Redwood Trust has assured investors that the captive ban on Federal Home Loan Bank (FHLB) system membership will not affect its ordinary course of business and operations.
The real estate investment trust (REIT) reacted to the Federal Housing Finance Agency’s (FHFA) ban on 13 January, as its captive, RWT Financial, is a member of the FHLB of Chicago.
The amended rule to the regulation on FHLB membership was issued on 12 January, after more than a year of debate and 1,300 comment letters from interested parties.
Under the amended membership regulation, the definition of “insurance company” has been amended to exclude captives because “an increasing number” of ineligible entities have been using them to “circumvent the membership eligibility requirements and gain access to low-cost FHLBank funding and other benefits”, according to the FHFA.
RWT Financial’s borrowing capacity from the FHLB Chicago stands at $2 billion. Its outstanding advances had reached that limit as of 12 January.
Redwood believes that the near-term impact of the FHFA’s ban may be that RWT Financial may not be able to obtain additional advances or increases to its borrowing capacity from the FHLB of Chicago.
This could affect RWT Financial’s ability to increase the size of its portfolio of residential mortgage loans, which would in turn impact on net interest income generated by the captive’s portfolio held for investment loans.
Redwood also said the ban does not affect its ability to obtain and increase financing for held-for-investment loans through other subsidiaries and from other sources.
The FHFA has given captive members that joined the FHLB system before the rule was proposed in 2014 up to five years to terminate their membership.
Those that joined after the rule was proposed have one year to end their membership. The final rule becomes effective 30 days from publication in the Federal Register.
As Redwood’s captive joined the FHLB of Chicago in June 2014, it has five years to terminate its membership.
