WASHINGTON, DC—The Federal Housing FinanceAgency on Tuesday shut out mortgage REITsfrom membership in Federal Home Loan Banks. NAREITexpressed disappointment with the ruling announced by FHFA directorMel Watt, which closes a loophole that allowedinvestors, including mortgage REITs, to create captive insurancecompanies as a means of gaining FHLB membership.

"We note that the FHFA acknowledged a well-known fact," that'mortgage REITs play an important role in the residential mortgagemarket,' " according to a NAREIT statement issued Tuesdayafternoon. "We look forward to continuing our dialogue with FHFA,other federal regulators and Congress to explore how mortgage REITsmay play an even greater role in the future in furthering nationalhousing finance policy aims."

Insurance companies are eligible for FHLB membership, whichprovides access to low-cost, government-backed funding. Inredefining "insurance companies" to exclude captive insurers, FHFAsought to prevent entities that otherwise don't meet the statutorymembership requirements from circumventing those requirements byestablishing and using captives as conduits. "The primary businessof a captive insurer is underwriting insurance for its parentcompany or for other affiliates, rather than for the public atlarge, and captives are generally easier and less expensive tocharter, capitalize and operate" than standalone insurers,according to FHFA.