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The proposed merger of the Home Loan banks in Seattle and Des Moines could spur massive consolidation among their sister banks, but only if the two show it's possible to overcome governance and other logistical challenges that have deterred similar deals.
August 4
WASHINGTON Banks, credit unions and insurance companies would have to hold more mortgages on their books in order to maintain their membership in the Federal Home Loan Bank System under a new regulatory proposal unveiled Tuesday.
The Federal Housing Finance Agency issued a plan that would require Home Loan Bank members to hold at least 1% of their assets in home mortgages and "do so on an ongoing basis," according to the proposal, which is already running into opposition from the banks.
But industry representatives objected to the proposal, arguing it would hurt liquidity in the system.
"We think it will be viewed as the anti-liquidity regulation," according to a David Jeffers, executive vice president of the Council of Federal Home Loan Banks. "It seems to strike at the fundamental purpose of the FHLBs, which supplies liquidity to a broad spectrum of cooperative members for a variety of uses."
The plan is aimed at excluding so-called captive insurers companies essentially set-up to insure affiliated parent or related firms from Home Loan Bank membership. The proposal would allow insurance companies that primarily insure non-affiliated persons or companies to remain Home Loan Bank members.
Several hedge funds and real-estate investment trusts such as Redwood Trust have obtained access to the Home Loan Bank system, sparking concerns from FHFA Director Mel Watt.
Industry analysts said the proposal would have a big impact if finalized.
"It's obviously a very significant change," said Karen Shaw Petrou, managing partner at Federal Financial Analytics. "Mel Watt is putting his stamp on the Home Loan Banks as a mission-driven source of mortgage funding. It will create a significant strategic challenge for some of the banks."
Some Home Loan Banks have welcomed membership from captive insurance companies because it gives them another avenue for advances, a business that has shrunk considerably among traditional membership since the financial crisis.
"We believe captive insurers should continue to be eligible for FHLB membership," Jeffers said.
Under the proposal, existing captive insurer members would "sunset over five years with defined limits on advances," the FHFA said in a press release.
The proposal is open for comment for 60 days.
