Financial Problems at FHLB Ripple Across Housing Projects
Declining Profits Result in Funding Cutbacks for Programs That Aid Low-Income Residents, Threaten Other Tasks
By James Hagerty
Falling profits at the Federal Home Loan Bank system are causing worries that extend far beyond the corridors of these government-backed financial institutions. Over the years, Congress has assigned new chores to the 12 regional banks, formed in 1932 to help prop up thrifts during the Depression. Today, along with their main function of making loans to commercial banks, thrifts and insurers, the home loan banks are responsible for financing low-income housing projects that Congress doesn’t want to put on the federal budget. They also help to pay off bonds issued two decades ago to pay for the bailout of failed savings-and-loan institutions. Financial woes at some of the home loan banks are making it harder for them to perform such tasks. …The drop in the FHLB’s combined income reflects write-downs on mortgage securities created by Wall Street during the housing boom and held on the banks’ books. Recent downgrades in ratings on many of these securities are likely to force further write-downs, said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington. Adding to the home loan banks’ worries, their long-term borrowing costs have risen as investors have become wary of debt issued by any entity that isn’t explicitly guaranteed by the government. Meanwhile, many banks have become less reliant on borrowings from the home loan banks because many can get funds directly from the government or issue bonds guaranteed by the Federal Deposit Insurance Corp. A drop in demand for FHLB loans makes it harder for the home loan banks to produce the earnings needed to bolster their capital.