New findings from the Pew Research Center point to a shrinking middle class and revealed that 29% of US adults were in low-income households in 2015, up from 25% in 1971. So much for the economic recovery we keep hearing about. Yet, with a falling middle class and more adults in low-income households, there are proposed changes to a Federal Program that could make the current situation for those folks even worse, particularly those that are looking to realize the American dream of home ownership.

The proposed rule changes are those under consideration by the Federal Housing Finance Agency (FHFA) that would change membership requirements for the Federal Home Loan Bank System. For those unfamiliar with them, Federal Home Loan Banks play a critical role in the housing market by helping lower income borrowers that are unlikely to to access traditional mortgage financing.

The first proposed change would alter a mortgage asset ratio requirement that currently applies only at the time an institution applies for membership and convert this ratio into an on-going obligation, regardless of market conditions, size of institution or length of time an institution has been a member in the System. Converting the current test into an on-going obligation could result in long-term members, particularly those in small and rural markets, leaving the program and shrinking the available capital for home mortgage lending.

The second change would prohibit all captive insurance companies from being part of the program. The definition of ‘insurance company’, under the FHFA’s proposed rule, would mean a company that has as its primary business the underwriting of insurance for non-affiliated persons.

This would continue to include traditional insurance companies, such as Allstate Corp. (ALL) and Hartford Financial Services Group (HIG), but not captive insurers. According to David Stevens, president of the Mortgage Bankers Association (MBA), "Captive insurers facilitate substantial investment in the housing finance market, including by financing the origination and purchase of mortgages and mortgage-backed securities by REITs.”

Currently mortgage REITs, such as Redwood Trust (RWT), Invesco Mortgage Capital (IVR) and Blackstone Mortgage Trust (BXMT), are direct holders of roughly $300 billion in mortgages and mortgage-backed securities (MBS).

Changes to such a system that impacts so many Americans should not come from bureaucratic mandate or an act of cronyism. We’ve seen what happens when that happens and need to look no further than the little to no public review of the Affordable Care Act that now has companies like United Health (UNH), the country’s largest insurer, potentially leaving the program because of the impact of low enrollment and high usage cost is taking a toll on the company’s bottom line.

With that in mind, Rep. Blaine Luetkemeyer, U.S. Representative for Missouri's third congressional district, has introduced legislation in the Congress looking to prevent the FHFA from executing its plan. As Luetkemeyer points out, historically it has been Congress that has decided membership requirements of Federal Home Loan Banks, not the Federal Housing Finance Agency.
 
Luetkemeyer went on to say, “This system plays an important role in our economy, and while conversations around membership in the system are valuable, decisions should not be made in a vacuum. They should be made by Congress and based on public input and extensive analysis.”

Luetkemeyer’s proposed bill would have the Government Accountability Office study the impact that FHFA membership provisions would have on the FHLB and its members. Studying the situation and assessing the impact, good or bad, makes far more sense than having a handful of bureaucrats put such a large portion of our economy and our citizens at risk without proper public scrutiny.

Chris Versace is the editor of the newsletter The Growth & Dividend Report. For more of his blogs, CLICK HERE NOW.