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FHFA changes for Federal Home Loan Banks could cripple housing

Local banks, affordable housing and economic development at risk

stormy sky ahead

The Federal Housing Finance Agency’s proposal to change membership requirements in the 12 Federal Home Loan Banks will devastate housing finance far beyond its affect on real estate investment trusts, some bankers are saying.

The proposed rule changes, announced Tuesday, would revise FHFA’s existing membership regulation to require that members maintain a commitment to housing finance and that only eligible entities can gain access to bank advances and the benefits of membership. 

The most obvious effect would be dialing out REITs, which use captive insurers, but it goes further than that, said David Jeffers, executive vice president of policy and public affairs at the Council of Federal Home Loan Banks.

“This goes much further, we see this as an anti-liquidity and anti-housing regulation, and a threat to the fundamental purpose of home loan banks,” Jeffers told HousingWire. “For 25 years Congress has made clear the purpose of Federal Home Loan Banks, and our purpose is to maintain a safe and secure model and to provide liquidity to a broad spectrum of business for broad use."

The Mortgage Bankers Association took a measured approach in its position on the proposed changes.

“The federal home loan banks provide a very important role in providing liquidity to the mortgage markets,” said Dave Stevens, president and CEO of the MBA. “Providing access that is not overly exclusive based on business model to this liquidity is a key concern for a well functioning market. We appreciate the request for comment and look forward to providing our input formally."

Jeffers didn’t pull any punches in his take on the proposal.

“The banking and housing sectors see us as the ‘federal hometown loan bank’ because we are a reliable source of liquidity for housing and economic development,” he said. “This will shrink and limit the amount of capital through HLBs to the mortgage market.

“Mortgage originators, especially the smaller ones, are encouraged to sell home mortgages on the secondary markets, and lenders who securitize would be penalized by this,” Jeffers said.

The proposal would establish a new quantitative test requiring all members to hold 1% of their assets in home mortgage loans and to do so on an ongoing basis. 

Under current rules, applicants for membership need only demonstrate a nominal amount of HML on their balance sheet at the time of their application, but not thereafter.

The revision would also require certain members that are subject to the 10% residential mortgage loans requirement to adhere to this requirement on an ongoing basis. 

Under the current rules, these members are subject to the 10% RML requirement only when they initially apply for membership in a bank, but not thereafter.

Jeffers said the ownership requirement in the FHFA’s proposed changes would be especially onerous for community banks, credit unions and community development financial institutions and similar organizations, as many wouldn’t be able to meet the requirements of an ongoing test.

“Finally, having a regulator propose such arbitrary, sweeping tests could have a chilling affect on FHL Bank members and the housing finance industry,” he said.

The impact will be especially hard on affordable housing efforts, as the FHLBs, through the Affordable Housing Fund, are the largest single private source of grant funds for affordable housing.

A client note from Compass Point Research & Trading suggests that it will be hard to push back against the FHFA proposal.

“Our sense remains that state insurance regulators and the FHLBs themselves are supportive of the captive insurance model being used by mortgage REITs. Notably, the FHFA stated that at least 3 state insurance regulators objected to the FHFA’s proposed change,” they said. “Furthermore, in an interview with Bloomberg a top FHLB representative stated: ‘In a period where housing finance is limping along and a sluggish economy needs all the help it can get, mucking around with a model that works doesn’t make sense…This proposal may be the first step in dismantling a very successful model. As an anti-liquidity regulation it hurts housing and hurts growth.’

“We believe that there will be a pushback against the FHFA’s FHLB proposal but our sense is that the esoteric nature of this particular issue, coupled with the slate of other FHFA proposals outstanding, may make it difficult to organize an effective opposition campaign,” Compass Point said.

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