The Federal Housing Finance Agency (FHFA) is requesting comments on a proposal to change the requirements for financial institutions in applying for, and retaining, membership in one of the 12 Federal Home Loan Banks (FHLBs).
In so doing, the FHFA aims to ensure that only eligible entities have access to FHLB advances and membership benefits and, further, that those entities maintain their commitment to housing finance.
Specifically, the FHFA is proposing to establish a new quantitative test requiring all FHLB members to hold 1% of their assets in home mortgage loans (HML) on an ongoing basis. Currently, applicants for membership need only demonstrate a nominal amount of HML on their balance sheet at the time of their application.
In addition, the FHFA proposes to require certain members that are subject to the 10% residential mortgage loans (RML) requirement to adhere to this requirement on an ongoing basis. Currently, these members are subject to the 10% RML requirement only when they initially apply for membership.
The biggest proposed change, however, is redefining the term ‘insurance company’ to mean a company that has as its primary business the underwriting of insurance for nonaffiliated persons. This would allow traditional insurance companies to continue to do business with the FHLBs, but would effectively exclude captive insurers from membership. Further, it would prevent entities not eligible for membership from gaining access to FHLB advances through a captive insurer.
Captive insurers that are already members would be phased-out over five years.
The agency also seeks to clarify the standards by which an insurance company's ‘principal place of business’ is to be identified in determining the appropriate bank district for membership.
If approved, the proposed rules could shut out mortgage real estate investment trusts (REITs) from applying for and maintaining membership in the FHLBs, as they commonly use captive insurance companies to gain access to low-cost funding through the FHLB system.
In a Wall Street Journal report, Mike McMahon, managing director for REIT Redwood Trust, said if the new rules are approved, REITs ‘won't have access to [low-cost funding] in the future,’ due to the fact their gateway to low-cost FLHB funding is through captive insurers. However, he added that the rules would not have a material impact on Redwood's business.
In a speech in May, Mel Watt, director of the FHFA, said captive insurance borrowing ‘raises a number of possible issues related to safety and soundness and access to the system;’ however, he did not elaborate.
David Jeffers, executive vice president of policy and public affairs for the Council of Federal Home Loan Banks, told the WSJ that ‘at first glance, this appears to be anti-liquidity regulation.’ As such, the proposed rules ‘will hurt housing, hurt credit and hurt growth,’ he said.