There’s No Room for REITs, Cap­tive In­sur­ers at Home Loan Banks

A for­mer Fed­eral Home Loan bank pres­i­dent ar­gues that the sys­tem should limit its ex­po­sure to risky non­banks.

National Mortgage News - - Voices - By Al­fred Del­liBovi Al­fred Del­liBovi is chair­man of the board of Flush­ing Bank. He served as pres­i­dent and CEO of the FHLB of New York from 1992 to 2014.

An Au­gust rat­ing agency report should be a wake-up call to ev­ery share­holder in the eleven Fed­eral Home Loan banks.

While the Stan­dard and Poor’s report is over­all pos­i­tive on the Fed­eral Home Loan Bank Sys­tem — with an AA+/Sta­ble rat­ing — it high­lights a bud­ding dan­ger to the sys­tem’s 7,000 mem­bers: shadow non­banks slowly in­fil­trat­ing this vi­tal source of liq­uid­ity for the na­tion’s lo­cal lenders.

Specif­i­cally, S&P calls out the “small, but grow­ing, ex­po­sure to non­de­pos­i­tory fi­nan­cial in­sti­tu­tions” as a weak­ness fac­ing the Home Loan Bank Sys­tem. These “cap­tive” in­sur­ance com­pa­nies and real es­tate in­vest­ment trusts, or REITs — highly lev­ered in­vest­ment ve­hi­cles with very trou­bling “bor­row short, lend long” bal­ance sheets — seek Home Loan bank mem­ber­ship to ac­cess low-cost fi­nanc­ing for their risky real es­tate lend­ing. These or­ga­ni­za­tions pose a threat to the Fed­eral Home Loan banks be­cause, un­like tra­di­tional mem­bers, they lack di­rect, pru­den­tial su­per­vi­sion, they are not in­sured by the Fed­eral De­posit In­sur­ance Corp. and they have no real cap­i­tal.

That means that, if they were to ac­cess the sys­tem through even just one Fed­eral Home Loan bank and their loans were to turn sour, all 11 banks and their mem- bers, which hold FHLB stock, would be the ones that take the hit.

As the for­mer pres­i­dent of the Fed­eral Home Loan Bank of New York, I view this risk as rem­i­nis­cent of the sav­ings and loan cri­sis of the 1980s. At that time, sav­ings and loan as­so­ci­a­tions were per­mit­ted to use fed­er­ally in­sured de­posits to make risky loans — in­clud­ing in­vest­ing in spec­u­la­tive real es­tate, fast food fran­chises and wind­mills. When these loans blew up, the re­sult was a $ 132 bil­lion tax­payer funded bailout.

Just as the S&Ls used po­lit­i­cal mus­cle and lob­by­ing to ex­pand into risky lend­ing, to­day the cap­tive in­sur­ers and the REITs are work­ing be­hind closed doors in Wash­ing­ton to roll­back safe­guards im­posed in 2016 by the sys­tem’s reg­u­la­tor, the Fed­eral Hous­ing Fi­nance Agency.

Le­git­i­mate mort­gage com­pa­nies that want to join a Fed­eral Home Loan bank to fund their busi­ness have a tried and proven path to fol­low: Buy a bank or form one. But cap­tives and REITS don’t want to do that. Why? They don’t want to pay the price for com­ing out of the shad­ows. They don’t want to com­ply with con­sumer pro­tec­tion reg­u­la­tions, the Com­mu­nity Rein­vest­ment Act, bank se­crecy laws, risk-based cap­i­tal re­quire­ments and all the other reg­u­la­tions banks are re­quired to fol­low.

And, of course, these shadow op­er­a­tions don’t want to be the sub­ject of in­tru­sive, but nec­es­sary, safety and sound­ness ex­ams, with their ex­press and in­de­pen­dent fo­cus on credit qual­ity and in­ter­est- rate risk.

Mem­bers are not the only stake­hold­ers put at risk by shadow non­banks’ de­sire for mem­ber­ship. The Fed­eral Home Loan Bank Sys­tem is one of the largest sup­port­ers of af­ford­able hous­ing in the na­tion, pro­vid­ing hun­dreds of mil­lions of dol­lars in hous­ing grants each year.

Al­fred Del­liBovi

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