WASHINGTON — In an era of low interest rates, weak loan demand and unprecedented efforts by the Federal Reserve Board to pump liquidity into the economy, the demand for Federal Home Loan Bank advances has plummeted to a 10-year low, raising questions about the system’s future as the government weighs a redesign of the housing finance sector.
Total outstanding advances fell to $402 billion in the third quarter, their lowest point since 1999, and far below their $809 billion total at the end of 2007. At the same time, the number of member banks holding such advances has also cratered, to 4,671, the fewest in more than a decade.
Though advances rise and fall with member demand, the abrupt decline comes at a key time for the Home Loan banks. Advances are the banks’ traditional business, and recent efforts to expand into other areas by buying mortgages from member institutions and investing in mortgage-backed securities have caused steep losses at several Home Loan banks, according to American Banker, an affiliate of Credit Union Journal.
“The FHLBs have a serious strategic challenge: providing a funding source … for mortgages that aren’t being made in portfolio to insured depositories that are shrinking in number,” said Karen Shaw Petrou, the managing partner at Federal Financial Analytics Inc.
“To counter this,” she said, “the banks tried to augment earnings by turning themselves into investors, holding hundreds of millions each in private-label, mortgage-backed securities to boost profits in a ‘mortgage’ arena. That, of course, was then. Now, the losses on these untoward investments are exacerbating the banks’ strategic problem and giving them — and [the Federal Housing Finance Agency] — lots less time to solve it.”
To be sure, the Home Loan banks and their regulator say the decline in advances is just a reaction to the market’s needs and that its recent boost during the financial crisis was never expected to be sustained.
“The simple reality is that the extent to which the banks are going to be growing or contracting advances is largely going to be dependent upon the demand of their member institutions,” said Stephen Cross, the acting senior deputy director and chief operating officer of the FHFA’s division of Federal Home Loan Banks. “Advances fill a gap,” he said, “and what has happened is, the gap is smaller because of the relatively weak economy, high levels of deposits and liquidity at the member institutions and relatively weak demand on the part of their customers for loans.”
“What we all recognize is, this was a particularly severe cycle and the extent to which advances grew and contracted is virtually unprecedented over time,” Cross said.
Still, questions persist about the Home Loan banks’ future as the Obama administration crafts a housing reform package. For their part, the banks have argued that they should largely be left alone, contending that their role is the same as it has always been: to provide liquidity to members.
