Using Captives to Access Federal Home Loan Banking System Funding

A new opportunity for real estate investment trust (REIT) clients has been growing rapidly since the summer of 2013. We have been working with REIT clients to create captives for the purpose of accessing funding with the Federal Home Loan Bank system (FHLB).

When the FHLB was chartered by Congress in 1932, it restricted membership to companies that engaged in lending activities. At that time, insurance companies were investing in lending, and thus, today’s captive insurance companies can be eligible applicants.

Clients have formed FHLB captives that not only help insure the risks of the mortgage originator or REIT parent, but also help the company gain access to low-cost funding through the FHLB, allowing them to increase leverage and improve liquidity at attractive rates.

Lines of coverage have mostly included mortgage impairment and terrorism coverage. Captives are being formed in Michigan in order to access the Indianapolis FHLB, and in Missouri to access the Des Moines FHLB. As the opportunity grows, Marsh’s Captive Advisory team is likely to begin forming captives in other domiciles to access additional branches of the FHLB.