FHLBs in trouble

When banks take loans from a Federal Home Loan Bank, besides paying interest, they have to buy FHLB stock, based on how much they borrowed and the credit quality of the collateral they posted. The system was set up as a way to support the FHLBs’ capital as banks borrow against it. When a member first signs on, the Home Loan bank sets up a clearing account that works like a checkbook; when member banks borrow money, the FHLB takes cash out of this account and in return gives the borrowing bank stock that pays a dividend. As a bank pays off the loan, the FHLB credits back their cash account by repurchasing the stock. At least, that’s how it usually works. Now, reports are surfacing that suggest that the FHLBs themselves are running into their own problems, from owning billions in toxic mortgage bonds that are becoming worthless.

Moody’s said in a report earlier this week that the FHLB System’s $76.2 billion MBS portfolio contained $13.5 billion in unrealized losses at the end of Q3; values have likely fallen [A LOT] further since that time. At least five Home Loan banks have already notified members as early as mid-December that they will not pay dividends and will stop buying back the excess FHLB stock members hold. Citigroup holds $4.7 billion, JP Morgan Chase holds $4.1 billion, Bank of America holds $2 billion, and Wells Fargo holds $1.6 billion.