Troubles With Secondary Mortgage Market Program Driving FHLB Merger

CHICAGO – Officials with the Federal Home Loan Banks of Chicago and Dallas are trying to resolve almost $38 billion in mortgage held by the Chicago Bank in order to proceed with the rare combination of the two FHLBs. The Chicago Bank, which originated the Mortgage Partnership Finance program copied by most of the other 11 FHLBs, was stuck with the mortgages purchased from credit unions and banks because they were unable to obtain authority to securitize them and move them off their books, according to sources familiar with the finances of the FHLB. As a result, the Chicago Bank was left holding millions of dollars in paper losses when interest rates turned up, the sources told The Credit Union Journal. Officials with the two FHLBs, who announced Thursday they are negotiating a merger, are working to resolve the issue, either by the sale of some or all of the massive mortgage portfolio, or a write down of the assets. The problem is different from those facing many troubled mortgage lenders trapped by subprime lending, as the mortgages held by the Chicago Bank are all prime. The Chicago Bank, though it is expected to report a second quarter loss over the next few days, is solvent and holds adequate capital to deal with the crisis. The secondary mortgage program has been the source of troubles at other FHLBs, as well, with the FHLB Seattle forced to sell off its mortgage portfolio and return to its core business of providing low-cost funding to bank and credit union members for their mortgage programs.