards, mission alignment and member credit-risk management as part of that effort.

There is also a more immediate regulatory discussion underway. On July 13, 2026, FHFA proposed repealing its regulation governing new FHLBank business activities. The comment period closed Aug. 12.

That proposal does not make IMBs eligible for membership, and we shouldn’t confuse the two issues. The Community Home Lenders of America used the current discussion to renew its push for IMB access, but admitting a new category of members is a much larger policy question than repealing the new-business-activities regulation.

Still, the timing is useful. If policymakers are already examining how the FHLBanks operate and what role they should play in the modern financial system, membership belongs somewhere in that conversation.

The System also receives advantages that justify a high bar

There is another reason I don’t think this should become a simple industry request for access.

The FHLBanks are privately capitalized and receive no appropriated federal funds. Their consolidated obligations are not guaranteed or insured by the federal government.

But they are government-sponsored enterprises, and that status matters.

FHFA says their GSE status provides privileges that enable the FHLBanks to raise funds at rates slightly above comparable U.S. Treasury obligations. The System can then use those funds to provide advances to eligible members.

That funding structure is valuable.

Expanding access to it should therefore come with a clear public purpose and meaningful safeguards. A company shouldn’t qualify merely because FHLBank funding would improve its economics. There needs to be a housing-finance reason for the expansion and confidence that the new member class does not introduce risks the System is poorly equipped to manage.

The same standard should apply to the existing membership structure. If we are going to defend a government-sponsored housing-liquidity system, its connection to housing should be more than historical.

Congress should ask a fairly simple question

I don’t know that the answer is to admit every qualified independent mortgage bank into the Federal Home Loan Bank System exactly as CHLA or any other trade organization proposes.

I do believe the question deserves a serious congressional examination.

The mortgage market has moved considerably since the FHLBank System was created. Independent mortgage banks now perform a substantial amount of mortgage origination, including a large share of lending through FHA. At the same time, FHFA itself has raised concerns about the declining housing focus of some institutions already inside the System.

That combination is difficult to ignore.

Congress should examine whether a carefully defined class of regulated, financially sound independent mortgage banks should be eligible for membership. It should examine the risks as seriously as the potential benefits, establish meaningful capital and liquidity requirements, require appropriate collateral, and make sure regulators have enough information to monitor the financial condition of participating companies.

If the risks cannot be managed, Congress shouldn’t do it.

If they can be managed, then excluding a major segment of the mortgage-origination market simply because it doesn’t fit a membership structure written for an earlier version of American finance becomes harder to defend.

The Federal Home Loan Bank System has lasted nearly a century because it has served a useful purpose. Updating it for the mortgage market we actually have doesn’t diminish that history.

It may be what allows the System to remain relevant to housing finance for the next hundred years.