Seattle’s Federal Home Loan Bank in big money trouble again

By Drew DeSilver


Don’t look now, but another big Seattle-based bank is struggling under the weight of distressed mortgage-backed securities, declining loan business and the deflated housing market. This time it’s not a consumer-oriented bank such as Washington Mutual, which collapsed last year, but the Federal Home Loan Bank of Seattle, a behind-the scenes funder of mortgage loans that faces its second major financial crisis in five years. The Seattle FHLB, a cooperative that lends money to its member banks at below-market rates, has accumulated $247 million in net losses over the past four quarters, mainly because of losses in its pile of mortgage-backed securities. The bank’s $16.2 million first-quarter loss would have been even deeper if not for a timely change in accounting rules. The upheaval in the banking world is cutting into the Seattle FHLB’s lending business. All of which raises the question of whether the Seattle bank — already the second-smallest of the 12 Federal Home Loan Banks — will have the scale it needs to remain healthy going forward. “You lose a very big customer, and you lose the capital base they have pledged to support their borrowings,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a Washington, D.C.-based research firm. As of March 31, the Seattle FHLB had $31.8 billion in outstanding loans — or “advances” in FHLB terminology — down from $46.3 billion as recently as Oct. 31, before the housing market went into deep-freeze and several members failed or were merged out of existence. “The advance business is a safe business, but the problem is it’s a very low-return one,” Petrou said.