Bipartisan Bill Would Stop Proposed Changes in Federal Mortgage Bank Membership

Proposed changes in rules would restrict FHLB membership and would not be beneficial to consumers[/caption] A bipartisan bill gaining support in Congress, H.R. 3808 – To require the withdrawal and study of the Federal Housing Finance Agency’s proposed rule on Federal Home Loan Bank membership, and for other purposes, is sponsored by Rep. Blaine Luetkemeyer (R-MO). The bill would prohibit implimentation of two new proposed changes in the rules for Federal Home Loan Bank (FHLB) membership released recently by the Federal Housing Finance Agency (FHFA). The proposed rules changes will likely restrict membersihp in the FHLB by financial institutions. The proposed rule changes membership in FHLB in two ways, one that would require an on-going asset ratio of members and the other that would prohibit participation by captive insurance companies. H.R. 3808 has support from members of both houses of Congress, including both Democrats and Republicans. If enacted, the bill set aside the proposed new rule from the FHFA and instead have the Government Accountability Office (GAO) conduct a study on the proposed rule. In order to apply for membership in the FHLB, financial institutions must meet an asset ratio requirement when applying to participate in the program. The FHLB Act mandates this requirement at the time of application to join FHLB, but the law does not require this on an on-going basis. The proposed change in the rule by FHFA would extend this requirement on an on-going basis for all members of FHLB, causing further limits on participation by financial institutions. The second rule change proposed by the FHFA could freeze out captive insurance companies, even though the FHLB Act clearly states “any insurance company” can have FHLB membership. Participation by captive insurance companies, which are regarded as risk management entities, in FHLB provides more private capital to expand home ownership opportunities for credit-worthy borrowers. Many captive insurance companies are owned by, or affiliatd with, Real Estate Investment Trusts (REITs), which are required by law to invest most of their assets in real estate and mortgages. REITs currently hold about $300 billion in mortgages and mortgage-based securities, which has partially replaced the declining retained portfolios of Fannie Mae and Freddie Mac. Participation in the system by captive insurance companies benefits them and the borrowers as well, and for more than 80 years the FHLB systme has been a stabilizing force in the housing finance market. A survey by the Mortgage Bankers Association found that “Mortgage REITs, through their captive insurer subsidiaries, view a consistent and reliable funding source as the primary benefit of FHLB membership. This diversified liquidity is beneficial both for its flexible terms, including the available length of terms. Most REITs noted in their responses that FHLB funding mitigated the potentially adverse changes in the availability of short-term funding during stress events.” Habitat for Humanity, the Independent Community Bankers of America, the Mortgage Bankers Association, and the National Association of Real Estate Investment Trusts have sent a letter to leaders of Congress urging them to oppose the proposed changes in the FHLB membership rules. “The Proposed Rule will cause harm not only to the System itself, but the communities and borrowers who rely on the capital it provides. Congress should take action and ensure that the System continues to serve its broad membership base and fulfills its statutory mission,” the letter states. Several letters from members of Congress and Senators have been sent to Melvin. L Watt, the Director of FHFA, urging the reconsideration of the proposed changes in the FHLB membership rules. H.R. 3800 has wide bipartisan support from more than 80 members of both houses of Congress, including members from both parties, and is endorsed by the Mortgage Bankers Association.]]>