SEATTLE-The Federal Home Loan Bank of Seattle reported unrealized losses on its private-label mortgage backed securities will push it below regulatory capital limits and could force it to suspend dividends and excess stock repurchases.
The Seattle Bank is the second of the 12 FHLBs to make a dire financial prediction, following a Dec. 8 announcement by the FHLB San Francisco that it was suspending dividend and excess share repurchases because of losses on so-called private-label, or non-agency, mortgage bonds.
The warning comes less than two years after the Seattle Bank exited a supervisory agreement with its federal regulator that required it to cease paying dividends and terminate its secondary market program, known as Mortgage Partnership Finance.
The latest announcement follows a report by Moody's Investors Service last week saying that unrealized losses on mortgage securities could push as many as eight of the 12 FHLBs under regulatory capital requirements and force one or more of them into federal conservatorship. The problems are similar to those experienced by corporate credit unions, which hold an estimated $18 billion of unrealized losses on their books due to the diminution of the market for asset-backed securities.
In a letter to the Seattle Bank's 325 members, including 75 CUs, Richard Riccobono, president of the FHLB, said he believes the regulatory requirements to accrue the loss of market value on the bank's books overstates the potential for losses. "While the market values of mortgage-based assets are currently under extraordinary pressure, the vast majority of the private-label mortgage-backed securities that we hold are highly rated, credit-enhanced, adjustable-rate securities that we have the ability and intent to hold until they mature," he said.
The FHLBs have become an important liquidity source for both natural person and corporate credit unions in recent years, providing low-cost funds that credit unions use to leverage mortgage lending or to arbitrage.
Almost 1,000 natural person credit unions access the FHLBs for low-cost financing.
Several FHLBs have reported large exposure to distressed private-label mortgage-backed securities in recent months, including the Chicago and Boston banks.
