Two FHLBs Eye Merger

CHICAGO – The Federal Home Loan Bank of Chicago, troubled by its growing secondary market mortgage portfolio, said yesterday it is in discussions to combine with the FHLB of Dallas. The Chicago Bank is the creator of the Mortgage Partnership Finance secondary market program, which buys mortgages from member banks and credit unions as well as other FHLBs, but has been unable to sell or securitize the mortgages to hedge interest rate risk. This has left the Bank holding almost $38 billion of low-rate mortgages at a time of higher payouts to members. The difficulties in the secondary market program have prompted the FHLB regulator, the Federal Housing Finance Board, to put the Chicago Bank under a supervisory agreement and close regulatory scrutiny. The Chicago Bank reported a 63% decline in first quarter earnings and laid off an undisclosed number of workers in the second quarter, but has yet to report its second quarter results. The Chicago Bank has $87 billion in assets and represents 850 banks and credit union in Illinois and Wisconsin, while the Dallas Bank has $53 billion in assets and represents 900 institutions in five Southwest states.