Home-Loan Banks Struggle to Maintain Capital

By James R. Hagerty

 

The Federal Home Loan Banks, which have thrived on obscurity for more than seven decades, are moving uncomfortably into the spotlight as souring mortgage investments threaten to leave some of them below their capital requirements. The 12 regional home-loan banks are a major source of funding for thousands of commercial banks, thrifts and credit unions across the country. As other sources of credit dried up, they increased their lending to financial institutions to about $1 trillion as of Sept. 30 from $641 billion at the end of 2006. In recent weeks, however, several of the home-loan banks have suspended dividends or warned that they may fall short of capital requirements. That raises the possibility that some of the home-loan banks may have to curtail their lending, charge more for credit or sell some of their financial assets. If bond investors get too jittery, the home-loan banks may have to tap an emergency credit line established by the Treasury Department for them in September, though that doesn’t appear imminent. The struggle to maintain adequate capital could spur home-loan banks to consider merging with one another, said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington. The Chicago and Dallas home-loans banks held merger talks last year but failed to agree on terms.

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