Mortgage Securities Drag FHLB to a Loss

By James R. Hagerty


The Federal Home Loan Banks recorded a combined loss for the fourth quarter of $672 million, the latest sign of strain on a group of institutions that provides loans to banks, thrifts and credit unions across the U.S. The loss, the first in at least 20 years, compares with net income of $846 million a year earlier for the 12 regional banks. For all of 2008, net fell 56% from a year earlier to $1.25 billion. The setback was mainly the result of write-downs in the value of mortgage securities created by Wall Street during the housing boom. Some of the home-loan banks invested heavily in these “private label” mortgage securities — ones not backed by any government-related entity — as a way of grabbing higher yields in recent years. A surge in defaults has slashed the value of such securities. To rebuild their capital, some of the home-loan banks have had to eliminate dividends and suspend repurchases of their stock from members. Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington, predicts continued pressure on profits at the home-loan banks, and says some of them may need to merge to cut costs.