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The Federal Home Loan Bank system : the "other" housing GSE

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  • Mark J. Flannery
  • W. Scott Frame

Abstract

Founded in 1932, the twelve Federal Home Loan Banks (FHLBs) have historically provided long-term funding to specialized mortgage lenders. But legislative changes in the wake of the 1980s’ thrift crises spurred the FHLBs to expand in both size and scope. For example, FHLB balance sheets now also include a substantial investment in mortgages and mortgage-backed securities, and the attendant interest rate risk has created financial and accounting difficulties at some of the FHLBs. ; Like Fannie Mae and Freddie Mac, the FHLB System is a government-sponsored enterprise that funds itself largely with federal agency debt obligations that investors perceive to be implicitly guaranteed by the U.S. government. This article identifies some differences in risk-taking incentives between the cooperatively owned FHLB System and investor-owned Fannie Mae and Freddie Mac. ; Cooperative ownership itself does not reduce FHLB risk-taking incentives because, unlike many mutuals, the FHLB System does not bundle its equity and debt claims. Also, the joint-and-several liability provision in the FHLBs’ consolidated debt obligations and a lack of equity market discipline may heighten FHLB risk-taking incentives. However, the FHLBs cannot avail themselves of equity-based managerial compensation, which create high-powered risk-taking incentives in investor-owned firms. Thus, it is unclear whether the FHLBs’ risk-taking incentives are necessarily weaker than Fannie Mae’s and Freddie Mac’s.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2006)
Issue (Month): Q 3 ()
Pages: 33-54

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Handle: RePEc:fip:fedaer:y:2006:i:q3:p:33-54:n:v.91no.3

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Keywords: Federal home loan banks;

References

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  1. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310.
  2. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 93-114, Fall.
  3. Lamm-Tennant, Joan & Starks, Laura T, 1993. "Stock versus Mutual Ownership Structures: The Risk Implications," The Journal of Business, University of Chicago Press, vol. 66(1), pages 29-46, January.
  4. W. Scott Frame & Larry Wall, 2002. "Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 45-59.
  5. W. Scott Frame, 2003. "Federal Home Loan Bank mortgage purchases: Implications for mortgage markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 17-31.
  6. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  7. Silber, William L, 1973. "A Model of Federal Home Loan Bank System and Federal National Mortgage Association Behavior," The Review of Economics and Statistics, MIT Press, vol. 55(3), pages 308-20, August.
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Citations

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Cited by:
  1. Lawrence J. White & W. Scott Frame, 2009. "The Federal Home Loan Bank System: Current Issues in Perspective," Working Papers 09-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. W. Scott Frame & Diana Hancock & Wayne Passmore, 2007. "Federal Home Loan Bank advances and commercial bank portfolio composition," Working Paper 2007-17, Federal Reserve Bank of Atlanta.
  3. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta.
  4. Adam B. Ashcraft & Morten L. Bech & W. Scott Frame, 2008. "The Federal Home Loan Bank System: the lender of next-to-last resort?," Staff Reports 357, Federal Reserve Bank of New York.

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