FHLB Financing: An Affordable Housing Secret Weapon

Helping Communities Grow Through Federal Home Loan Banks

By James Poznik
KeyBank Community Development Lending

People interested in homeownership should familiarize themselves with Federal Home Loan Banks, or FHLBanks, as they play a prominent role in the development of affordable housing across the country.

FHLBanks work in a public-private partnership with member banks, helping finance housing and economic development. They deploy capital directly from their earnings, not taxpayers, and are one of the largest collective sources of home mortgage and community credit in the country.

Congress established the FHLBanks in 1932 during the Great Depression. The aim was to provide liquidity to financial institutions to support building and loan institutions. The goal was to encourage the financial institutions to offer mortgages to homeowners. The system, as well as its purpose and integrity, remain intact and available to Americans today. Banks, as well as other savings and loan institutions, continue to be the client base of the FHLBank system.

Here’s how it works. More than 8,100 member banks across the country own stock in 12 FHLBanks. They sell debt securities on global capital markets to finance their operations, making them the largest U.S. borrower after the federal government. FHLBanks provide funds to member banks in a number of ways, the first of which is through advances or fully collateralized loans. To note, no FHLBank has ever lost money on an advance. They can also purchase fixed-rate, fully amortizing conventional and Federal Housing Authority mortgages from member banks.

At the end of each year, FHLBanks allocate 10 percent of their annual net profit to affordable housing programs, including the Affordable Housing Program (AHP) and the Welcome Home Program. In the case of the AHP, the funds are deployed into the community through direct grants to affordable rental housing projects. Those grants are awarded to projects through a competitive process and must have applications “sponsored” by a member FHLBank. In the case of the Welcome Home Program, funds are set aside to provide low- and moderate-income home buyers with down payment assistance.

In addition to the grant dollars that are allocated each year, the FHLBanks also provide below-market-rate “advances” to member banks, which help member financial institutions borrow more cheaply. This helps provide long-term, lower rate mortgages for affordable multifamily projects.

The Federal Home Loan Bank of Cincinnati is one of 12 FHLBanks in the U.S. and has 725 member banks, many of which employ a specialist assigned to facilitating FHLBank financing for borrowers. This year, the Federal Home Loan Bank of Cincinnati (designated the Fifth District Bank among the 12 districts, covering Ohio, Kentucky and Tennessee) has $13.2 million to distribute in the form of affordable housing subsidies through the AHP.

For-profit and not-for-profit developers can apply through a competitive process, and potentially obtain grant funds up to $1 million for affordable housing projects. Funds may be applied for and used on projects only after most other funding sources are in place. The FHLBanks prefer that developers seek out and obtain all available tax credit equity, grants and foundation support before obtaining FHLBank funds, which can be used for site acquisition, new construction or rehabilitation projects. All project costs are eligible for FHLBank reimbursement with the exception of operating, lease-up and replacement reserves.

FHLBank funds have historically represented anywhere from 10 to 50 percent of total project costs. Developers must first raise all other project costs, while showing they have the background, ability and resources to build and manage a project long term. Once construction is completed, FHLBank grants can pay construction debt or the advance can be used to fund the permanent loan, if required.

Success stories abound across the country, but securing FHLBank financing requires special expertise of commercial bankers who understand application requirements. Sponsors who work with such specialists have the greatest likelihood of successfully utilizing this valuable “secret weapon” method for financing quality housing with long term viability.

James Poznik is the senior vice president at KeyBank Community Development Lending. KeyBank is one of the more than 8,100 member banks partnering with FHLBanks.