When it comes to housing finance, few would deny the importance and effectiveness of the Federal Home Loan Bank system. The FHLBs serve as an important source of capital and should be part of the dialogue as we decide the future of Fannie Mae and Freddie Mac. However, given the exclusivity of its members, the FHLB system is failing to serve the marketplace as well as it could.
Let's be realistic. The FHLB system was created in the 1930s and today we live in a completely different financial world. The global economy is constantly changing and only getting more complicated. Thus, it is time to reexamine the various rules and regulations that govern our financial institutions.
This past January, the FHLBs' regulator, the Federal Housing Finance Agency,
Captive insurance companies are widely recognized institutions that have been productive members of the mortgage finance system for more than two decades. Furthermore, they represent new potential for private capital to expand homeownership opportunities for credit-worthy borrowers.
Many captive insurance companies are owned by or affiliated with mortgage Real Estate Investment Trusts. Mortgage REITs are required by law to invest the vast majority of their assets in real estate and mortgages, and currently hold roughly $300 billion in mortgages and mortgage-backed securities. Additionally, mortgage REIT-owned captive insurance companies acquire and hold mortgages and MBS with their own capital. This fulfills the secondary market role insurance companies of all types have held since the FHLB Act was signed into law. Notably, this influx of capital has helped partially replace the declining portfolios of Fannie Mae and Freddie Mac.
In turn, the FHLB system helps captive insurers, and by extension their parent companies, by providing flexibility in funding terms. But the FHLB system could also be helpful to a broad array of business models, given the opportunity. That's because the ability to match funding terms with expected asset maturities allows such companies to invest in a greater array of mortgages and MBS.
As I mentioned earlier, the future of Fannie Mae and Freddie Mac is of the upmost importance. However, given the legal morass of their conservatorship and an intractable Congress, we must use all tools possible to create a stable, robust secondary mortgage market going forward. But if key entities with an abundance of capital are excluded from the FHLB system the participation of the system itself in any type of reform will be called into question.
It's time to think differently about how taxpayer-backed entities, especially those regulated by the FHFA, can be deployed to serve the entire housing market and not just a limited set of participants. The housing finance system is rapidly innovating new business models, in response to new economic and demographic fundamentals and new regulation. We must think differently about making sure liquidity and capital can support all qualified, compliant companies that serve today's housing community.
David H. Stevens is the President and CEO of the Mortgage Bankers Association. He is the former FHA Commissioner and Assistant Secretary for Housing in the Obama Administration.
