Home-loan banks begin to show stress

The money needed to alleviate the strain could come from taxpayers.

Washington Post

WASHINGTON — The mortgage crisis is seeping into one of the last dry corners of the mortgage business, the regional network of Federal Home Loan Banks, which provide U.S. banks with hundreds of billions of dollars in low-cost funding to support lending to home buyers.

The little-known network has grown in importance as banks lose access to other sources of funding because of the credit crunch. The volume of outstanding loans provided by the home-loan banks has increased by 58 percent since the beginning of 2007, to more than $1 trillion at the end of September.

But several of these banks hold mortgage-related investments that have plummeted in value. The losses are draining the capital foundations of the home-loan banks, forcing them either to reduce their lending — making mortgages more expensive and harder to get — or to raise additional capital.

The money could come from taxpayers. The Treasury Department created a program in September that for the first time allows the home-loan banks to borrow directly from the federal government. That hasn’t happened yet, but some financial experts said it’s looking increasingly likely.

A report from Moody’s Investors Service last week, citing “the demonstrated importance of the [home-loan banks] to the banking system through the credit crisis,” concluded that the government was likely to provide the necessary support to keep loans flowing.

The 12 home-loan banks are collectives chartered by the federal government and owned by member financial firms. The government’s sponsorship allows the collectives to borrow money at low cost, which they lend to banks of all sizes, from giants such as Bank of America to small community lenders. Nearly all U.S. banks are members of at least one of the collectives.

As with other banks, federal regulators require the home-loan banks to keep a certain amount of money as a capital foundation to support their lending.

The home-loan bank in Seattle, which serves the northwestern United States, said last week that the declining value of its investments probably dropped its capital below a level required at the end of the year, though a final determination won’t be made until the bank completes its fourth-quarter bookkeeping.

The home-loan bank in Pittsburgh warned Friday that it, too, was in danger of dropping below a capital threshold.

And Moody’s estimated that six more home-loan banks could follow Seattle and Pittsburgh.

The most immediate impact is that the collectives are paying less to their members.