WASHINGTON — As the Federal Home Loan Bank of Seattle works to dig out of the current financial turmoil, the bank and its regulator must also contend with the aftermath of past crises.
At the end of 2004, as it struggled with the size of its mortgage purchase program, the Seattle Home Loan bank said members who wish to redeem their stock must wait five years before receiving their money.
But as the five-year mark approaches, sources — many of whom requested anonymity to speak freely — said the Federal Housing Finance Agency might not want the bank to redeem the stock, which would have the effect of lowering the capital base.
The bank held $1.9 billion worth of capital stock on Sept. 30, and some observers said it would be difficult for the Finance Agency to justify allowing capital to walk out the door.
"The bank remains undercapitalized," said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc. "Stock redemptions while a bank remains undercapitalized is a very difficult situation. The whole focus needs to be on restoring its capital."
The Finance Agency and the Seattle Home Loan bank both declined to comment for this story.
The issue traces back to the early part of the decade, when the Seattle Home Loan bank launched a program to purchase mortgages from their members. The Chicago Home Loan bank had a similar program with the idea of essentially competing with Fannie Mae and Freddie Mac in the secondary mortgage market. But both programs proved to haunt the banks, which were never able to effectively manage the interest rate risk associated with the programs or tap securitization markets to move the loans off their books.
As losses mounted at the Seattle bank in 2004, its regulator — then the Federal Housing Finance Board — slapped it with a written agreement that banned redemptions within five years, curtailed dividend payments and required the development of a capital plan.
The decision helped the Seattle bank manage its capital and return to profits in 2005. The Finance Board lifted the written agreement in January 2007 but still barred the Seattle bank from repurchasing any stock before the five-year waiting period expired.
But that waiting period expires as the Seattle bank finds itself in yet another hole. It said last week that it lost $144.3 million in the first nine months of 2009, $93.8 million of which was reported during the third quarter. Also troubling is that the Seattle bank's advance business, which totaled $24.9 billion, is roughly half of what it was a year earlier.
The latest earnings slump stems from other-than-temporary impairment charges that have been levied against the Seattle bank's portfolio of private-label mortgage-backed securities, which totaled $130.1 million during the third quarter.
While the Seattle bank said it met all its capital requirements for the third quarter, some member of the bank say they doubt they will be able to redeem any of their stock in the near future.
"They're not in a position to redeem any of it," said an executive at one member institution. "We're stuck anyway. We don't hold out any hope of getting redeemed anytime soon."
Total capital held at the Seattle bank has fallen 48.5% during the first nine months of the year, to $927.4 million on Sept. 30.
