In an era of low interest rates, weak loan demand and unprecedented efforts by the Federal Reserve Board to pump liquidity into the economy, the demand for Federal Home Loan Bank advances has plummeted to a 10-year low, raising questions about the system's future as the government weighs a redesign of the housing finance sector.
Total outstanding advances fell to $402 billion in the third quarter, their lowest point since 1999, and far below their $809 billion total at the end of 2007. At the same time, the number of member banks holding such advances has also cratered, to 4,671, the fewest in more than a decade.
Though advances rise and fall with member demand, the abrupt decline comes at a key time for the Home Loan banks. Advances are the banks' traditional business, and recent efforts to expand into other areas by buying mortgages from member institutions and investing in mortgage-backed securities have caused steep losses at several Home Loan banks.
To be sure, the Home Loan banks and their regulator say the decline in advances is just a reaction to the market's needs and that its recent boost during the financial crisis was never expected to be sustained.
Advances peaked at $1 trillion in October 2008 during the crisis and began to decline only after the Fed began to pump money into the market. Since then, advances began plummeting, falling to $631 billion by the end of 2009 and below $500 billion this year.
In a report to Congress this month, the FHFA expressed concern about the credit-related impairment charges on the banks' holdings of private-label MBS, which totaled $900 million in fiscal year 2010. At Sept. 30, the Home Loan banks held private-label MBS equivalent to 4.5% of assets, according to the agency.
To date, shortfalls in principal or interest have occurred in 1% of those private-label MBS, but collectively they have recognized $3.3 billion in credit-related impairments and an additional $10.8 billion in noncredit-related, other-than-temporary impairment on those investments, according to FHFA's report.
