Mortgage lenders get federal help

WASHINGTON - The Federal Home Loan Bank system has increased low-cost lending to financial institutions in an effort to bolster credit stability.

As the housing crisis worsens and the Federal Reserve has swooped into the market to ensure liquidity, the 12 regional banks are making more cash available to banks and thrifts that make mortgage loans.

Created by Congress during the Depression, the self-funded home loan bank system has about 8,100 members across the country: banks, savings and loans, and credit unions, predominantly small community lenders. Eight of every 10 U.S. financial institutions belong to the home loan bank system, a big player in the $8 trillion home-mortgage market.

Because members are government-insured deposit takers, they are subject to federal regulation and underwriting guidelines and have made far fewer of the subprime mortgages — targeted at borrowers with weak credit — that triggered panic as defaults and foreclosures in that sector surged, experts say.

The credit problems have spread though in recent weeks to the broader mortgage market, making investors nervous about nearly all types of home loans.

The role of the little-noticed web of 12 federal home loan banks has taken on increased significance because Washington is not in favor of allowing mortgage giants Fannie Mae and Freddie Mac to increase their debt burden until they are under tighter government supervision.

“The powers that be would definitely prefer” the Fed’s market intervention and the home loan bank system’s stepped-up advances to a raising of the mandated investment caps for Fannie and Freddie, said Armando Falcon, a former director of the Office of Federal Housing Enterprise Oversight, chief regulator for the two companies.

FHLB members in recent weeks have increased requests for loans, known as advances, from the home loan bank system. The increase in the loans, backed by the mortgages held by the member institutions, has been notable at the Atlanta bank, for example, which loaned about $7 billion to members this month, a 6.5 percent increase from the start of August and in contrast to a 3 percent rise during the 12 months ended June 30.

Lending is up 4 percent this month, mostly in the past 2½ weeks, at the Federal Home Loan Bank of Topeka, said Bradley Hodges, senior vice president of corporate services for the institution, which covers Colorado, Kansas, Nebraska and Oklahoma.

“We don’t know if it will stay at that level for a sustained period, but we are prepared to continue doing so if it is needed,” Hodges said.

The Atlanta region members include thrift Countrywide Bank, a subsidiary of the nation’s largest mortgage lender, Countrywide Financial Corp. The parent was forced to borrow $11.5 billion Thursday from a group of banks so it could continue making home loans, and most of the company’s home-mortgage business has been transferred to the savings and loan. The amount advanced to the thrift by the Atlanta regional bank was not disclosed.

Like Fannie and Freddie, the federal home loan banks are government-chartered enterprises, benefiting from the widespread assumption on Wall Street that the federal government would bail them out in the event of a crisis.

That implicit backing enables the home loan banks as a group — made up of 12 individual cooperatives — as well as the two publicly traded companies to borrow cheaply on global markets by issuing hundreds of billions of dollars in top-rated securities backed by mortgages.

The collective financial clout can be a double-edged sword, however, some critics say. “Unless you have prudent practices at each of the banks, you could have massive problems,” said former Rep. Jim Leach, an Iowa Republican who headed the House Financial Services Committee from 1995-2001.

ONLINE > In depth Find out more about the Federal Home Loan Bank System at www.fhlbanks.com or about the Federal Housing Finance Board at www.fhfb.gov