WASHINGTON — Mortgage Real Estate Investment Trusts are an important source of private capital for the housing market and appear to be aligned with the mission of the Federal Home Loan Banks, according to a top advisor to Treasury Secretary Jack Lew.

Michael Stegman, Treasury's counselor for housing financial policy, praised a partnership that would create a conduit to allow members of the Federal Home Loan Bank System to sell their jumbo loans to Redwood Trust.

"If successful, this partnership may create a new source of liquidity and access to the secondary market for the roughly 1,500 community banks, thrifts, and credit unions" that participate in the FHLB Mortgage Partnership Finance program, Stegman said at a mortgage conference this week.

But Stegman noted that Redwood and other mortgage REITs have gained access to Home Loan Bank advances via their captive insurance subsidiaries, which "poses potential incremental risks to the FHLB system."

In light of these risks, the Federal Housing Finance Agency has issued a proposal that would phase out Home Loan Bank membership for captive insurers over five years. Stegman said that REITs don't have the same stringent regulatory oversight as community banks or access to stable funding sources like deposits and emergency funding tools.

"However, many of the activities that REITs engage in appear to be aligned with the FHLB System's core mission, and represent an important source of private capital that should be at the core of the U.S. housing finance system," Stegman said.

He noted that Treasury has not taken a position on the captive insurance proposal yet.

Still, Stegman's remarks could cause some tension between Treasury and the FHFA. FHFA Director Mel Watt touted the agency's plan in a speech this week in Raleigh.

"While captive insurers may, in some cases, be involved in mortgage finance, their access to Federal Home Loan Bank System raises a number of concerns that are discussed in the proposed rule," Watt said.

Even if the FHFA proposal is finalized as proposed, it would have “no effect" on Redwood's jumbo loan conduit with the Chicago Home Loan Bank, according Redwood spokesman Mike McMahon.

It would stop Redwood's captive insurance subsidiary, RTW Financial LLC, from borrowing advances. But RTW Financial or Redwood's mortgage banking subsidiary could still buy jumbo loans from the FHLB.

Redwood has completed two private-label jumbo securitizations this year and both were backed with about $300 million in mortgages.

As of July 31, Redwood had "utilized $26 million of Chicago FHLB advances to fund $30 million of jumbo residential loans," Redwood said in its second quarter securities filing.

The jumbo loan program known as MPF Direct is still in the pilot stage and only Chicago FHLB members can participate.

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