Federal Home Loan bank mortgage 'advances' surge

(Adds comment from analyst, FHLBs of New York and Atlanta, and FHLB trade group)

By Al Yoon

NEW YORK, Sept 4 (Reuters) - Mortgage-related loans by the Federal Home Loan Bank system to members rocketed at an "unprecedented" rate in August as an upheaval in credit markets shut off the dominate funding sources of recent years, the FHLB's office of finance and main trade group said 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 which are used 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 top-rated mortgage "AAA" securities.

"An increase in Home Loan advances of $110 billion in one month appears to be unprecedented," said Nancy Vanden Houten, an agency analyst at Stone & McCarthy Research Associates. "In recent years, advances haven't increased by that much in any single year."

Financial institutions in the New York region are relying more on advances as Wall Street firms reduce or stop lending money through so-called repurchase agreements, or temporary loans backed by mortgages, according to a letter posted on the Federal Home Loan Bank of New York Web site. New York area members have said many Wall Street banks are limiting the repos to one month, restraining funding options. Advances give institutions the ability to fund mortgages from their balance sheets instead of through securitizations, giving them a leg up in the current market. Packaging loans into securities during the housing boom through firms such as Bear Stearns Cos. BSC.N and Lehman Brothers Holdings Inc. LEH.N was often the most profitable avenue for lenders.

"If you are getting your mortgage funded on the Street, it's hard to do that now," said John von Seggern, president of the Council of Federal Home Loan Banks, a trade group. "You're seeing banks and thrifts move to being the primary mortgage lender, at least in the short run."

Wall Street firms have reported some stabilization in credit markets partly due to expectations that the Federal Reserve will lower its target lending rate this month. Thornburg Mortgage Inc TMA.N on Friday was able to raise cash by securitizing $1.44 billion in prime jumbo loans, a segment in which members of the FHLB of New York faced funding problems.

The FHLB office of finance, which sells debt in the market along with government-chartered Fannie Mae (FNM.N) and Freddie Mac (FRE.N), 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.

"Member institutions and the consumers they serve benefited greatly from access to FHLBank liquidity during a period of unusual turmoil," Richard Dorfman, chief executive of the Federal Home Loan Bank of Atlanta said in a statement citing a $29.1 billion increase in its advances since June 30.

(Additional reporting by Lynn Adler in New York)

((Reporting by Al Yoon; editing by Tom Hals; Reuters Messaging: albert.yoon.reuters.com@reuters.net; Email: albert.yoon@reuters.com; +1 646-223-6347)) Keywords: USA HOUSING/FHLB

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