FHLB System’s Rationale Erodes as Advances Dwindle

By Donna Borak

In an era of low interest rates, weak loan demand and unprecedented efforts by the Federal Reserve Board to pump liquidity into the economy, the demand for Federal Home Loan Bank advances has plummeted to a 10-year low, raising questions about the system’s future as the government weighs a redesign of the housing finance sector. Though advances rise and fall with member demand, the abrupt decline comes at a key time for the Home Loan banks. Advances are the banks’ traditional business, and recent efforts to expand into other areas by buying mortgages from member institutions and investing in mortgage-backed securities have caused steep losses at several Home Loan banks. “The FHLBs have a serious strategic challenge: providing a funding source … for mortgages that aren’t being made in portfolio to insured depositories that are shrinking in number,” said Karen Shaw Petrou, the managing partner at Federal Financial Analytics Inc. “To counter this,” she said, “the banks tried to augment earnings by turning themselves into investors, holding hundreds of millions each in private-label, mortgage-backed securities to boost profits in a ‘mortgage’ arena. That, of course, was then. Now, the losses on these untoward investments are exacerbating the banks’ strategic problem and giving them — and [the Federal Housing Finance Agency] — lots less time to solve it.”

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