WALL STREET – The Federal Home Loan Banks, which have become critical liquidity providers for credit unions, may face "substantial" losses on their vast holdings of mortgage-backed securities, which could push most of them below minimum capital requirements, Moody’s Investors Service warned yesterday.
In a problem similar to that faced by corporate credit unions, the 12 FHLBs hold as much as $13.5 billion of unrealized losses on $76.2 billion of private label MBS because of the seizing up of the credit markets. As a result, the federal government may decide to put some of the FHLBs into conservatorship or force them into mergers, the Wall Street rating agency said. The big question is whether the continued declines in the market value of those securities will be deemed "other-than-temporary impairments," and how much losses their regulator will force them to realize, Moody’s said.
The warning comes as the FHLBs are becoming a growing source of liquidity for the corporate credit unions, which are holding as estimated $18 billion of unrealized losses on their books. The corporates have more than $14 billion in outstanding borrowings from the FHLB, including $5.9 billion for U.S. Central FCU.
Almost 1,000 natural person credit unions also access the FHLBs for low-cost financing.
Several FHLBs have reported large exposure to distressed private-label mortgage-backed securities in recent month, including the Seattle, Chicago, Boston and Atlanta banks.
Private-label bonds, those not issued by Fannie Mae, Freddie Mac, of Ginnie Mae, lack the federal guarantee and so have a greater risk of default, Moody’s explained.
