Life Insurers Taking Advantage of US Financing Aimed at Housing

Life insurers have been utilizing the funding available from the Federal Home Loan Banks (FHLBs) in the United States to invest in various sectors such as commercial real estate mortgages and corporate and government bonds. This has raised concerns as it has diverted billions of dollars from its intended purpose of increasing affordable housing.

Established in 1932 to provide financing for firms offering home loans, FHLBs have traditionally focused on funding mortgage-related activities. However, in recent years, major life insurers have been actively engaging in borrowing from FHLBs, arguing that their investments in residential mortgages and related securities contribute to housing support.

While the extent of FHLB financing for insurers has not been widely reported, this practice has enabled insurance companies to secure substantial profits by investing the borrowed funds in different markets. The affordable funding particularly benefits life insurers by aiding them in meeting long-term liabilities and enhancing their investment returns.

The Federal Housing Finance Agency (FHFA), the regulatory body overseeing FHLBs, has acknowledged the potential concerns associated with insurers tapping into FHLBs. The regulator is considering implementing new borrowing requirements to ensure continued support for housing and community development.

Data from the FHLB Office of Finance revealed that FHLBs provided a record $137.1 billion to life insurance firms last year, indicating a rising trend since 2008. However, despite this trend, the industry’s investments in home mortgages have decreased, with insurance companies purchasing fewer residential-backed mortgage securities (RMBS) while maintaining steady purchases of commercial-mortgage backed securities (CMBS).

Although life insurers are entitled to access FHLB funding, the practice could be seen as adding additional strain on housing and community development support. Critics argue that insurers may not necessarily need to borrow from FHLBs to invest in mortgages and that they do not sufficiently contribute to the public benefits in return for utilizing this funding.

Regulatory changes have also played a role in promoting increased borrowing from FHLBs by insurers. The National Association of Insurance Commissioners (NAIC) permitted insurers in 2009 to consider FHLB borrowing as “operating leverage” rather than debt, provided the funds are used for investments. Additionally, in 2018, the NAIC reduced capital charges for FHLB borrowing, making it more attractive for insurance companies to take advantage of this funding source.

Insurers, along with industry groups such as the American Council of Life Insurers (ACLI) and the Insurance Coalition, have been advocating to maintain the current arrangement by asserting that it is part of prudent, long-term risk management strategies.

As the debate surrounding insurers’ use of FHLB funding continues, concerns persist regarding the potential impact on housing affordability and the broader housing market. However, with regulatory oversight and potential reforms, the goal is to strike a balance between supporting the financial stability of insurers and ensuring the effectiveness of FHLB funding in promoting affordable housing.