Responding to one of the harshest criticisms of the Federal Home Loan Bank System, its regulator said Wednesday that non- housing- related investments have declined as a percentage of assets.

Detractors have long cited the investment portfolio as evidence that Home Loan banks have strayed from their 1930s mission of funding mortgages.

The Federal Housing Finance Board acknowledges that investments considered unrelated to housing hit $81 billion on Sept. 30. But that's a shrinking piece of total assets-20% on Sept. 30 compared with 27% at yearend 1997.

The agency also noted that loans and mortgage-backed securities comprised 87.5% of the system's obligations at Sept. 30, up from 75% in June. That's mainly because loans to member thrifts and commercial banks have been growing faster than nonhousing investments.

Loans have been growing steadily since 1992, reaching a record $43.4 billion in September, the Finance Board said.

"The increase may be due to a number of factors, including new advances products offered by some FHL Banks, changes in the pricing of advances by some FHL Banks, overall financial market developments, and actions taken by some FHL Banks to re-orient their portfolios," according to the Finance Board report.

The report is part of the Finance Board's attempt to convince the Treasury Department to support long-sought reform of the system.

Bruce A. Morrison, chairman of the Finance Board, has asked Congress to repeal the law requiring thrifts to join the system. He has also requested that the banks' capital structure be revamped. To entice even smaller institutions to join the system, Mr. Morrison has proposed letting them hold fewer housing-related assets.

The agency's next step, expected this spring, is a proposed rule that would limit what Home Loan banks may invest in.

Reached for comment Wednesday, Richard S. Carnell, the Treasury's assistant secretary for financial institutions, said through a spokesman, "The Federal Home Loan Bank System has been and remains on an arbitrage binge. A slight recent decline in the pace of arbitrage hardly warrants declaring victory. It isn't even the first step in a 12-step program."

Mr. Carnell has said repeatedly that any reform legislation should force the Home Loan banks to reduce their investment portfolios by roughly two- thirds to $45 billion.

Home Loan banks began raising money in the capital markets after they were forced to contribute to the thrift bailout in 1989. As government- sponsored enterprises, the banks can borrow money at below-market rates.

Since the economy has rebounded and provided other sources of revenue, Mr. Morrison has been calling for Home Loan banks to reduce the amount of money that is invested in securities with no connection to the housing market.

"We want to show that positive things have been going on despite the fact that we haven't written any regulations yet," Mr. Morrison said at the Finance Board's meeting on Wednesday.

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