January 22, 2009
Don't worry if you've never heard of the Federal Home Loan Bank of Boston. You have lots of company.But the $80 billion banking cooperative that helps fund about 450 institutions in New England is an important cog in the region's financial machinery. And it's got real problems.
Boston's home loan bank, known for the conservative lending standards it applies to members seeking credit, is saddled with billions of dollars of securities backed by riskier mortgages on its own balance sheet.The value of those securities fell sharply, about $1.3 billion, to $3.3 billion through the first nine months of 2008. Though the bank isn't planning to sell any of the securities backed by so-called Alt-A mortgages, the decline in value is equal to about a third of all its capital.
Most of the dozen federal home loan banks spread across the country are dealing with similar problems. A report by Moody's Investors Service this month said the home loan banks own a combined $76 billion in mortgages that are not backed by Fannie Mae, Freddie Mac, or the federal government. As a group, they face unrealized losses of $13.5 billion on those investments, representing about 25 percent of their total capital.
But the declines went over particularly badly at the Boston home loan bank, where longtime president Michael Jessee plans to retire in April. The bank's board pressured Jessee, 62, to retire early as the value of the investment portfolio shrank last year, according to two executives who worked with him. Jessee denied he was retiring under duress and said he never planned to work to age 65.
The Boston home loan bank restricted dividend payments and stopped buying back stock to help preserve capital last month. But Jessee said the bank has not limited the billions of dollars in advances it extends to member banks to finance loans."That's our top priority," he says. "We need to be there as a lender at reasonably good prices."
The home loan banking system, chartered by Congress in 1932, has been an important source of money for its members during the current crisis. Advances made to members grew 58 percent to $1 trillion between June 30, 2007 and Sept. 30 last year.
The home loan banks act as wholesalers, borrowing money in global credit markets and advancing most of it to members. But a smaller portion of the money raised has been invested by the home loan banks themselves.Some bankers who are members of the home loan system bristle at the current investment problems, citing the strict restrictions and collateral demands they must meet when seeking advances.
"It's discouraging to see them taking such risk in their investment portfolio while avoiding any hint of a risk with advances to its members," says Gerald Mulligan, chief executive of LSB Corp., the parent of River Bank in North Andover. "They bought assets they probably would not have accepted as collateral from their members."
Boston home loan bank executives say they did not think they were taking an investment risk when they bought the securities and do not believe they face much real financial damage from the paper losses now.The Alt-A mortgages backing those securities were home loans typically given to borrowers with good credit but little proof of incomes, or with a small down payment or none at all.
But Jessee says the Boston home loan bank only bought securities backed by extremely senior slices of those mortgage portfolios. That guaranteed the bank a spot at the front of the line when it came time to get paid. When they were issued, those securities came with top ratings from credit agencies.Still, the securities attract few buyers today and prices have sunk. Boston home loan bank officials say that shouldn't matter much because they have no need or interest in selling.
That would only change if the banks were forced to account for the lower investment values as other than a temporary setback. That's possible but hasn't happened yet.The real losses suffered inside the riskier mortgage portfolios remain to be seen. Moody's analyst Brian Harris estimates the true economic losses at less than $1 billion for all 12 home loan banks combined.But real risk has become a notoriously difficult thing to nail down for everyone, from go-go investors to conservative home loan banks.
Source:http://www.boston.com/business/