Not All Housing GSEs Are Alike 613 Mark K. Cassell Kent State University Susan M. Hoffmann Western Michigan University Not All Housing GSEs Are Alike: An Analysis of the Federal Home Loan Bank System and the Foreclosure Crisis PAR Symposium on the Financial Crisis Mark K. Cassell is an associate profes- sor of political science at Kent State Univer- sity. He is the author of How Governments Privatize: The Politics of Divestment in the United States and Germany (Georgetown University Press, 2002) and the 2003 recipi- ent of the Charles H. Levine Award for the best book in public policy and administra- tion. His interest in public sector reform and government capacity has led to studies of the Federal Home Loan Bank System, tax expenditures, and e-government. E-mail: mcassell@kent.edu Susan M. Hoffmann is an associate professor of political science at Western Michigan University. A former practicing urban planner, she has worked in com- munity development and infrastructure. Her academic research is rooted in the same concerns, and focuses on the intersection of public policy process and public administra- tion in the construction of financial institu- tions. She is author of Politics and Banking (Johns Hopkins University Press, 2001) and articles on GSEs and capital budgeting. E-mail: susan.hoffmann@wmich.edu While the financial crisis of 2008 ultimately affected the range of U.S. financial institutions, it began with practices in home ownership finance. he Federal Home Loan Bank (FHLBank) System was the first instrumentality created by the U.S. government, in 1932, to sustain affordable home ownership finance. In this article, the authors ask what role, if any, the FHLBanks played in the subprime lending and securitization practices that precipitated the current crisis. he authors analyze publicly available FHLBank financial data in terms of a framework focused on the System’s assets: advances; mortgage loans acquired from members; and investments, particularly in mortgage-backed-securities. hey conclude that the FHLBanks did not contribute significantly to problematic practices. Nonetheless, they recommend consideration of three reforms to the FHLBanks to ensure a return to effective regulation and responsible, affordable home ownership finance. W hile the current financial crisis does not end with practices in home ownership finance, it began there. And while the reas- sertion of regulatory authority over the financial serv- ices industry will have to extend well beyond housing finance, it will be inadequate if it fails to address the fundamental issue of the structure and underwriting of individual mortgages, along with financial practices that channel a flow of funds toward those mortgages. he Federal Home Loan Banks (FHLBanks or Banks) were the first instrumentality created by the U.S. government to address precisely these issues. As the current financial turmoil unfolded, Senator Charles Schumer (D-NY) charged that their central mechanism—advances—was being used to fuel problematic housing finance. his charge is ironic from a historical perspective, and it warrants careful scrutiny. What role, if any, did the Federal Home Loan Banks play in the subprime lending and securitization practices that precipitated the current crisis? How might the Banks be reshaped moving forward to ensure a constructive role in housing finance and its regula- tion? he first two sections of this essay lay the groundwork for un- derstanding how the FHLBanks work. he first describes the FHLBank System and explains its central mechanism. he second reviews the development of the System, highlighting how the articulation of its network structure relates to its mission. he third section tackles the central empirical question of the Banks’ possible relationship to recent subprime lending and securitization practices. In the fourth section, we comment on structural changes to the FHLBanks that Congress quietly tucked into the home ownership statute passed in the summer of 2008, and we recommend consideration of differently focused restructuring. The Federal Home Loan Banks in 2008 Congress chartered the FHLBank System in 1932 to channel money into home ownership. As a congres- sionally chartered financial institution designed to di- rect capital flows toward a public purpose, with public and private elements in its design, the FHLBank System is a government-sponsored enterprise (GSE). he term “government-sponsored enterprise,” as far as we can tell, did not exist when the FHLBanks were established. he System was classified as a GSE ret- rospectively, after Congress had chartered additional financial intermediaries to ensure capital flows into the service of policy priorities. he Federal Reserve Banks, on the other hand, did exist in 1932, and the Federal Reserve Act provided a model What role, if any, did the Federal Home Loan Banks play in the subprime lending and securitization practices that precipitated the current crisis? How might the Banks be reshaped moving forward to ensure a constructive role in housing finance and its regulation?