Few Insurers Offer Input on Future of the Federal Home Loan Bank System

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Very few insurance companies showed up this month to talk about the future of the much-discussed, 90-year-old Federal Home Loan Bank System, even though the system provides many large insurers with low-interest lending for a wide variety of reasons.

Of the 85 speakers at meetings hosted by the system’s overseer, the Federal Housing Finance Agency, the vast majority came from small community banks, American Banker magazine reported. An official from just one insurance company, Mutual of Omaha, which is heavily invested in mortgage-backed securities, spoke about the need to maintain lending practices to keep the home loan market afloat in good times and bad.

“Our experience as members of the Federal Home Loan Bank of Topeka demonstrates directly how important insurance company membership is to the overall mission of ensuring a competitive, liquid, efficient and resilient home finance market,” said Ryan Comins, senior vice president at Mutual of Omaha , according to the recording of the listening session.

He pointed out that the Mutual of Omaha companies own approximately $7 billion in home loans and mortgage-backed securities. But premium income from life insurance policies doesn’t always coincide with the timing of market stress, he said. FHLB membership allows non-banks to continue lending when others are not allowed to.

“We have found that in many cases insurance companies are the only ones providing reliable liquidity during these periods of market crisis and the Federal Home Loan Bank system plays a critical role,” Comins said.

Without FHLB liquidity, which has proven crucial during the COVID-19 pandemic’s economic slowdown, mortgages would become more expensive for the average American, he added.

Other insurers have remained silent on home loan banks in recent years, despite becoming the largest borrowers. The FHLB system has reported that more than 500 US insurance companies participate in the program, a number that has doubled in the past decade. And the system makes loans available to members at cheap rates — just as interest rates have otherwise skyrocketed this year thanks to the Federal Reserve’s efforts to curb inflation.

Bills designed to make it even cheaper for insurers to borrow were introduced in several states earlier this year, but they received little debate from airlines and only passed in one state. Kentucky’s House Bill 171 gives home loan banks the highest priority over collateral pledged by member insurers. This means FHLB no longer has to apply a mark-up on loans, saving airlines significantly on upfront fees. Across Germany, 21 other federal states have taken similar measures in recent years.

Lending to insurers has risen steadily since 2008 but actually fell by about $14 billion in 2021, the FHLB reported. But that could change if the Fed’s interest rate continues to rise.

The future of the Home Loan Bank system, which has 11 banks across the country, is now in question. Critics say the system has become less relevant and now mainly benefits banks, which can take advantage of low interest rates, rather than collecting deposits from the local community. The scheme should also be extended to more insurers and other types of fintech companies offering mortgages, some said.

Others have questioned whether FHL banks are too focused on providing low-cost funding for some large institutions that already have access to capital markets, American Banker noted. Big U.S. banks and insurance companies like MetLife were among the top users of FHLB funding last year, accounting for more than 70% of advances at five of the 11 home loan banks, according to the system’s financial reports, American Banker reported.

“While smaller banks have defended the system as is, it is larger banks, non-banks and insurance companies who are actually the primary beneficiaries – a significant blind spot in the investigation of the FHFA hearing,” the magazine noted.

The FHLB system was created in 1932 to support community banking and mortgage lending at a time of widespread bank failures. But the majority of mortgages now come from non-banks.

The Federal Housing Finance Administration’s new director, Sandra Thompson, has pledged to review sweeping reforms of the banking system and launched the listening sessions as part of the first sweeping review of the system in nearly a century.

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