Home Loan Bank woes shake up $6 trillion mortgage market
Financial difficulties within the little-known Federal Home Loan Bank system, which provides crucial funding for the lending industry, have opened a new front in the battle over how to regulate the $6 trillion U.S. mortgage-finance market. The problems have set off a new wave of concern about the institutions that helped finance the decade-long housing boom.
For decades, the 12 Federal Home Loan Banks operated beneath investors’ and lawmakers’ radar screens, quietly providing capital to mostly small-town lenders so they could make more home loans. But the Federal Home Loan Bank of New York caught attention in the markets this week when it said it would have to suspend dividend payments after suffering $183 million in losses from soured investments in mobile-home loans — losses that may have been evident as long ago as early August but weren’t made public until this week.
That news came on the heels of an 82 percent drop in second-quarter earnings at the Federal Home Loan Bank of Pittsburgh, which was stung by a sudden move in interest rates. Rates fell on June 19 to a 40-year low of 5.21 percent for a 30-year, fixed-rate mortgage with no points. The bank’s quarterly net income plunged to less than $2.4 million from about $13.6 million a year earlier.
The Pittsburgh bank is on Grant Street, Downtown, and employs about 185 people. The home loan bank has more than 350 member financial institutions stretching from Pennsylvania and West Virginia to Delaware.
“What happened last spring was everybody was refinancing their loans, and some people had done it several times,” said spokeswoman Terri McKay. “With this kind of unprecedented refi activity, our premium amortization got condensed, and we took this big hit.”
That is, the Pittsburgh home loan bank pays an average 1.7 percent premium to acquire home mortgages from its member institutions. Normal time to write off that premium is an average of seven years, McKay said, but the quarter’s raft of refinancings reduced that time period to five months.
The weak financial results led the Pittsburgh bank to cut its third-quarter dividend to member institutions to 2.0 percent of their investment in the bank’s stock, payable on Sept. 30, versus the 2.25 percent payout in the second quarter.
CEO James “Jay” Roy was not available yesterday.
“Jay said the third quarter was going to be tough,” McKay said. “But we hope we’ll turn the corner soon.”
The home-loan banks were established by the federal government during the Depression to make funding available for home loans in local, often rural, communities. They’ve expanded in recent years from that low-key mission into some of the same types of mortgage business that Freddie Mac and Fannie Mae dominate, for instance buying and holding mortgages from banks. Some on Wall Street have begun to question whether the home-loan banks have moved out of their league.
The home-loan banks’ surprising stumbles come at a time of rising concern about the risks coursing throughout the U.S. mortgage market as it cools down from one of the biggest housing booms in U.S. history. Lawmakers already were debating ways to boost regulation of Fannie Mae and its smaller sibling, Freddie Mac, which recently acknowledged that it used accounting gimmicks to smooth the volatility in its earnings. Thursday, the debate shifted to include the Federal Home Loan Banks, which, together now have $809 billion in assets and $710 billion in debts, making them larger than Freddie Mac.
At a hearing of the House Financial Services Committee Thursday, several members of Congress pushed to include the home-loan banks in a bill being drafted to give the Treasury Department oversight of Fannie Mae and Freddie Mac. Fannie Mae, Freddie Mac and the home-loan banks all were chartered by the government and have access to lower-cost financing and other perks because of that relationship.
Created in 1932, the 12 Federal Home Loan Banks use their ties to the federal government to borrow money at favorable rates and then lend that cheap money to their member institutions. Whenever the banks turn a profit, they then pay a dividend to member banks.