Housing Finance Reform and the FHLBank System

posted on Wednesday, October 23, 2019 in Letters from the CEO

In early September, the United States Department of the Treasury released its Housing Reform Plan.

You may or may not have decided to curl up in your favorite arm chair and peruse the 50+ page document. But, in case you elected not to, I’d like to focus this quarter’s letter on the parts of the plan that discuss the Federal Home Loan Bank (FHLBank) System. As a member of this cooperative, and the overall FHLBank System, it’s our job to keep you updated on matters that involve that membership.

Overall, the plan recommended legislation to expand the FHLBank System to include more categories of members and that, pending legislation, Federal Housing Finance Agency (FHFA) revisit its 2016 ruling that excluded captive insurers from being members.

The FHLBanks were established by Congress, and ultimately, Congress determines membership eligibility. FHLB Des Moines supports analysis and consideration of potential changes to FHLBank membership eligibility to reflect the evolution of financial services in our country. However, it is imperative that Congress preserve the ability of the FHLBanks to continue their critical mission of providing liquidity to current member financial institutions that support our economy, including the economic, housing and community developments needs of their communities. We would welcome the opportunity to work with Congress on assessing potential changes to FHLBank membership, including the ability to conduct business with any new classes of membership in a safe and sound manner.

Here’s is an excerpt from the plan discussing the FHLBank System:

FHLBank Support of the Primary Market
When the FHLBank Act was enacted in 1932, Congress limited FHLBank membership to thrift institutions of various types and to insurance companies, many of which were active mortgage lenders at the time. As the housing finance system has evolved and other types of financial institutions have become important sources of mortgage lending, Congress has expanded membership to include federally insured depository institutions in 1989, non-depository community development financial institutions in 2008, and non-federally insured credit unions in 2015. Some non-bank and other types of mortgage lenders, however, still do not have access to FHLBank advances, despite now playing a larger role in the housing finance system. Related to this, from time to time, FHFA has amended its membership rule to ensure "a nexus between [FHLBank] membership and the housing and community development mission of the [FHLBanks]." The most recent was a 2010 review that culminated in a final rule in 2016 that excluded captive insurance companies from membership, subject to a transition period for those that were already members.
With the continued evolution of the housing finance system, there might be some question as to whether the current statutory and regulatory restrictions on FHLBank membership continue to be well-tailored to the housing and community development mission of the FHLBanks. The collateral eligible to secure FHLBank advances is already limited by law to mortgage and other assets that generally have a close nexus to the FHLBanks' mission, such that broader membership eligibility should not necessarily detract from that mission. While there might be unique counterparty or other safety and soundness risks posed by advances to mortgage lenders that are not subject to comprehensive prudential regulation, those risks potentially could be managed through enhanced collateral haircuts, capital requirements, or other counterparty risk management practices (e.g., bankruptcy-remote funding structures). In light of these considerations and the continued evolution of the housing finance system, Congress and FHFA should revisit the FHLBank membership eligibility restrictions to consider whether captive insurers and other types of financial institutions should be eligible for membership.

Treasury recommends:
  • Congress should consider permitting additional classes of mortgage lenders to become FHLBank members. (Legislative)
  • Pending legislation, FHFA should revisit its rule excluding captive insurance companies from FHLBank membership in light of the continued evolution of the housing finance system. (Administrative)

I encourage you to keep apprised of the Treasury’s plan as well as other initiatives in Washington, DC that could impact the FHLBanks by subscribing to our Public Policy Network newsletter.

If you have questions about this information or the plan overall, please feel free to contact me at CEO@fhlbdm.com.

Best,

Mike