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Seattle FHLBank Exits Mortgage Purchase Deals

Under regulatory pressure, the Seattle Federal Home Loan Bank is exiting the mortgage purchase business to reduce its interest rate risk exposure and cut operating costs.

The bank's board of directors and senior management is developing an "exit strategy" for the mortgage purchase program, the government-sponsored enterprise said last week.

The Seattle bank's profitability declined sharply last year and it is currently operating under a supervisory agreement.

As part of that Dec. 10 agreement, the bank agreed to slow the growth of its mortgage purchase program and submit a business and capital plan to its regulator.

The Seattle FHLBank also announced that the Federal Housing Finance Board has extended its deadline for submitting the business and capital plan until April 5. The original deadline was Feb. 28.

This extension appears to recognize that the Seattle bank recently replaced its president, at least temporarily, by bringing back James Faulstich, who served as the bank's president and chief executive from 1979 to 1999.

The Seattle bank developed its mortgage purchase program separately from the Chicago FHLBank's Mortgage Partnership Finance program. And it applied to the Finance Board last summer for approval to start a mortgage-backed securities program called Mortgage Choice.

"Mortgage Choice is a risk mitigation tool for us to accommodate large loan volumes from our members without ballooning our balance sheet," according to the Seattle bank.

But by last summer, the Finance Board had become concerned about the large mortgage portfolios the Seattle and Chicago banks had accumulated.

On June 30, the Finance Board forced the Chicago bank to slow its mortgage purchases under the MPF program.

Under a business plan that the Finance Board has accepted, the Chicago bank will no longer use "voluntary stock" to capitalize its mortgage portfolio.

In addition, the bank said it is exploring alternative methods of capitalizing and funding MPF assets including techniques to "liquefy" MPF assets. This appears to mean that the bank is looking for ways to securitize and sell MPF loans.

However, the Chicago bank remains committed to the MPF program and it restated that commitment last week in the wake of the Seattle bank announcement.

"As we said in announcing the acceptance of our business plan several weeks ago, we remain committed to continued development and evolution of the MPF program and the benefits it delivers to our member financial institutions and their customers," Chicago bank president and chief executive Mike Thomas said.

The Seattle bank also announced last week that it will allow member banks and thrifts to use their "membership stock" as collateral for advances.

"This change will allow members to access about $560 million in existing stock to support up to $16 billion in new advance borrowings," the bank said.

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