Move will bar membership in government-backed federal home loan banks for captive insurers
A top federal housing regulator on Tuesday shut the door on mortgage investors who had been using a loophole to access low-cost, government-backed financing.
The Federal Housing Finance Agency said so-called captive insurance companies, which insure the risks of the companies that own them, no longer will be eligible for membership in government-backed federal home loan banks.
Real-estate investment trusts that invest in mortgages are normally ineligible for home-loan-bank membership, but over the past few years have created captive insurers to gain indirect access to cheap federal funding.
After the announcement on Tuesday, shares of some mortgage REITs with captive insurers, such as Annaly Capital Management Inc., Two Harbors Investment Corp. and Redwood Trust Inc., fell between 0.9% and 5%.
Mortgage experts said the move is likely to make it even more difficult for some riskier borrowers who don’t fit the parameters of government-backed agencies to get loans.
“It will make some loans to lower-quality borrowers even slower to come back,” said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, a think tank.
Mortgage rates also could tick up, since the rules would effectively cut off some investment in mortgage bonds.
On the other hand, some had feared that allowing captive insurers to get access could put the FHLB system at risk, as other types of firms like hedge funds and investment banks considered using the workaround.
“Congress has had plenty of opportunities to give mortgage REITs access to the system, and they haven’t done so,” said Joseph Pigg, senior vice president for mortgage finance for the American Bankers Association, a banking industry trade group.
The 11 regional federal home loan banks advance low-cost loans to financial institutions such as credit unions and commercial banks to promote lower mortgage rates.
In shutting captive insurers out, FHFA Director Melvin Watt said the agency sought to abide by Congress’s intent when it passed the law governing the home loan bank system.
As of the end of September, 40 captive insurers had become home-loan bank members and as of mid-November, they had outstanding borrowings of more than $35 billion.
In a statement, John von Seggern, president of the Council of FHLBanks, said the FHFA’s decision “will mean fewer opportunities for private capital to expand homeownership opportunities for Americans.”
Mortgage Bankers Association President David Stevens said the rule “removes a vital component of the FHLBank membership which provides liquidity for the real estate finance market.”
On Tuesday, the FHFA did roll back separate provisions that would have required home-loan bank members to keep a certain percentage of their assets in mortgages. That move is expected to help liquidity.
The FHFA first proposed the changes in September 2014. A bipartisan group of congressmen in October last year introduced a bill that would require the FHFA to withdraw the proposal, though that legislation never left committee.
Mortgage REITs that have already used insurers to get home-loan bank access will get some relief. Those that entered the system before the September 2014 proposal can stay members for up to five years, while those that became members after will have one year.
Michael Widner, an analyst for Keefe, Bruyette & Woods, said that because of the uncertainty surrounding membership, mortgage REITs until now have hesitated to rely on the home-loan banks for a large portion of their funding. In part for that reason, he said he didn’t expect the FHFA’s decision to have a near-term impact on REIT earnings. Mr. Widner said 19 of 24 publicly traded mortgage REITs had captive insurers that were home-loan bank members.
Annaly CEO Kevin Keyes said mortgage REIT membership in the FHLB system “enhances both the stability of the residential financing market and is supportive of the federal government’s broader goal of returning private capital to the U.S. mortgage market.”