WASHINGTON, DC—The Federal Housing Finance Agency on Tuesday shut out mortgage REITs from membership in Federal Home Loan Banks. NAREIT expressed disappointment with the ruling announced by FHFA director Mel Watt, which closes a loophole that allowed investors, including mortgage REITs, to create captive insurance companies 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 mortgage market,' " according to a NAREIT statement issued Tuesday afternoon. "We look forward to continuing our dialogue with FHFA, other federal regulators and Congress to explore how mortgage REITs may play an even greater role in the future in furthering national housing finance policy aims."

Insurance companies are eligible for FHLB membership, which provides access to low-cost, government-backed funding. In redefining "insurance companies" to exclude captive insurers, FHFA sought to prevent entities that otherwise don't meet the statutory membership requirements from circumventing those requirements by establishing and using captives as conduits. "The primary business of a captive insurer is underwriting insurance for its parent company or for other affiliates, rather than for the public at large, and captives are generally easier and less expensive to charter, capitalize and operate" than standalone insurers, according to FHFA.