A federal regulator's decision to kick mortgage real estate investment trusts out of the Federal Home Loan Bank System does not seem to be alarming Two Harbors Investment Corp., which will be forced to exit within five years.
Since Two Harbors became a Home Loan Bank System member in 2013, prior to the rulemaking the mortgage REIT has a five-year grace period to line up new funding sources. Additionally, long-term financings or advances maturing beyond five years will remain in place according to their original terms.
"We do not believe the ruling with have an impact to our financing model in the near or intermediate term," Tom Siering, chief executive of Two Harbors, said during a conference call Thursday on fourth-quarter results.
The New York-based REIT has $3.8 billion in advances from the Des Moines Home Loan Bank. More than half of the advances have 20-year terms.
Under the new Federal Housing Finance Agency rule, which was finalized last month, the Des Moines bank is prohibited from renewing or making new advances that extend beyond the five-year period. In addition, a REIT's borrowing authority is limited to 40% of the assets of its captive insurer.
"Although we are disappointed that our membership will end in five years, we are comfortable with the 40% asset requirement," said Brad Farrell, Two Harbors' chief financial officer.
Mortgage REITs like Two Harbors and Redwood Trust used captive insurance company subsidiaries to gain Home Loan Bank membership and access to advances. The FHFA membership rule would close what it views as a loophole.
Two Harbors reported a comprehensive loss of $3.2 million in the fourth quarter, compared with a $92.8 million loss in the prior quarter. It reduced its stock dividend by 3 cents per share to 23 cents per share.
The REIT securitized $2 billion in prime jumbo loans in the fourth quarter. Two Harbors also is a buyer of mortgage servicing rights and commercial real estate mortgages.