US life insurers siphon off billions meant for affordable housing
Sector cashes in by investing money borrowed from Federal Home Loan Banks
New York — Big life insurers are accessing cheap funding at record levels from a US government-backed financing system, sapping billions of dollar meant to help increase affordable housing, interviews with executives and regulatory disclosures show.
When Federal Home Loan Banks (FHLBs) were created in 1932 after the Great Depression to finance firms that offer home loans, insurers were granted access to this system because they provided mortgages.
They stopped providing mortgages in decades that followed as they became a sector distinct from banking. Starting in 2008, they have been aggressively drawing on FHLBs, arguing they support housing because they invest in residential mortgages and related securities.
The extent to which FHLBs finance insurers has not been previously reported. Interviews with more than a dozen sector executives and regulators, a review of regulatory disclosures and data show this borrowing has not been matched by a rise in home loan affordability, with the cost of mortgages soaring to its highest in 23 years.
The practice has been lucrative for insurance firms that have locked in billions of dollar in profits by investing the borrowed money in areas such as commercial real estate mortgages and corporate and government bonds. It has been used predominantly by life insurers, because they need to boost their investment returns with cheap funding to meet long-term liabilities.
FHLBs typically have a cost of borrowing lower than what is otherwise commercially available because these banks enjoy an implicit US taxpayer-backed guarantee on their debt. They provide the cheap funding to banks and insurers in exchange for collateral to ensure they get their money back.
A spokesperson for the Federal Housing Finance Agency (FHFA), which oversees the FHLBs, declined to comment specifically on insurers tapping FHLBs, but said the regulator is considering implementing new requirements for borrowing from FHLBs to ensure the support of housing and community development. They declined to provide more details.
Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, a trade association for FHLBs, said the banks have “abided by the will of Congress” to provide liquidity and support affordable housing.
FHLBs lent a record $137.1bn to life insurance firms last year, building on a trend that started about 2008, according to the FHLB office of finance.
Yet the sector’s investments in home mortgages have dropped. National Association of Insurance Commissioners (NAIC) data shows that insurance companies have been buying fewer residential-backed mortgage securities, which boost liquidity in the home mortgage market, while purchases of commercial-mortgage backed securities have been steady.
In 2022, life insurance companies bought $193.1bn in residential-backed mortgage securities, down 6% from $205.3bn in 2021, as soaring inflation soured their appetite to invest more. In contrast, their appetite for commercial-mortgage backed securities remained steady, with purchases totalling $203.6bn in 2022, almost flat compared with $204.7bn in 2021.
Lawrence White, an economics professor at New York University who recently co-authored research about FHLBs, said insurers do not need to borrow from FHLBs to invest in mortgages in the first place.
“It’s an artefact of the 1930s that insurance companies are part of the FHLB system,” said White.
MetLife, Equitable Holdings, TIAA, Corebridge Financial and Brighthouse Financial are among the insurance firms that are prolific users of FHLB funding, their regulatory filings show.
MetLife, TIAA, Corebridge, Brighthouse and Equitable declined to comment.
Cynthia Beaulieu, MD and portfolio manager at Conning, which manages $205bn in assets for investors such as insurance companies, said most of her clients use FHLB loans to generate extra returns because “the arbitrage was really attractive”.
Life insurers can lock in returns of 85-140 basis points by taking FHLB loans and investing the money in pools of loans such as collateralised loan obligations, Wellington Management, a Boston-based investment manager, said on its website in July. A percentage point is 100 basis points.
Insurers are entitled to tap FHLB funding. Yet US taxpayers are backstopping the insurance industry’s profits with little to show, said Cornelius Hurley, a lecturer at the Boston University School of Law and a member of the Coalition for FHLB Reform, a group that calls for changes to the FHLB system to address unmet housing needs.
“All [insurers] do is they happen to have some government securities and mortgage-backed securities in their investment portfolios. But they don’t provide any public benefit in return for that,” said Hurley.
Banks have also been stepping up their borrowing from FHLBs to tap cheap funding. An FHFA report published last month showed how some troubled regional banks, including Silicon Valley Bank and First Republic, were using FHLBs as lender of last resort, encouraging risk-taking that hastened their collapse.
Insurers’ borrowing from FHLBs rose in the 2008 financial crisis, as those that spread themselves thin with aggressive investments scrambled for cash. Subsequent regulatory changes emboldened insurers to borrow more.
The National Association of Insurance Commissioners (NAIC), which sets policy that many state insurance regulators follow, allowed insurers in 2009 to treat FHLB borrowing as “operating leverage” rather than debt, as long as they use the money for investments.
This gives insurers more room to saddle themselves with more with debt, because borrowing from FHLBs weighs less on their capital ratios than commercial borrowing, FHLB officials, analysts and economists say. It can also give them a more favourable credit rating, allowing them to borrow more debt at cheaper rates.
In 2018, the NAIC again made FHLB borrowing more attractive for insurance companies, by requiring them to hold less money aside for every dollar they borrow from FHLBs.
The NAIC declined to comment.
The reduced capital charges can more than double insurers’ return on investments from FHLB loans, according to FHLB Chicago. On its website, it gives examples of how insurers can borrow from it to invest in commercial mortgage securities, rather than residential mortgage securities that benefit the housing market directly.
Michael Ericson, president and CEO of FHLB Chicago, said the use of mortgages and mortgage-backed securities as collateral for FHLB loans helps maintain the FHLBs’ nexus to housing finance.
Insurers have lobbied to maintain the current arrangement. The American Council of Life Insurers (ACLI) and the Insurance Coalition wrote to the FHFA in letters reviewed by Reuters, arguing that curbing their FHLB borrowing would remove liquidity from the market for mortgages. They did not explain why insurers need FHLB funding to invest in mortgages.
ACLI spokesperson Jack Dolan said that life insurers’ FHLB borrowings represent a small fraction of the $8.3-trillion in assets held by the industry, and that tapping FHLBs is “part of prudent, long-term risk management strategies”.
The Insurance Coalition did not respond to a request for comment.
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