Saturday, May 23, 2009

I've been expecting a headline about the Federal Home Loan Banks and got it today. These banks have been leveraging up and acquiring mortgages at a record pace since this financial meltdown began. This should come as no surprise to anyone who has followed my blog (here and here in 2007 and here again). Here is some of the news from this Wall Street Journal Online Edition article:

Financial troubles at some of the Federal Home Loan Banks are raising questions about how well directors of these institutions are supervising their executives.

A plunge in the value of mortgage securities bought by several of the regional home-loan banks has forced them to halt dividends and curtail funding for local housing projects. An annual report issued by the banks' regulator this past week says some of them "paid insufficient attention" to credit risks and haven't invested enough in information technology.

Unlike giant banks or government-backed mortgage companies Fannie Mae and Freddie Mac, the 12 regional home-loan banks draw little public scrutiny. Created by Congress in 1932 to support the housing market, they are cooperatives owned by more than 8,000 banks, thrifts, credit unions and insurers. Because investors assume the government would bail them out in a crisis, they can borrow money cheaply in the bond market.

If the home-loan banks ever stumble badly, U.S. taxpayers would be called on to "rescue yet another financial entity," warns Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington. These banks have about $1.26 trillion of debt outstanding, putting them among the world's biggest borrowers.

Here is a quote from the FHLB press release:
Operating Results and Affordable Housing Activity:
For the 12 FHLBanks, the combined net loss for the fourth quarter of 2008 was $715 million, compared to combined net income of $846 million for the fourth quarter of the previous year. Combined net income for 2008 decreased 57.3% to $1.2 billion, compared with $2.8 billion for 2007. Combined net income for 2008 was reduced by other than temporary impairment charges of $2.03 billion on certain private label mortgage backed securities (MBS) and home equity loan investments, as well as $252 million of writeoffs/reserves on receivables due from Lehman Brothers Special Financing.

FHLBank Affordable Housing Program (AHP) contribution expenses equaled $188 million in 2008, down from $318 million in 2007, due to the decrease in earnings.

Each FHLBank actively monitors the credit quality of its MBS. If delinquency and/or loss rates on mortgages and/or home equity loans continue to increase, and/or a rapid decline in residential real estate values continues, more FHLBanks could experience further reduced yields or additional losses on MBS investment securities.

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dd said...

I just caught up on all the blog posts I've missed in the last couple months. Good stuff. I'm still wondering how come I find myself agreeing with you more nowadays?

Palermo's Blog said...

Perhaps we are converging? I have some real issues with the FED doling out commercial credit and monetizing debt. I think it has gone too far at this point, although I also think most people still underestimate the potential for economic deterioration. Good article in the NYT on the FED here. I may do a piece on it over the weekend if I can muster the energy.

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Palermo's Blog said...

Hey Annon - thanks a lot for the nice feedback. I haven't had time to do any posts in a long time but I hope to get back to it at some point.

Anonymous said...

I am glad you are still researching and writing about housing topics. I hope you find the time to keep updating this Blog.


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