UPDATE 2-FHLB Chicago to stop mortgage-buying program

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NEW YORK, April 23 (Reuters) - The Federal Home Loan Bank of Chicago on Wednesday said it would halt its program of purchasing mortgage loans, citing onerous costs.

The FHLB of Chicago will no longer make or renew commitments under the program after July 31, Matthew Feldman, acting president of the bank, said on the company's website.

The bank in the past decade has been criticized for lax interest-rate risk management, in part due to the growth of the program known as the Mortgage Partnership Finance, or MPF, analysts said. The bank launched the program in the late 1990s to share the risk of managing mortgages with lenders.

"This is a program that's been under significant criticism, or some would say attack, from the Federal Housing Finance Board," said Bert Ely, a banking consultant. The housing finance board regulates the 12 Federal Home Loan Banks.

"It's more a matter of managing the risk" on the MPF portfolio, he added.

Mortgage Partnership Finance was once seen as competition for the largest mortgage buyers, Fannie Mae (FNM.N) and Freddie Mac (FRE.N), which "have never liked the program," Ely said.

But growth has waned since 2004 as lenders sought more profitable ways to push the assets off their balance sheets, said Jim Vogel, a strategist at FTN Financial Capital Markets.

The Chicago FHLB held $34.6 billion in MPF mortgages on its balance sheet, net of an allowance for loan losses, at the end of 2007. The total is down from nearly $47 billion in 2004.

Losses on interest-rate hedges have weighed on the bank's capital, which has come under scrutiny from the board. The regulator has also told the bank it must obtain approvals before honoring stock redemptions of its shareholders.

Standard & Poor's this month said it may cut the "AA+/A-1+" counterparty credit rating due to losses related to MPF, the termination of merger with the Federal Home Loan Bank of Dallas and reduced capital.

"The hedging and funding costs for these loans, and the need to capitalize our loan portfolio while reducing voluntary stock, have had a significant adverse effect on our income," Feldman, the acting president, wrote.

The MPF program supplements the traditional FHLB business of raising money from investors for low-cost, collateralized loans to shareholder banks. The system is made up of 12 regional banks chartered to promote lending for housing through the members that hold stock in their region's FHLB.

The bank has renewed efforts to finance mortgages through an off-balance sheet alternative that would sell loans to other investors, Feldman said. (Reporting by Al Yoon; Editing by Leslie Adler)