Home Loan Banks Raise Fears;
Losses Suggest Too Much Risk
By PATRICK BARTA and JOHN D. MCKINNON
Staff Reporters of THE WALL STREET JOURNAL
Two regional banks within the Federal Home Loan Bank system reported additional struggles related to derivatives and investments, raising a new round of concerns about whether the government-sponsored banks have been taking on too much risk during the housing boom.
In a letter sent to shareholders Wednesday, the Federal Home Loan Bank of Atlanta said it recorded a loss of $9.1 million for the third quarter. Meanwhile, in a similar letter, the Federal Home Loan Bank of Pittsburgh said it will likely post a loss of $6.5 million when its third-quarter earnings are finalized later this month. In both cases, the banks' losses were tied to hedging strategies that were intended by the banks to offset risks.
Home-loan banks aren't publicly traded, but most of their earnings are paid out as dividends to member banks -- which include public- and private-banking concerns.
The latest results seem to indicate that some of the home loan banks are having difficulties dealing with recent gyrations in interest rates, which can cause sudden losses for any institutions that buy and own mortgages or use derivatives. Unexpected interest-rate moves, and the need to hedge against them, played a role in the accounting debacles that derailed mortgage-finance company Freddie Mac earlier this year.
Created by the government in the 1930s, the 12 federal home loan banks were designed to use their government ties to borrow money at low interest rates, and then lend that cheap money to smaller lenders. In more recent years, some of the government-sponsored banks have moved to build up larger mortgage portfolios of their own, taking on more risk, in part to be more competitive with Fannie Mae and Freddie Mac. Those companies operate under similar government charters and have massive loan portfolios.
Late last month, the Federal Home Loan Bank of New York rattled markets when it suspended its dividend payment and disclosed a loss of $183 million from soured investments in securities backed by mobile-home mortgages. Also, the Pittsburgh bank reported an 82% drop in second-quarter earnings due to a failure to adequately hedge at a time when low interest rates were spurring a refinance boom
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