Killing a flea with an elephant gun
by: Henry Meier
This morning brings yet another example of how the government seems to work against itself. The FHA announced that it is cutting premiums charged to homeowners who take out FHA loans. At the same time, the FHFA is proposing regulations that will, at the very least, add one more layer of complexity for credit unions offering mortgage loans. Time is running out to comment on this regulation that would impose new ongoing requirements on FHLB members. Considering how many credit unions are FHLB members – 64 in New York alone – you may want to dash off a quick note to the FHFA explaining that the proposal uses a butcher’s knife where a scalpel is in order.
First, some background. The Federal Home Loan Bank was formed in 1932 as one of the phalanx of quasi-governmental corporations intended to prop up Depression-era mortgage lending. The FHLB is comprised of 12 regional banks. Membership is extended to banks, credit unions, Community Development Financial Institutions, and insurance companies. (This last one surprised me, too, but it makes sense when you consider that insurance companies purchase mortgages and mortgage-backed securities). The purpose of the system is to provide liquidity to the housing market by providing loans to member institutions. The enabling statute requires that institutions applying for membership “make such home mortgage loans as, in the judgment of the Director [of FHFA], are long-term loans.” In the erstwhile tradition of congressional abdication, regulators are left to determine what that means. Congress also requires depository institutions that were not members of the Bank as of January 1, 1989, to have at least 10 percent of its total assets in “residential mortgage loans.” The statute generally exempts FDIC-insured depository institutions with $1 billion or less in total assets from this requirement. However, since credit unions aren’t FDIC-insured they don’t qualify for this important exemption. Again, the statute does not define what constitutes a residential mortgage loan.
Now for the regulation, with which I am vexed. The FHFA, which oversees the FHLB system, is concerned that the existing regulation has such loose membership requirements that institutions can enjoy its benefits without being committed to the housing market. According to the regulator, several real estate investment trusts (REITs), which are not eligible to become members, have established captive insurance subsidiaries that then became Bank members. A number of those captives then obtained advances in dollar amounts so large that they appear to have no relationship to the operations of the captive and appear to flow to the REITs.
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