Redwood Trust’s special purpose captive insurance subsidiary, RWT Financial, has been approved as a member of the Federal Home Loan Bank of Chicago (FHLBC), effective 6 June.
Through its captive’s membership of the FHLBC, the REIT will have access to financing offered by the Federal Home Loan Bank for certain assets.
"Membership in the FHLBC marks an important development for our company and adds to our financing and distribution options for residential mortgage loans," commented Brett Nicholas, president of Redwood Trust.
He added: "This additional financing source should enable Redwood to expand the types of residential mortgage loan products we can acquire from mortgage loan originators. Ultimately, we believe that mortgage loan borrowers, and the communities in which they live, will benefit from the additional liquidity Redwood is able to provide, consistent with the mission of the FHLBank System."
Congress created the FHLBank System to be a reliable source of funds for local lenders to finance housing, jobs and economic growth. It is made up of 12 Federal Home Loan Banks, which are cooperatives owned by more than 7500 community financial institutions throughout the US.
Last year, the FHLBank System had almost half a trillion dollars out on loan to community bank, credit union, insurance company and community development financial institution members, which must put up high-quality collateral to borrow funds.
Captives’ use of the system has been a particular concern for regulators that are worried about the structure of and capital invested in insurance companies.
REIT Two Harbors Investment Corp and Ladder Capital Corp have set up captives to access the FHLBank System. Between them, they have borrowed approximately $1.5 billion.
Federal Housing Finance Agency director Melvin Watt told the FHLBanks Directors Conference in May that his agency, which oversees the secondary mortgage markets in the US, is keeping an eye on captives.
“One area of insurance company membership—captive insurers—deserves some additional attention. Captive insurance borrowing and membership in the FHLBank System raises a number of possible issues related to safety and soundness and access to the system.”
Redwood Trust has also agreed with the FHLBC to establish MPF Direct, a new mortgage purchase product offered by the Mortgage Partnership Finance (MPF) Program.
MPF Direct will allow members of a Federal Home Loan Bank that participate in the MPF Program to deliver eligible residential high-balance mortgage loans through the MPF Program's operational platform to subsidiaries of Redwood Trust.
Under the agreement, Redwood Trust will be the sole investor in MPF Direct loans for three years. The launch of MPF Direct is subject to the final regulatory approval from the Federal Housing Finance Agency.
Redwood Trust CEO Marty Hughes welcomed the news. He said: "MPF Direct is a great example of how the private sector can work with the FHLBank System to increase the availability of mortgage credit and increase the types of mortgage products that FHLBank members can offer to their customers."
"We expect to start investing in MPF Direct loans during the second half of 2014.”
