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Lending slowdown puts federal home loan banks under pressure

The slow pace of bank lending has become a drag on a less-visible front — the Federal Home Loan Bank system.

The 12 wholesale banks, including one in Pittsburgh, earn income on money they lend to their member banks. So, when those banks make fewer mortgages and other loans to families and businesses, they don’t borrow as much from the home loan banks.

The Pittsburgh home loan bank, located on Grant Street, Downtown, employs about 230 people. The bank provides funding for home mortgages and community development to 314 member banks in Pennsylvania, Delaware and West Virginia. They range in size from PNC Bank, the state’s largest, to Eureka Bank, which has two offices.

A report on the Federal Home Loan Bank system by Moody’s Investors Services said the wholesale banks’ earnings are improving but are still under pressure. Moody’s rates the 12 home loan banks as well above investment grade, but they face challenges from weak loan demand.

“The banks still have strong liquidity. Deposit growth is still pretty strong, but loan growth is down sharper than in past recessions,” Brian Harris, the analyst who wrote the Moody’s report, said Monday.

Total loans to their member banks dropped nearly 21 percent, to $499 billion as of Sept. 30, vs. $631 billion a year ago, according to the Federal Housing Finance Agency, which oversees the home loan bank system.

Total loans were at an all-time high of $929 billion, as of Sept. 30. 2008, “which is unheard of,” said Stephen Cross, the agency’s deputy director.

“Since October 2008, there were a plethora of federal programs to rescue the economy, and home loan bank (loans) came down to a more normal level,” said Cross.

“We stepped in before the Fed programs revved up,” said Terry McKay, spokeswoman for the Federal Home Loan Bank of Pittsburgh. “So we had to artificially ramp up (loans), and now they are on their way back down.”

Loans to member banks by the Pittsburgh bank fell to under $32 billion as of Sept. 30, a 23 percent drop from a year ago. As a result, net interest income on loans dropped 25 percent to $50.6 million.

The bank had net profit of $45 million last quarter, but “it’s hard to say” if that trend will continue, said McKay. In the same quarter a year ago, the Pittsburgh bank had a loss of $40 million.

Also dampening home loan banks’ results are problem mortgage-backed securities on their books. The 12 home loan banks recorded nearly $4 billion in losses from late 2008 until last quarter on mortgage-backed securities that are now valued about $46 billion, said Cross. In the third quarter of 2009, the Pittsburgh bank had losses on mortgage-backed securities of $190 million.

He estimates “the vast majority of write-downs has already occurred.” But the value of those securities could continue to trickle down until late 2011, said Cross. That’s how long it may take before housing prices recover.

“The longer-term question for home loan banks is, can they make a reasonable return and avoid the kind of systemic risk that hit Fannie Mae and Freddie Mac,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., a Washington consulting firm.

One possible way to increase profit would be for home loan banks to merge. The Chicago and Dallas banks were in merger talks in summer 2007 but later dropped their plans. Coincidentally, the Federal Housing Finance Agency last week proposed rules that would guide such mergers.

The Pittsburgh home loan bank has no merger plans, said McKay. Nor does the bank have any plans to downsize the organization any time soon.


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