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Life Insurers Overindulge In US Funding Intended To Support Housing

tax refund (Photo: marca)

Interviews with industry executives and regulatory declarations reveal that major life insurers are taking advantage of historically low funding rates from a government-backed financing system in the United States, siphoning off billions of dollars intended to support the growth of affordable housing.

Insurers were given access to the Federal house Loan Banks (FHLBs) system because they offered mortgages, when FHLBs were established in 1932 as a means of financing companies that make house loans following the Great Depression.

In the decades that followed, they ceased to offer mortgages as they separated themselves from banks. They have been heavily relying on FHLBs since 2008, claiming that because they engage in residential mortgages and related instruments, they promote housing.

The degree to which FHLBs provide financing to insurers has not been documented before. The cost of mortgages has soared to its highest point in 23 years, but this borrowing has not been accompanied by an increase in house loan affordability, according to data, regulatory disclosures, and interviews with over a dozen industry executives and regulators conducted by Reuters.

Taking Out Loans

Based on a trend that began around 2008, FHLBs lent a record $137.1 billion to life insurance companies last year, according to the FHLB Office of Finance.

Life Insurers

Source- MARCA

However, the industry’s mortgage investments have decreased. According to data from the National Association of Insurance Commissioners (NAIC), insurance firms have been steadily purchasing commercial-mortgage backed securities (CMBS) but have been purchasing fewer residential-backed mortgage securities (RMBS), which increase market liquidity for house mortgages.

With The Help Of Regulators

Undoubtedly, banks have increased their borrowing from FHLBs in order to get low-cost finance. A report released by the FHFA last month revealed how certain distressed regional banks, such as First Republic and Silicon Valley Bank, were using FHLBs as lenders of last resort, which encouraged risk-taking and accelerated their demise.

During the 2008 financial crisis, insurance companies began to borrow more money from FHLBs as those who had taken risks with their investments were desperate for cash. Later regulatory modifications strengthened.

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