Federal Home Loan Banks (FHLBs) are an important but little-known component of the nation’s financial system. Membership requirements are stringent, but member financial institutions gain access to cheap, flexible, on-demand capital that is nearly impossible to find anywhere else — and they don’t have to use the capital solely for home mortgage lending.
Congress created the FHLB system during the Great Depression to kick-start home mortgage lending through savings and loan institutions. No taxpayer dollars are involved in the operation of FHLBs. They are self-funded, borrowing from global capital markets at super-low interest rates and charging slightly higher interest on loans to members.
The 11 regional FHLBs are each cooperatively owned by members, which have evolved over time to include mainstream commercial banks, credit unions and, as of 2010, non-depository community development financial institutions (CDFIs). Over 7,200 financial institutions are members of a regional FHLB, including at least 41 non-depository CDFIs around the country.
Although they’ve had a historic mission to support homeownership, FHLBs in the 1990s began expanding their mission beyond support for home loan lending. In the late 1990s, they began to accept small business loans, not just home mortgage loans, as collateral, meaning that small business lending institutions (with assets below $1 billion) could access new lending capital faster than waiting for loans to be repaid. More recently, FHLB Chicago now provides capital to non-members for small business lending. And now, FHLB San Francisco will put $40 million toward quality job growth and business expansion financing.
“The net we’re casting is really around the notion of how do we help to move people up the economic ladder who are already in the system, but who are either stuck or unable to move up from the working poor slice of life into working-class and middle-class,” says Lawrence Parks, senior VP for external and regulatory affairs at FHLB San Francisco.
Basically, they want to figure out how to generate more homeowners. While homeownership is not the only way to address the racial wealth gap, the fact is 73 percent of white households owned their own homes in 2011, while only 47 percent of Latinos and 45 percent of blacks were homeowners. And for those who do own their homes, white home values grow faster than black or Latino home values.
The extent to which bringing people up the economic ladder into homeownership can address stubborn racial wealth inequality in the U.S. is partly going to be a function of the region’s racial demographics.
“In a diverse community like Arizona, California and Nevada, and when you look at data, it jumps out that the wealth gap exists,” Parks says. “This isn’t a racially steered or racially motivated program per se. It’s just that the face of working-class America and people who are working poor and working-class increasingly mean people of color.”
According to a recent report from UCLA, “The Color of Wealth in Los Angeles,” the racial wealth disparity is particularly gaping in the nation’s second-largest city. The report estimates that in L.A., the typical U.S.-born black or Mexican family has just 1 percent of the wealth of a typical white family.
Closing the racial wealth gap is a cause that is near and dear to the hearts of many, including Rep. Maxine Waters, who represents parts of Los Angeles.
“The wealth gap and its causes are not new. And this level of inequality is not a natural phenomenon,” observed Waters, at a May 6 event at Los Angeles Southwest College. “It is the result of long-standing, deliberate policy choices and of systemic discrimination in the private sector that hamstrings the ability of minority families to succeed,” Waters added.
The L.A. event was part of a five-city series of roundtables that FHLB San Francisco is using to help design its new $40 million initiative. Other places on the tour are Phoenix, Bay Area (June 9), Las Vegas and Sacramento. The five stops are meant to give FHLB San Francisco a sense of different parts of the region. “We’re not going to exclude other places, but these are natural population centers,” Parks notes.
They’re also using the roundtable tour to understand who might be the most effective types of grantees.
“We really haven’t narrowed down who could receive grants,” Parks says. “We’re going through this process on purpose, to understand what the needs are in the region.” Some of those they’ve heard from include lenders, business owners, people who train workers or business owners, and people who are in education.
They’ve also been hearing about existing initiatives, including public-private collaborations, to drive specific industry growth in one city or another. “For some communities it means how do you attach minority communities into these growing industries,” says Parks. “For others it means how do you really take this nascent structure of this industry and how do you grow it, and grow it equitably.”
It’s also becoming clear that the answer to quality jobs or expanding small businesses may already be out there in the community. “We’re not excluding them at this point, but we’re probably not leaning toward startups. What we found is that a lot of the communities already have institutions,” Parks says.
The Equity Factor is made possible with the support of the Surdna Foundation.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.