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Federal Home Loan Bank mortgage purchases: Implications for mortgage markets

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  • W. Scott Frame

Abstract

The Federal Home Loan Bank (FHLB) System is a government-sponsored enterprise created by Congress to support residential housing finance. Historically, the twelve regional wholesale banks that constitute the FHLB System have pursued this goal by making loans to their depository institution members secured by residential mortgage loans. In 1997, however, the Federal Home Loan Bank of Chicago began purchasing pools of conforming mortgages under its Mortgage Partnership Finance Program. Today, nine FHLBs offer this program, and the remaining three offer their own Mortgage Purchase Programs. ; The FHLB mortgage programs represent a small but growing part of the secondary conforming mortgage market, which has traditionally been dominated by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This article examines the various FHLB mortgage programs offered, analyzes the evolving competitive environment in the secondary conforming mortgage market, and identifies implications for this market. ; Consumers could ultimately benefit from lower mortgage costs because of a lower cost of guaranteeing mortgage credit, the author contends, but the savings per borrower would likely be small. He also notes that increased competition may reduce the franchise value of Fannie Mae and Freddie Mac, in turn possibly increasing risk-taking incentives for these firms. The author concludes that the evolution of this competitive landscape bears close attention as it could have important implications for mortgage markets.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedaer:y:2003:i:q3:p:17-31:n:v.88no.3
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    File URL: http://www.frbatlanta.org/filelegacydocs/erq203_frame.pdf
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    References listed on IDEAS

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    1. W. Scott Frame & Larry D. Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
    2. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
    3. Black, Deborah G & Garbade, Kenneth D & Silber, William L, 1981. "The Impact of the GNMA Pass-through Program on FHA Mortgage Costs," Journal of Finance, American Finance Association, vol. 36(2), pages 457-469, May.
    4. Ambrose, Brent W & Warga, Arthur, 2002. "Measuring Potential GSE Funding Advantages," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 129-150, Sept.-Dec.
    5. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
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    Cited by:

    1. Lawrence J. White & W. Scott Frame, 2004. "Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac," Working Papers 04-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Finkelstein, David & Strzodka, Andreas & Vickery, James, 2018. "Credit risk transfer and de facto GSE reform," Staff Reports 838, Federal Reserve Bank of New York.
    3. Rosalind L. Bennett & Mark D. Vaughan & Timothy J. Yeager, 2005. "Should the FDIC worry about the FHLB? The impact of Federal Home Loan Bank advances on the Bank Insurance Fund," Working Paper 05-05, Federal Reserve Bank of Richmond.
    4. 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.
    5. Frame, W. Scott, 2016. "The federal home loan bank system and U.S. housing finance," FRB Atlanta Working Paper 2016-2, Federal Reserve Bank of Atlanta.
    6. Lawrence J. White, 2007. "Reducing Barriers to Services Trade: The U.S. Case," Working Papers 07-7, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Mark J. Flannery & W. Scott Frame, 2006. "The Federal Home Loan Bank system : the "other" housing GSE," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 33-54.

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    Keywords

    Federal home loan banks ; Mortgage loans;

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