Des Moines FHLB Hikes Two Harbors’ Borrowing Limit

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The Federal Housing Finance Agency wants to chase mortgage REITs out of the Federal Home Loan Bank System, but that didn’t stop one regional FHLB from expanding its credit facility for Two Harbors Investment Corp.

The New York-based real estate investment trust already has $1.5 billion in outstanding advances from the FHLB of Des Moines. The Des Moines FHLB increased the REIT’s borrowing capacity to $2.5 billion during the third quarter, according to Two Harbors chief executive Thomas Siering.

The CEO stressed during a conference call Wednesday that his company has a strong relationship with the Des Moines FHLB. “The strength of our alliance is underscored by the fact that our facility with the FHLB was expanded to $2.5 billion during the third quarter. We believe this highlights the home loan bank’s comfort with us as a counterparty and provides us with long-term financing at favorable rates, which enables us to provide liquidity at better rates to borrowers,” Siering said.

The Des Moines FHLB declined to comment.

In August, the FHLB regulator issued a proposed rule to tighten FHLB membership rules which caused a backlash among the FHLB community because it would require many members to hold more mortgage assets on their books to continue borrowing from the 12 regional FHLBs.

The proposal, which was originally issued for a 60-day comment period, would also require REITs that became FHLB members through their captive mortgage insurance units to phase out their FHLB borrowings over a five-year period and exit the system.

Strong opposition to the proposal forced the federal regulator to extend the comment period to Jan. 12.

Two Harbors is mainly known for purchasing and securitizing prime jumbo loans. But it recently launched a conduit program to fund nonprime loans for borrowers with average quality credit quality that currently can’t qualify for a mortgage.

Chief financial officer Bill Roth noted that a lot of borrowers are rejected by automated underwriting systems. They have credit scores in the 600s because of previous credit problems or debt-to-income issues. “These borrowers need a high touch,” Roth said during the conference call, “which is where we intend to add value.”

Siering pointed out that Two Harbors’ efforts “align well” with the mission of the FHLB System. And FHLB advances allow the REIT to provide stable and attractive pricing to originator partners, which helps homebuyers.

“Obviously are we are disappointed” with the FHFA’s membership rule making, the CEO said. If finalized as proposed, “it would not take effect for some time,” he added. Two Harbors would have five years to phase out its FHLB borrowings.

 

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