The overseer of the Federal Home Loan Banks is planning changes to membership rules that would keep investment firms and lenders lacking customer deposits out of the U.S. government-chartered system.
The Federal Housing Finance Agency, which has voiced concern over firms using specialized insurers to join FHLBs, said in a statement today that under new rules it’s proposing, the home loan banks would only be able to accept insurers dealing primarily with “nonaffiliated persons.”
The existing memberships of captive insurers — which mainly offer coverage to their owners or customers of those parent companies — would be “sunset” over five years.
Real estate investment trusts that buy mortgage debt and other lenders known as shadow banks have been using captive insurers to flock to the FHLBs in recent years for dependable funding that can offer better terms than traditional banks or bond markets. FHFA Director Mel Watt said in a May speech that the new members could raise “issues” for the safety of a system with $815 billion of debt that’s seen by investors and credit raters as being backed by taxpayers.
Captive insurers should remain a part of the FHLBs’ membership base because they help support the U.S. housing market, which is the system’s mission set by Congress, said David Jeffers, a spokesman for the Council of Federal Home Loan Banks, a trade group for the lenders.
“In a period where housing finance is limping along and a sluggish economy needs all the help it can get, mucking around with a model that works doesn’t make sense,” Jeffers said today in a telephone interview. “This proposal may be the first step in dismantling a very successful model. As an anti-liquidity regulation it hurts housing and hurts growth.”
Mortgage REITs Redwood Trust Inc., Annaly Capital Management Inc., Invesco Mortgage Capital Inc. and Two Harbors Investment Corp. have all joined the network of regional lending cooperatives since October through captive insurers. Commercial real estate lender Ladder Capital Corp. joined in 2012. Spokesmen for the companies didn’t immediately respond to emails seeking comment.
The FHLB system was set up in 1932 after a string of bank failures caused by runs on deposits, and has accepted insurers since its start. Members buy stock in the institutions and get access to low-cost, wholesale funding in return for pledging collateral such as mortgages.
The FHFA said other proposed rules include a new test requiring all members to hold 1% of their assets in home-mortgage loans, and a requirement that some keep 10% in residential-mortgage loans on an ongoing basis. It will also clarify how an insurer’s “principal place of business” is identified for determining the appropriate Home Loan Bank district.