WALL STREET – Standard & Poor's Ratings said last week it lowered the counterparty credit rating on the Federal Home Loan Bank of Chicago, which continues to struggle from the weight of more than $30 billion worth of loans its purchased from credit unions and banks under its Mortgage Partnership Finance program.
Standard & Poor's cut the rating one notch to 'AA/A-1+', the third highest investment-grade level, from 'AA+/A-1+'.
The downgrade reflects deteriorating operational metrics caused by unprofitable hedging for the Chicago Bank’s secondary loan program, which it is winding down and exiting under an agreement with its federal regulator, the Federal Housing Finance Board.
S&P said its expects the Chicago Bank, which reported a $78 million loss in the first quarter due to poor hedging of its huge mortgage portfolio, to "incur only the second annual loss by a System bank in its history in 2008 --and its unprofitability could extend into 2009."
The Chicago Bank said last week it is still searching for a permanent solution to extricate itself from the huge portfolio of mortgage loans but has reached interim agreements with other Home Loan Banks to buy loans from participating credit unions and banks through October 31. Those loans will be investments on the other FHLBs’ balance sheets. The program was originally scheduled to be terminated on July 31.
