Right now, Congressional leaders continue to wrangle over the 21st Century Road to Housing Act, a bipartisan effort to lower housing costs by making it easier to build. But while such legislation is urgently needed, there’s a way to build more homes without extensive new regulation or funding.
America is short at least four million homes. The typical first-time buyer is 40 years old, a decade older than in 2010. That leaves a lot of younger renters, many of whom pay more than 30 percent of their income for housing. The rate of new housing construction has stagnated; and without new homes, prices will only continue to rise.
One promising solution is already on the books. The Federal Home Loan Bank System, a network of 11 regional banks owned cooperatively by some 6,400 members, was chartered by Congress in 1932, in the depths of the Great Depression. The system’s mission then was to channel credit to thrift institutions — especially the local savings and loan associations that were central to American mortgage lending — to spur home buying during the Depression.
For decades, that’s what the system did. Today, though, it specializes in providing cheap funding for the country’s largest financial institutions. Only 10 percent of its net income goes to the mission it was intended to serve. That needs to change. The system should be rechartered to help make housing more affordable.
One segment of the housing market is in particular trouble. While single-family homes and luxury high-rises continue to be built, medium-size multifamily condominiums of five to 50 units are so rare that housing experts have come to refer to them as the “missing middle.” Too small to attract high-rise developers given the expensive per-unit cost of construction and too large to finance with a conventional home mortgage, these buildings often don’t get built.
If we want to build more housing quickly in the United States, we have to make “missing middle” housing cheaper to build. In the F.H.L.B. system, Congress has an easy, no-cost solution that could spur the construction of 200,000 new homes every year, roughly 40,000 of them below market in midsize buildings.
How did the system’s member banks lose their way? Institutional drift. The savings and loans sector collapsed in the 1980s as a result of record-high interest rates and irresponsible deregulation. As S.&L.s faded, the F.H.L.B.s needed a new business model. Congress then allowed the system to open its membership to commercial banks, insurance companies and eventually anyone with a federal or state charter.
Gradually, the system began providing wholesale funding to institutions that had little to do with housing. Today, more than 40 percent of all F.H.L.B. institutions do not even give out mortgages.
Member banks now use the system as a source of reliable, inexpensive funding, particularly in times of stress. Large banks and insurers borrow from the F.H.L.B.s at rates just above short-term Treasury rates and invest the proceeds at higher yields. That’s a very profitable trade. Most of the profits go to member banks, not to fund mortgages. In 2024, the F.H.L.B.s paid about half of their $6.4 billion income in dividends to their banking member institutions, and earmarked a paltry $850 million — 13 cents of every dollar they earned — for affordable housing.
Home loan banks ought to serve homeowners, not member banks. The F.H.L.B.s should have to dedicate 25 percent of their overall lending, about $175 billion, to direct, below-market construction loans for multifamily housing — modestly sized buildings in pedestrian-friendly neighborhoods in small towns and big cities alike. The F.H.L.B.s would get a five-year window to grow into this requirement, with interim milestones. Construction lending typically runs in three-year cycles, allowing a new, revolving F.H.L.B. fund to invest about $60 billion annually over time. If the average unit costs $300,000 to build, that lending would produce roughly 194,000 new multifamily units a year — doubling the number of units completed annually in missing middle buildings. More likely, F.H.L.B.s would finance only a portion of construction costs for each unit, meaning the number of new units constructed could be still higher.
Less expensive financing can underwrite affordability. Any project that gets F.H.L.B. financing should be required to set aside at least 20 percent of its units for buyers who earn less than 80 percent of the area’s median income. Market-rate units can support the financial health of the project, as early efforts for public financing of mixed-rate housing in Montgomery County, Md., have shown.
There’s a social benefit, too. A blend of market-rate and affordable units avoids the concentrated poverty patterns that have plagued low-income housing developments while dramatically expanding the production of dense, multifamily housing.
Because the F.H.L.B.s enjoy an implicit government guarantee of their debt, valued by the Congressional Budget Office at around $7 billion per year, they will be able to lend at roughly 2 to 3 percentage points below conventional construction lending. No commercial bank could do the same. If the interest rate on a $30 million project is 4 percent rather than 7 percent, a developer could save as much as $1 million a year. That’s the difference between a project where the math works out and one that never breaks ground.
This banking reform does not require dismantling anything. The 11 regional banks would keep their structure, their cooperative ownership and their capital markets funding. The F.H.L.B. of San Francisco could specialize in California permitting and seismic codes, and the F.H.L.B. of Dallas in Sunbelt land economics. The F.H.L.B. of New York would have particular familiarity with the layered capital stacks of the most expensive urban markets in the country.
The one genuinely new capability that F.H.L.B.s would need is construction finance expertise. Offering financing to developers for new construction projects is more onerous than the deals these banks normally do, but this skill set can be learned. It’s already practiced by thousands of professionals at state housing finance agencies and commercial banks.
In a period of extreme partisan gridlock, it may seem naïve to expect Congress to do anything. But the housing bill currently under consideration in the House passed the Senate 89 to 10, with Republican Tim Scott and Democrat Elizabeth Warren, hardly centrists, as co-authors. Both parties are competing to show voters they can lower the cost of living, and housing is the rare domestic issue where broad agreement is not only possible but already happening.
The hardest problems in housing policy are the ones that require new money or forcing local residents to accept new development in their backyard. Those are critically important efforts, but this one requires neither. We only need insist an old public institution serve a public purpose again.
Chris Hughes is the chair of the Economic Security Project. He is a doctoral candidate at the Wharton School.
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