US: Credit Market

Federal Home Loan Bank Mortgage 'Advances' Surge


Mortgage-related loans by the Federal Home Loan Bank system to members surged 17 percent in August as "extraordinary events" upset credit markets, the FHLB's office of finance said on Tuesday.

Outstanding collateralized loans to the FHLB's 8,100 member financial institutions rose $110 billion to $769 billion as of Aug. 31, the office of finance said in a statement. Debt issued by the FHLBs in the $2.7 trillion "federal agency" market also rose by $110 billion, it said.

The increase in use of "advances" comes as investors have sharply pulled back on purchases of mortgage securities issued by banks and Wall Street firms to raise money for mortgage originations. Investors struggling with steep losses due to poor underwriting practices and the housing slump in August began shunning even "AAA," top-rated mortgage securities.

"Members can be comfortable that the triple-A rated Home Loan Bank System is able to efficiently access capital markets to fund advance demand in this period of market stress," Mike Thomas, chief executive of the Federal Home Loan Bank of Chicago said in a statement.

Advances give institutions the ability to fund mortgages from their balance sheets instead of through securitizations.

The FHLB office of finance, which sells debt in the market along with government-chartered Fannie Mae and Freddie Mac, said short-term "discount note" issues rose by $82 billion in August to $249 billion outstanding. Longer-term debt issues increased by $28 billion to $838 billion.

Fannie Mae and Freddie Mac use agency debt to fund their combined $1.4 trillion investment portfolios that are limited in growth under current regulatory agreements. The companies were recently rebuffed in a bid to lift portfolio caps by their regulator, the Office of Federal Housing Enterprise Oversight.

The FHLBs -- which are not publicly traded -- use agency debt to provide advances to their members which include banks, savings and loan institutions and insurance companies.