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November 3, 2009

OTTI Charges Continue to Plague FHLBs

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 of mortgage backed securities. Many FHLB 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, president of the Council of Federal Home Loan Banks.