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61 » VISIT US ONLINE @ DSNEWS.COM FITCH: FHLB-FUNDED mREIT BORROWERS ARE FACING A KEY DECISION Mortgage real estate investment trusts (mREITS) that currently receive funding from the Federal Home Loan Banks (FHLBanks) will see their funding phased out after five years from the effective date of the FHFA's final rule for FHLB membership, which was announced on January 12. e new rule cuts off the possibility of FHLBank membership for non-bank financial institutions such as hedge funds, investment banks, and equity REITs, keeping in line with the FHLBanks' mandate of serving the housing finance market by extending credit to commercial banks, credit unions, and savings/ loan institutions. FHLB system's traditional mandate is to serve the US housing finance market by extending credit to commercial banks, credit unions, and savings/loan institutions. ose mREITs which received captive insurance subsidies from FHLBanks prior to September 2014, when the FHFA originally published the membership rule, will be eligible to receive funding for another five years from the date the rule becomes effective, which will be 30 days after it is published in the Federal Register. With ample time left to find replacement funding, mREITs are faced with a key decision, according to Fitch Ratings: Go with either low-cost, short-term repo funding with a shorter duration and increased liquidity risk, or long-term borrowings that include increased funding costs and affect profitability. "From a credit risk perspective, we would view the latter more favorably because of the benefit to asset-liability duration matching," Fitch stated. Fitch Ratings believes that an mREIT such as Ladder Capital used the FHLBank system for approximately 42 percent of its funding as of September 30, 2015, will benefit from the five- year phase out provision of FHFA's final rule. While many REITs have used the FHLBank system for a significant portion of its funding, the total FHLBank advances for the 10 largest mREITS were just 10.6 percent of their overall debt funding. e phasing out of borrowing from the FHLBank system "incrementally weakens the diversification of (mREIT) funding sources," according to Fitch. e establishment of captive insurance subsidies gave nonbank financial institutions greater access to FHLBank membership starting in 2012, and 2015 saw a significant ramp-up, according to Fitch. At least 23 insurers (out of 7,255 institutions that were members of the FHLBank system, 346 of which were insurance companies) were captive insurance subsidiaries of mREITs, while FHLBank advances increased from 11.6 percent of par value at year-end 2011 up to 15.6 percent of par value by September 30, 2015, according to Fitch. FREDDIE MAC DROPS SUIT AGAINST DELOITTE Freddie Mac has dropped its $1.3 billion lawsuit against Deloitte & Touche that accused the accounting firm of negligence regarding the auditing of certain mortgage loans the GSE purchased from now-defunct mortgage lender Taylor Bean & Whitaker, according to media reports. Both parties agreed to dismiss the suit without prejudice. e case was scheduled to go to trial on February 22. A spokesperson from Freddie Mac confirmed to DS News that the settlement was made on mutually agreeable terms. A spokesperson from Deloitte said in an email that the firm did not have a comment on the suit being dropped. Freddie Mac sued Deloitte for $1.3 billion in a Florida court in September 2014 with regards to fraudulent mortgage loans the GSE purchased from Taylor Bean & Whitaker, according to reports. Freddie Mac says it would not have purchased those mortgage loans from Taylor Bean if Deloitte, which audited Freddie Mac from 2002 to 2009, had paid attention to red flags which indicated fraud. Freddie Mac claims that Deloitte's negligence cost the GSE $1.3 billion. Both Freddie Mac and Fannie Mae were taken over by the government in September 2008 at the height of the financial crisis. At that time, the GSEs needed a combined $188 billion bailout from the government to stay afloat. In March 2015, reports surfaced that Freddie Mac was seeking punitive damages in addition to the original $1.3 billion in the lawsuit. An amended complaint filed by Freddie Mac's lawyers accused Deloitte of "gross negligence" with regards to the purchased mortgage loans. Deloitte made a bid to have the lawsuit thrown out last year, claiming that Freddie Mac failed to prove gross negligence and that the GSE did not present enough evidence to warrant demanding punitive damages. In May 2015, a Federal judge in Florida rejected Deloitte's arguments and refused to dismiss the lawsuit. Taylor Bean, which was once the largest non-bank mortgage servicer in the nation, filed for bankruptcy in 2009 after the housing market collapsed. In 2011, Taylor Bean's chairman, Lee Farkas, was sentenced to 30 years in prison for fraud. THE LEADER IN DEFAULT SERVICING NEWS Help shape the next issue of DS News. Drop us a line at Editor@DSNews.com.

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