Bazemore on Housing & FHLBs

Episode Summary

Executive Summary: The episode centered on the housing market’s affordability crisis, the near-term economic relief from falling oil and mortgage rates, and a deep dive into the Federal Home Loan Bank system with CEO Teresa Bazemore. Discussion covered supply shortages, mortgage-rate lock-in, bank liquidity stress, SVB fallout, and FHFA’s reform report, with debate over the FHLBs’ role as a stabilizing but potentially hazard-creating backstop.

Main Topics: Housing affordability and supply shortages: The panel and guest agreed the housing market is constrained by too little affordable inventory, high construction costs, and limited turnover due to mortgage-rate lock-in and aging in place. Interest rates, oil prices, and near-term economic relief: The hosts highlighted falling oil prices, lower Treasury yields, and easing mortgage rates as positive near-term developments for consumers and inflation. Chinese weakness and disinflation spillovers: Marissa noted weak Chinese consumer and producer prices, arguing that softer demand from China may help keep global commodity prices and U.S. inflation lower. How the Federal Home Loan Bank system works: Teresa Bazemore explained the FHLBs’ core mission: providing on-demand liquidity to member institutions and financing mortgage-related assets through advances funded in debt markets. SVB, liquidity risk, and lender-of-last-resort debate: The discussion examined whether banks should rely more on the Fed discount window versus FHLBs, and how the March banking crisis exposed speed-of-run and collateral-management issues. FHFA reform report and affordable housing mandates: The hosts and guest discussed the FHFA’s roughly 49 recommendations, including raising affordable housing obligations and possibly changing membership/activity requirements.

Key Arguments: Housing remains expensive because supply is structurally short, households are forming faster than homes are built, and existing owners with sub-4% mortgages are reluctant to sell. Lower oil prices and falling long-term rates should ease inflation and improve consumer sentiment, but these trends can reverse quickly. China’s weak demand and deflation are helping pull global prices down, which may indirectly support U.S. disinflation. The FHLB system is designed for on-demand liquidity; changing it into a purpose-based or pre-approval lender would undermine its stabilizing function. SVB and Signature showed that modern bank runs can happen too fast for traditional responses, reinforcing the need for both FHLB advances and Fed facilities. FHLBs reduce failure risk, especially for small institutions that lack capital-market access, but critics are right to worry about moral hazard and incentives to prepare for the discount window. FHFA reforms should be phased in carefully because the FHLB system is part of financial plumbing and abrupt changes could disrupt liquidity and housing finance. Affordable-housing obligations are central to the FHLB compact, but the best allocation of those resources may differ by district and should preserve local discretion.

Data Points: WTI crude oil price: ~$75 per barrel - The hosts cited the recent drop from above $90 in September as a key source of inflation relief. Gasoline price example: $3.60/gallon - Mark referenced his local Wawa retail price as an illustration of easing fuel costs. 10-year Treasury yield: ~4.5% to 4.6% - Discussed as having fallen from the much-feared 5% area. 30-year fixed mortgage rate: ~7.5% - The rate had recently eased from around 8%. China CPI/PPI: Negative / deflationary - Marissa cited weak Chinese price data as a sign of soft demand. Housing shortage estimate: 1.2 million homes - Chris’s vacancy-gap analysis estimated the number needed just to return to long-run vacancy norms. FHLB membership borrowing share: About 50% - Teresa said roughly half of members are borrowing at any given time. FHLB establishment year: 1932 - Teresa explained the system was created during the Great Depression to provide liquidity. Affordable Housing Program contribution: 10% (current statutory level) - Teresa described the current AHP assessment and noted the FHFA recommendation to increase it. Proposed AHP level: 20% - Referenced as part of the FHFA reform report. San Francisco FHLB internal allocation: 15% currently / 5% discretionary use highlighted - Teresa said her bank already contributes about 15% and uses additional funds for local programs. Middle-income down payment pilot: $10 million - A San Francisco FHLB pilot program was fully committed in about four months. Middle-income pilot income band: 80% to 140% of area median income - Teresa described the target range for the pilot down-payment assistance program. Nonprofit/community grants: $1.5 million to $4 million - The bank increased grant support for community investment, economic development, and financial literacy. Native American capacity-building investment: $1 million - A new allocation mentioned for community capacity-building. SVB deposit loss: 26% in one day - Used to illustrate the speed of the 2023 bank run. Wamu deposit loss: ~10% over about three months - Cited as a slower comparison during the financial crisis era. Discount window term: 90 days / 3 months - Used to contrast the Fed’s short-term backstop with longer FHLB advances. FHLB advance terms: 1, 2, and 5 years - Teresa noted the FHLBs can offer longer maturities than the Fed discount window.

Pivotal Quotes: "Everybody hates Brexit now." — Mark Sandy: Mark opened with an anecdote from London to make a broader point about how economic outcomes can shift public opinion over time. "If George Bailey had membership in the Federal Home Loan Bank, he could have just called up, got some money when those folks were doing the run on the bank." — Teresa Bazemore: Used to explain the FHLB system’s original purpose: providing liquidity to prevent self-reinforcing bank runs. "I think they are." — Teresa Bazemore: Her answer when asked whether Federal Home Loan Banks are systemically important financial institutions.

Implications: Expect housing affordability to stay tight and FHLB reform to move slowly. For banks, liquidity planning and collateral readiness matter more after SVB. For policymakers, the challenge is preserving stability while tightening oversight and boosting affordable housing.