Independent mortgage banks originate roughly 84% of U.S. mortgages but remain shut out of direct membership in the Federal Home Loan Bank System.
The Community Home Lenders of America (CHLA) says that disconnect is getting harder to defend.
CHLA is using a Federal Housing Finance Agency (FHFA) proposal to loosen restrictions on new Federal Home Loan Bank activities to renew its push for qualified IMBs to gain access to FHLBank membership and liquidity — while simultaneously warning regulators against allowing the banks to move too far into mortgage purchasing.
"This exclusion is increasingly difficult to reconcile with the modern structure of U.S. mortgage finance," CHLA wrote in an Aug. 12 comment letter to FHFA.
The trade group noted that IMBs now account for approximately 84% of mortgage originations and an even greater share of government and agency lending.
Yet IMBs remain ineligible for FHLBank membership.
Commercial banks, thrifts, credit unions, Community Development Financial Institutions, and insurance companies can qualify under current law. That gives eligible depositories access to FHLBank advances, while IMBs generally depend on private warehouse funding to finance mortgage originations.
For mortgage companies competing for the same borrowers, that's not an insignificant distinction.
CHLA argues it creates a structural liquidity difference that becomes particularly important during periods of severe market stress.
The organization wants Congress and FHFA to establish a framework allowing qualified IMBs to become FHLBank members and access liquidity subject to safety-and-soundness requirements, including potentially rigorous capital, collateral, borrowing and risk-management standards.
The push isn't new. But it comes as regulators are reconsidering what the FHLBank System itself should be allowed to do — putting the question of who gets access to its benefits back into focus.
More Freedom For FHLBanks — But Not Too Much
FHFA has proposed repealing 12 CFR Part 1272, the regulation governing the FHLBanks' New Business Activities framework.
CHLA supports the basic idea.
The organization said existing requirements can be overly prescriptive and duplicative, unnecessarily constraining FHLBank flexibility and innovation.
But it doesn't want deregulation to become a path toward turning the FHLBanks into another mortgage-purchasing system.
"CHLA supports giving FHLBanks greater operational flexibility," the organization wrote. "However, that flexibility should not result in the expansion of activities that could create unnecessary risk to the System or blur the distinction between the FHLBanks and Fannie Mae/Freddie Mac."
CHLA specifically wants FHFA to make clear that repealing the regulation isn't intended to facilitate an unchecked expansion of direct residential mortgage acquisitions or other activities that could effectively replicate functions performed by Fannie Mae and Freddie Mac.
There is an important distinction: FHLBanks already acquire eligible mortgage assets through their Acquired Member Assets programs.
CHLA isn't arguing that FHFA's proposal suddenly creates mortgage-purchasing authority. Instead, it says removing the existing review framework could make it easier for FHLBanks to expand or develop mortgage-purchase activities without equivalent scrutiny of the new or material risks those activities could create.
CHLA said it has previously opposed efforts that would move the FHLBanks further toward "GSE-like direct loan purchasing."
And its concern isn't solely systemic risk.
It is also competition.
A significant expansion of FHLBank mortgage purchasing, CHLA argues, could provide another advantage to depository institutions that already have access to FHLBank advances and other benefits — while IMBs remain outside the membership system.
That makes the two issues difficult to separate.
CHLA wants FHFA to prevent FHLBanks from becoming more like Fannie and Freddie while simultaneously asking policymakers to give qualified IMBs access to the liquidity benefits banks already receive.
The Liquidity Divide Isn't New
The argument fits into a broader fight over the financial infrastructure supporting a mortgage market increasingly dominated by nonbanks.
In June, CHLA made a similar point while commenting on proposed bank-capital changes.
The group backed lower capital requirements for certain mortgage assets but argued that regulatory changes alone were unlikely to reverse banks' long retreat from mortgage lending. It also called for more favorable capital treatment of warehouse lending and renewed its push for a Ginnie Mae standby liquidity facility for solvent nonbank issuers during periods of market stress.
The common thread is liquidity.
Banks can potentially draw on deposits, Federal Reserve facilities, FHLBank advances and other sources of funding unavailable to independent mortgage companies. IMBs, meanwhile, have become the dominant mortgage originators while remaining heavily dependent on private warehouse funding.
The industry's push to reconsider FHLBank membership also predates the current rulemaking.
Mortgage industry groups have argued for years that a system created to support housing finance should reflect the institutions actually providing that financing.
Now CHLA is making that argument again with IMBs' share of originations at approximately 84%.
Should Existing Members Have To Keep Making Mortgages?
CHLA's third recommendation adds another layer to the debate.
The organization isn't only asking FHFA to reconsider who's excluded from the FHLBank System. It also wants regulators to consider whether institutions already receiving its benefits should have to demonstrate an ongoing connection to mortgage lending.
FHFA's membership regulations govern both becoming and remaining an FHLBank member, but the agency previously declined to adopt a requirement that members maintain a specified minimum level of residential mortgage assets.
CHLA says the issue deserves another look.
"At a minimum, FHFA should consider whether an annual review of members' active mortgage lending would provide a more current measure of whether continued access to the public benefits of FHLBank membership remains aligned with the System's housing mission," the group wrote.
CHLA isn't proposing a single origination threshold for every member. Instead, it said FHFA could develop standards recognizing differences among institutions while ensuring members continue to demonstrate a meaningful connection to housing finance.
That turns the FHLBank membership debate on its head.
If active mortgage lenders responsible for most U.S. originations can't get in, CHLA is effectively asking: should institutions that are already in be able to retain the benefits if mortgage lending is no longer a meaningful part of what they do?
"The FHLBank System's public benefits should remain closely tied to its statutory housing and community development mission," CHLA wrote. "Aligning those benefits with the institutions that are actually providing mortgage financing to American families would strengthen both the System and the broader U.S. housing finance market."
For IMBs and the originators working for them, that's the larger issue behind what otherwise looks like another technical FHFA rulemaking: the mortgage market has changed dramatically. The system providing government-sponsored liquidity to it hasn't changed nearly as much.
