FHLBanks Face Possible MBS Write-Downs

New York-Under a "worst case scenario," the Federal Home Loan Banks may have to report substantial impairment in the value of their $76.2 billion of private-label MBS, but the true economic losses embedded in the portfolio are manageable, according to Moody's Investment Service.

Still, the "other than temporary impairment" write downs, should they be required under accounting rules, could place most FHLBanks below their minimum regulatory capital requirement under a worst case scenario, Moody's warned. As MSN went to press, an accounting regulatory body was moving forward with revisions to the OTTI rules (See related story, this page).

If all the MBS have to be written down under OTTI accounting standards, Moody's estimated that the impairment would be so great that only four of the 12 FHLBanks would remain above regulatory capital minimums. But Moody's said this degree of impairment is unlikely to occur.

Overall, Moody's estimates that the economic losses embedded in the MBS total less than $1 billion, but they also have $13.5 billion of unrealized losses related to the private-label MBS that could be affected by OTTI accounting.

John von Seggern, president and CEO of the Council of Federal Home Loan Banks, noted that most of the banking industry is upset about the "other than temporary impairment" standard.

"The real story of the Moody's report is that the economic losses embedded in the FHLBanks' MBS are manageable," Mr. Von Seggern said. He said the MBS holdings probably account for less than 10% of the FHLBank System's assets. The investments usually add to the System's underlying income, helping to reduce the cost of advances.

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