WASHINGTON — Despite changes by the Financial Accounting Standards Board in March that were expected to stem fallout caused by other-than-temporary impairment charges at the Federal Home Loan banks, the system is continuing to suffer massive losses on its portfolio holdings.

Many Home Loan bank representatives praised the FASB after it amended its rules concerning OTTI to limit them solely to credit risk. But it has become clear that the credit risk embedded in the system's portfolios of private-label mortgage-backed securities is significant.

During the third quarter alone, the system's credit-related OTTI charges totaled $1.042 billion. That is more than half of the $1.995 billion in OTTI charges the system has taken all year.

The impact of the charges has been painful; the system said last week it lost $165 million during the quarter.

"This is an indication of the magnitude of their exposure to these kinds of securities," said Brian Harris, an analyst at Moody's Investors Service. "The credit pieces are becoming larger."

Home Loan bank representatives acknowledged that, even with the FASB's change, OTTI charges will remain a big challenge for the system. "The private-label mortgage-backed securities market continues to be a weight on the Federal Home Loan banks' earnings," said John von Seggern, the president of the Council of Federal Home Loan Banks.

The situation could be much worse. Noncredit-related OTTI charges totaled $8.4 billion for the first nine months of 2009 and before the FASB's decision, Home Loan banks would have been required to run that amount against earnings as well.

But the big question is how many more charges are in the offing. Harris estimated credit-related losses in the MBS portfolios could reach $2.8 billion.

In a press release last week, the Home Loan banks' Office of Finance did not offer an estimate of future charges but said the third-quarter hit resulted in large part from rising unemployment, lower housing prices and a tough refinancing market for borrowers who owe more than their home is worth. Those factors are unlikely to improve anytime soon, leading some observers to predict more charges. "Now you're down to the real fundamentals of credit being bad," said Bose George, a mortgage equity analyst at KBW Inc. "Credit fundamentals are going to be weak for several quarters."

Given that background, there is little the Home Loan banks can do at the moment to minimize future OTTI charges. But George said the system should continue shifting back to its core advance business.

"The damage is done in terms of the old stuff but going forward, their business models need to have far-tighter parameters," he said.

Advances on Sept. 30 declined 27% from yearend, to $678 billion.

Some held out hope that the models Home Loan banks are using to determine credit-related OTTI charges are overly conservative and ultimate losses may prove to be lower. "There's an element that says they are front-end loaded accounting losses and there are potential recoveries," said Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s First Financial Capital Markets Corp.

Others were less optimistic.

"They are real charges," Harris said. "It's an expected credit loss calculation."

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