Despite Hedge Problems, Pittsburgh FHLBank Sticks with MPF

The Federal Home Loan Bank of Pittsburgh is sticking with its Mortgage Partner-ship Finance program although it plans to limit its purchases of single-family mortgages and keep its MPF portfolio at 10% of total assets.

In filing its first annual report with the Securities and Exchange Commission, the Pittsburgh FHLBank said it will continue to purchase mortgage loans from community bankers and midsize members, but it will no longer purchase mortgages on a flow basis from large producers. "This approach has proven to be unworkable since the bank could not fully anticipate and hedge deliveries of material volumes of loans from such large producers," according to the 2005 annual report.

The Pittsburgh bank ran into heavy prepayments and hedging problems in 2003 that sharply reduced earnings. At the time, the Pittsburgh FHLBank had the second-largest MPF portfolio. The 2005 annual report includes restated earnings, which shows the FHLBank incurred a $27 million loss in 2002 and a $68.7 million profit in 2003.

Since then, its performance has definitely improved. The Pittsburgh bank reported a 61% jump in earnings in 2005 and a 22% increase in advances. Earnings at the FHLBank jumped from $118.9 million in 2004 to $191.8 million in 2005 while advances rose 22% to $47.5 billion.

Today, the Pittsburgh bank does not want MPF loans to make up more than 10% to 12% of its balance sheet, according to Craig Howie, the FHLBank's marketing and sales director. The FHLBank had $72.9 billion in total assets as of Dec. 31.

The Pittsburgh bank also disclosed that its largest source of MPF loans, the National City Bank of Pennsylvania, is expected to terminate its membership in 2006. The Pittsburgh FHLBank currently holds $7.7 billion in MPF single-family loans and 90% of those loans were purchased from National City.

National City Corp. is in the process of consolidating six national bank charters into a single national bank based in Cleveland, a company spokesman aid. However, the Pittsburgh FHLBank still expects to purchase some National City loans on a select basis to maintain the size of its MPF portfolio.

Apparently, National City has a captive reinsurance company in Vermont that can sell MPF loans to the Boston FHLBank.

"We expect to be able to participate in that volume with the Federal Home Loan Bank," Mr. Howie said.

The Pittsburgh bank is the last of the 12 FHLBanks to file an audited 2005 financial statement and apply to be a SEC registrant, which was mandated by the Federal Housing Finance Board nearly two years ago.

Like many of its fellow government-sponsored enterprises, the Pittsburgh FHLBank's registration took longer than expected because it had to restate financial results from 2001 through 2004 due to the misapplication of Financial Accounting Standard 133 involving derivative instruments and hedging activities. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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