FHFA Splits the Industry with Final Home Loan Bank Rule

WASHINGTON — Community bankers and credit unions scored a significant victory while others in the mortgage industry lost out in the Federal Housing Finance Agency's final rule establishing membership standards for the Home Loan banks.

The rule, issued Tuesday, dropped a contentious proposal to force Federal Home Loan bank members to hold a certain percentage of assets on an ongoing basis in order to preserve their membership. But the agency kept another controversial part of the plan that would kick real estate investment trusts and other captive insurers out of the Home Loan Bank System.

The result was a mixed bag for the industry, with many simultaneously expressing relief as well as disappointment.

"In today's marketplace, we need a FHLB system that serves the wide variety of lending institutions active in today's housing finance market, including captive insurance companies, REITs, independent mortgage bankers, and other entities, all of which provide major sources of liquidity and are core components in the 21st-century FHLBank system," said David Stevens, the president and chief executive of the Mortgage Bankers Association. "We will continue to work with Congress on this issue to address the shortcomings of today's rule."

At issue is whether captive insurance companies should be part of the Home Loan Bank System. Most of the FHFA's 168-page rule is devoted to discussing why they should not be. Under existing rules, a real estate investment trust cannot belong to a Home Loan bank — but an insurance company can.

As a result, many REITs were forming captive insurance companies that they control in order to gain access to Home Loan Bank membership. This worried FHFA officials, which see it as gaming the system.

"FHFA has the authority and the duty to implement the statutory membership provisions of the Federal Home Loan Bank Act and by adopting the proposal to exclude captives from the definition of insurance company we are making sure that institutions can't frustrate the intent of Congress," said FHFA Director Mel Watt in a press release.

Since mid-2012, the Home Loan banks have admitted 27 new captive members, 25 of which are owned by mortgage REITs, finance companies, and other types of entities that are not themselves eligible for membership, according to the FHFA.

"This trend has become a matter of growing concern to FHFA, as it has become increasingly clear that captives are being promoted and used as vehicles to provide access to bank funding and to other benefits of membership for institutions that are legally ineligible for membership," FHFA says in the final rule.

Yet many mortgage industry officials argue that REITs should be allowed access through captive insurers or other means.

"We are concerned about the captives," said Ron Haynie, senior vice president of the Independent Community Bankers of America. "All community bank members benefit from the advances going to captives."

He argued that walling off captive insurers could increase the cost of advances. As the advances held by captives roll off, "it could lead to higher costs of funding," Haynie said.

The FHFA's move also drew the ire of lawmakers, some of whom have argued the agency does not have the power to exclude captive insurance companies.

"I am disappointed that it forces captive insurers out of the Federal Home Loan Bank System," said Rep. Blaine Luetkemeyer, D-Mo., who chairs the House Financial Services subcommittee on housing, in a statement. "We must ensure that decisions impacting our housing system are made in a thoughtful and educated manner and make sure that entire segments of industry are not exiled from participation in the Federal Home Loan Bank system. More importantly, FHFA needs to comply with standards already set in law. Congress changes the law, not the FHFA."

Luetkemeyer is a co-author of a bill introduced in October that would block the FHFA from enacting its membership rule.

The Home Loan banks themselves, meanwhile, also want to keep captive insurance companies as members. (Under the final rule, existing members would have to exit the system within five years.)

"In disqualifying captive insurance companies altogether, the agency has removed a longstanding category of FHLBank members who are important to housing finance," said John von Seggern, the president of the Council for Federal Home Loan Banks.

The reaction to that part of the plan stood in stark contrast to the industry's reception of the FHFA's decision to drop the asset test. Under the 2014 membership proposal, banks and credit unions with less than $1 billion of assets would have had to keep at least 1% of their assets in the form of mortgage loans or securities in order to maintain their membership. Larger institutions would have had to keep 10% of their assets in residential mortgage assets.

But the final rule dropped those requirements, with the FHFA deciding they would have a limited impact at too high a cost. That was a big relief to banking and credit union groups.

"The FHFA wisely heeded community bank concerns and dropped the ongoing asset test for FHLBank members," said Camden Fine, president of the ICBA. "The FHLBanks have long stabilized the housing-finance market—particularly in small and rural communities—so this change will avoid negative consequences for many borrowers."

Carrie Hunt, the executive vice president of government affairs for the National Association of Federal Credit Unions, echoed that sentiment.

"Extending the 10% standard on an ongoing basis would have unnecessarily restricted a credit union's ability to provide the mortgage financing needed by their members and the communities that they serve," she said in a statement.

Banks, credit unions and others sent more than 1,300 comment letters on the issue, which likely helped persuade the FHFA to drop the provision.

"There was no demonstrable need for the proposed changes, which contradicted congressional intent and would have harmed the FHLBs, their member banks and the communities they serve," said Rob Nichols, the president of the American Bankers Association.