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  • Comment Detail

  • Date: 09/15/14
    First Name: Matthew
    Last Name: Norton
    Organization: N/A
    City: N/A
    State: N/A
    Attachment: N/A
    Number: RIN-2590-AA39

  • Comment

    Real Estate Investment Trusts (REITs), in their present form, came into existence in 1960. They may be divided into equity REITs (ownership interest) and mortgage REITs or mREITs (debt interest). mREITs may be subdivided further into commercial mREITs and residential mREITS. All REITs may be publicly owned (traded on a major stock exchange such as NYSE or NASDAQ) or privately held. If an mREIT concentrates in residential properties and is traded on a major stock exchange it should be able to borrow funds or obtain advances from the Federal Home Loan Bank (FHLB) system, either directly or through captive insurance companies. These REITs are focused almost entirely on residential housing finance and provide liquidity to the home loan market, which is also the mission of the FHLBs.

    The Federal Housing Financing Agency (FHFA), the regulator of the Federal Home Banks (FHLBs), has recently proposed revisions to FHLB membership eligibility requirements. These include (along with my responses):
    1) Establish a new quantitative test requiring all members to hold one percent of their assets in home mortgage loans (HML).To qualify under US tax rules, a REIT must have at least 75% of their total assets invested in real estate and derive at least 75% of their gross income from rents or mortgage interests. This is what mREITS do. This MINIMUM 75% requirement far exceeds the just mentioned 1% standard.
    2) Require certain members that are subject to the 10% residential mortgage loans (RML) requirement to adhere to this standard on an ongoing basis. Again, this is what mREITS do. Please refer to the just mentioned answer to #1.
    3) Define “insurance company” to mean a company that has as its primary business the underwriting of insurance for nonaffiliated persons. Insurance companies have been eligible for membership in the FHLBs since 1932 (when the FHLB system was started). Captive insurance companies did not exist in their present form until the mid- 1950s. As residential mREITs can’t currently be members of the FHLBs directly, they utilize these captives as a conduit to obtain advances. Most insurance companies are not major investors in the residential mortgage market. Life /Health insurers mainly invest in commercial real estate and mortgages. Property/Casualty insurers do not invest much of their policyholders’ surplus in real estate and mortgages at all, as they concentrate their investments in bonds (non-mortgage) and equities. Why not admit mREITs directly as FHLB members and avoid having captive insurance companies as members at all?
    4) Require a bank to obtain and review an insurance company’s audited financial statements when considering it for membership. This is a good start. I have analyzed hundreds of insurance companies as a financial analyst. I would request other information as well, such as SAP numbers (yellow or blue books), 10-Ks and 10-Qs if the company (or its holding company) is publically traded, Management Discussion and Analysis, I.R.I.S. results, the most recent state insurance department examination results, loss reserve examination results from their outside actuaries, etc. It is vital to examine the insurer’s holding company as well.
    5) Clarify the standards by which an insurance company’s “principal place of business” is to be identified in determining the appropriate Bank district for membership. I agree. However, since the individual FHLBs all have their separate standards for membership and some banks have much experience in this area (e.g. Des Moines and Indianapolis) while some have little to none (Seattle and San Francisco) some overall FHLB system requirements should be put in place to avoid insurance companies shopping for the weakest regulator, i.e. the FHLB with the easiest requirements with which to comply.

    In conclusion, residential mREITs that are publically traded should be allowed to obtain advances, either directly or through their insurance captives. The mREITs mission is the same as that of the FHLBs. If done in the right way, the mission of both mREITs and the FHLBs will be greatly enhanced by allowing mREITs to obtain advances from the FHLBs.