April 28, 2008 / 9:13 PM / 11 years ago

RPT-UPDATE 1-US FHLB banks advances hit record high in 1st qtr

NEW YORK (Reuters) - The Federal Home Loan Banks said on Monday the amount of loans made to its member banks rose to a record high in the first quarter as a credit crunch crimped other funding sources for banks.

The system of 12 regional FHLB banks, the largest collective source of U.S. home funding, has increased in importance to the housing market since the credit crunch shriveled up other sources of funds for mortgage lenders.

The group makes low-cost loans to its members, which it funds by selling debt in the capital markets.

Advances, or secured loans, rose 4.3 percent to $913 billion in the first quarter, representing 69.0 percent of total assets, FHLBanks said in a statement.

The volume of loans the FHLB provides to members belonging to the network has soared since last summer as lenders such as Countrywide Financial Corp CFC.N boosted requests for the funding.

FHLBanks on Monday also preliminarily reported a 12.2 percent rise in first-quarter net income to $697 million, from a year earlier.

“The overall profitability of the FHLBanks is going to make people, for now, rest easy,” said Jim Vogel, agencies analyst, at FTN Financial Capital Markets in Memphis, Tennessee.

“If you have a check list of the things you are watching out for, you can check off the FHLBanks and move on to the next item on your list after today’s report,” he said.

FHLBanks, Fannie Mae FNM.N, Freddie Mac FRE.N, and the Federal Housing Administration have become favored vehicles of the Bush administration as it makes efforts to stem surging mortgage defaults, falling home prices and rising foreclosures.

In late March, the Federal Housing Finance Board said it would enable banks in the Federal Home Loan Bank System to expand holdings of securities issued by Fannie Mae and Freddie Mac.

Although profitable in the first quarter, combined net income was hampered by a net loss of $78 million at the Federal Home Loan Bank of Chicago.

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

The Chicago bank said last week it will be halting its program of purchasing mortgage loans.

Losses tied to the mortgage purchase program, reduced capital levels and the termination of a merger with the FHLB of Dallas led ratings agency Standard & Poor’s to consider a downgrade of the Chicago institution.

“The remaining FHLBanks do not expect to record any material other-than-temporary impairment charges as of March 31, 2008,” FHLBanks said in the statement.

Combined total assets were $1.323 trillion at March 31, an increase of 4.0 percent from $1.272 trillion at year-end 2007.

FHLB said the principal investments are U.S. mortgage-backed securities, overnight and term federal funds sold, commercial paper and government-sponsored enterprise securities.

Approximately 99 percent of the GSE securities, commercial paper, and mortgage-backed securities were triple-A rated or the short-term equivalent at March 31. Less than 1 percent of total investment securities were rated below investment grade at March 31.

Congress established the Federal Home Loan Bank System back

in 1932, to fill a dire need for a stable source of funds for residential mortgages. The Great Depression had undermined the existing banking system, and with it, Americans who had recently purchased — or wanted to purchase — homes.

Reporting by Julie Haviv; Additional reporting by Albert Yoon and Patrick Rucker; Editing by James Dalgleish

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