The new security will help pave the way for the future of the housing finance sector, said FHFA Director Mel Watt.
The new security will help pave the way for the future of the housing finance sector, said FHFA Director Mel Watt. Credit: Bloomberg

WASHINGTON — The top regulator at the Federal Housing Finance Agency strongly defended a proposal that would institute new membership requirements for the Federal Home Loan Banks, saying the system needs to be protected from possible abuse.

Speaking with reporters on Wednesday, FHFA Director Mel Watt emphasized that there are substantial advantages to belonging to a Home Loan Bank, and he wants to ensure those that belong qualify under rules originally stipulated by Congress.

The agency's proposal has come under fire because it would effectively kick captive insurance companies out of the system and force other lenders to comply with an ongoing mortgage asset test.

"It would irresponsible not to evaluate these things," Watt said. "We are not trying to stifle homeownership. But we do have a responsibility to follow the law. And sometimes following the law is not so popular."

The proposal would require all Home Loan Bank members to maintain a least 1% of their assets in the form of mortgages. Although the statute initially requires such a test to join the system, there is not currently an ongoing requirement.

"That has the possibility of abuse," Watt said. "I am not saying it is being abused. That is one of the things we will evaluate."

The agency received more than 1,300 comment letters on the plan, many of which strongly opposed that aspect of the proposal.

Watt noted that Congress could loosen the membership rules but in the meantime, FHFA must ensure the system is protected.

"I think we can do it without adverse impact on the FHLB System," Watt said. "And that will certainly be one of the factors that we take into account."

Watt also noted that several mortgage real estate investment trusts, which are not normally eligible for membership, have established captive insurance companies so they can join the Home Loan Bank System and have access to advances.

"Should that be something that we allow?" Watt asked.

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