Shadow Bank REITs Draw Scrutiny of Federal Regulator: Mortgages
By Heather Perlberg and Jody Shenn
Mortgage investors are borrowing from government-chartered Federal Home Loan Banks, raising concerns from their regulator that the trend creates
unacceptable risks. Three real estate investment trusts — Annaly Capital Management Inc., Invesco Mortgage Capital Inc. and Two Harbors Investment Corp. — set up insurance units that allowed them to gain access to an FHLB in the past seven months. Commercial real-estate lender Ladder Capital Corp. joined the network of 12 regional cooperatives in 2012. Two Harbors and Ladder had borrowed a total of about $1.5 billion through March. Lightly regulated investment firms and lenders that lack customer deposits are flocking to the FHLBs for dependable funding, often with better terms than traditional banks or debt markets. Their memberships are drawing scrutiny from the home loan bank overseer, the Federal Housing Finance Agency, because they may affect the safety of a system that operates with perceived taxpayer backing. FHFA Director Melvin Watt said last month he saw “possible issues” with the insurers’ access. “Just because it’s legal doesn’t mean it’s not risky,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc. The companies “are technically eligible borrowers because of carefully constructed windows. These are not traditional banks. They’re very different.”