The CEO of Two Harbors Investment Corp. is defending his company's Federal Home Loan Bank membership against claims that it and other real estate investment trusts are injecting credit risk into the FHLB System with their captive mortgage insurance units.
It would take a "systemic meltdown before there would be a penny of credit risk to the FHLB System," CEO Thomas Siering said Monday during a presentation at a Barclays financial services conference in New York.
"We are disappointed," the CEO said when asked about the Federal Housing Finance Agency's proposal to strip captive insurance companies of their membership and borrowing rights from Federal Home Loan Banks over a five-year period. Two Harbors formed a captive insurer to gain membership to the Des Moines FHLB in December 2013. It had $1.5 billion in outstanding advances from the regional bank as of June 30.
"We are funding pristine prime jumbo loans," with mid-700 credit scores, 30% down payments and pristine debt coverage ratios, the CEO added.
Siering also stressed that the advances Two Harbors uses are "consistent" with the mission of FHLBs, which is to provide liquidity for the residential mortgage market. Advances from the Des Moines FHLB currently make up about 10% of Two Harbors overall funding mix.
"We hope that FHFA will reconsider its proposed stance on this. We are hopeful we can persuade them to think about this differently," he said.
Meanwhile, the mortgage REIT is dedicating resources to develop a non-qualified mortgage loan program that could be "saleable" in the secondary market. Two Harbors deals in agency and nonagency mortgage-backed securities, as well other assets including mortgage-servicing rights. It's looking to non-QM loans to expand its product line and fund mortgages for the "massive cohort" of borrowers who are not being served by the mortgage market right now, Siering said.
The New York-based firm also wants to sign up more lenders for its origination platform. "We have two dozen origination partners. Our goal for this year is to have 35 to 40 lenders," said Chief Financial Officer Bill Roth.
Developing a non-QM loan product requires an estimate of the litigation risk and the cost a lender could face if it is sued when a loan goes into default. "You have to gauge the probability of getting sued and if you get sued the probability of what you lose and how much it would cost you," Roth said.
In addition, there are questions about how much risk and costs that third-party originators should bear.
It is very "complicated, which is why we are still working on it," Roth said at the Barclays conference. "But we are very confident we will come up with something that will be acceptable in the market."
The mortgage REIT issued a private-label $268 million jumbo securitization in August and it has conduit mortgage holdings and a pipeline of loans totaling about $1 billion. Two Harbors expects to complete more jumbo securitizations this year.