The Internal Revenue Service has come out with new guidelines that could help two other federal agencies use cash from variable life and variable annuity holders to support federal mortgage loan guarantees.
The IRS gave the federal mortgage agencies the boost with Revenue Procedure 2018-54.
Two major federal mortgage agencies — the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) — want to team up to offer a new type of “uniform mortgage-backed security” (UMBS) through a Single Security Initiative (SSI) program.
The new IRS guidelines clear away an investment asset diversification rule that could have reduced life insurers’ ability to put the new UMBS products in variable life and variable annuity customers’ separate accounts.
Section 817(h) of the Internal Revenue Code requires life insurers that offer variable life or variable annuity separate accounts to support the customers’ separate accounts with “segregated accounts” filled with a variety of assets.
IRC Section 817(h) requires, for example, that a life insurer keep less than 55% of the account value in any one investment, and less than 90% of the value in any four investments.
For variable account diversification purposes, The IRS treats mortgage-backed securities from Freddie Mac and Fannie Mae as securities from different issuers.
The IRS notes that, given the way UMBS sales will work, life insurance company purchasers may have no way to know whether they will be getting Freddie Mac UMBS or Fannie Mae UMBS.