UPDATE 1-FHLB advances seen $1 trillion by August-regulator

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By Al Yoon

BOSTON, May 6 (Reuters) - Outstanding short-term loans to banks by the Federal Home Loan Banks are on pace to hit $1 trillion by August as financial institutions continue to seek liquidity for housing, the federal regulator of the FHLB said on Tuesday.

"We currently have out about $925 billion worth of advances (outstanding and) at the rate things are going we will hit the $1 trillion mark in August," Ronald Rosenfeld, chairman of the Federal Housing Finance Board, said on a panel hosted by the Mortgage Bankers Association. The level is up about $300 billion from June 30, he said.

The FHLB system raises low-cost money for its shareholder banks with proceeds from debt in the so-called federal agency debt market. The advances to member institutions have soared since last year as the credit crunch squeezed off access to other sources of capital.

The mortgage industry continues to undergo a wrenching correction as soaring foreclosures exacerbate home price declines and lead banks to clamp down on lending standards. Lean times and job losses are reflected in a 53 percent drop in attendance at the MBA secondary markets conference, which last year featured as top speakers now-humbled executives of Bear Stearns Cos. BSC.N and Countrywide Financial Corp CFC.N.

The FHLBs are facing increased risk due to the concentration of loans to big financial institutions that recently "decided to become very involved in the FHLB system," Rosenfeld said. Those banks include Countrywide, Washington Mutual Inc (WM.N) and Wells Fargo & Co (WFC.N), he said.

The top 10 borrowers of the FHLB system account for 37 percent of all advances, he said.

"That's an astonishing number, and an astonishing amount of concentration," he said.

The FHLBs can continue to provide money for their commercial bank members as long as demand persists in the market for agency debt. But other issuers, Fannie Mae (FNM.N) and Freddie Mac (FRE.N), are expected to also increase debt sales to fund growth in their portfolios.

FHLBs, which sell debt under one umbrella, issued $298.5 billion in bonds and $833 billion in short-term discount notes in the first four months of 2008, according to the FHLB Office of Finance. The FHLBs issued $495.2 billion and $1.7 trillion in long- and short-term debt last year.

FHLBs had $1.24 trillion in long- and short-term debt outstanding as of April 30, nearly double that of 2002. (Additional reporting by Scott Malone; Editing by Neil Stempleman)