MBA, Trade Groups Urge House to Reject FHFA Plan for Federal Home Loan Banks
The Mortgage Bankers Association and other industry trade groups sent a letter to House Financial Services Committee leadership, urging committee members to reject a Federal Housing Finance Agency proposed rule that would make changes to Federal Home Loan Bank System membership requirements.
The proposed rule, issued in September 2014, would alter a mortgage asset ratio requirement that currently applies only at the time an institution applies for membership in the System. This proposed rule would convert this ratio into an on-going obligation, regardless of market conditions, size of institution or length of time an institution has been a member in the System. A second proposed component would prohibit all captive insurance companies from being part of the System.
The letter said the proposed rule would make “harmful changes” to the Federal Home Loan Bank System’s (the System) membership requirements. It also raises significant concerns regarding legislative intent and the fulfillment of the System’s overall mission. The letter noted members of both the House and the Senate submitted letters during the notice and comment period, voicing their strong opposition to the changes proposed by FHFA.
“We respectfully urge Congress to prohibit this Proposed Rule from taking effect. Congress should also direct FHFA to consult with stakeholders to evaluate an appropriate membership structure to allow the System to best serve its mission in the 21st century.”
The letter pointed out the Federal Home Loan Bank Act imposes the mortgage asset ratio only at the time a prospective member applies to join the System. As proposed, this new mortgage asset ratio test effectively amends the Act.
“Converting the current test into an on-going obligation could result in current long term members leaving the System, many of which are in small and rural markets, thereby reducing access to capital for home mortgage lending,” the letter said. “It also risks undermining member confidence in the System, forcing current members to consider the risk that they may one day find themselves on the wrong side of an arbitrary requirement.”
The letter also expressed concern with the second component, pointing out that the prohibition of all captive insurance companies from being part of the System contradicts the FHLB Act’s express language that “any . . . insurance company” is eligible for membership. “FHFA justifies this step by noting that captive insurance companies did not exist when the Act was drafted,” the letter said. “While this is technically correct, it is also misleading. Captive insurance companies are widely-recognized risk management vehicles and have been productive members of the System for more than two decades.”
The letter pointed out that many captive insurance companies are owned by or affiliated with mortgage Real Estate Investment Trusts. Mortgage REITs are required by law to invest the vast majority of their assets in real estate and mortgages, and currently are direct holders of nearly $300 billion in mortgages and mortgage-backed securities using permanent capital raised in the public markets. Additionally, mortgage REIT-owned captive insurance companies acquire and hold mortgage and MBS with their own capital, fulfilling the secondary market role insurance companies of all types have held since the Act was signed into law.
“Notably, this influx of capital has helped partially replace the declining retained portfolios of Fannie Mae and Freddie Mac,” the letter said. “In turn, the System helps captive insurers, and by extension their parent companies, by providing flexibility in funding terms. The ability to match funding terms with expected asset maturities allows these companies to invest in a greater array of mortgages and MBS–including those to borrowers who remain underserved. In return, the System receives more collateral than other sources of funding, such as Wall Street repurchase agreements. It is worthwhile to note that the System has never lost money on an advance.”
Joining MBA in the letter: Habitat for Humanity International; Independent Community Bankers of America; and the National Association of Real Estate Investment Trusts.
