The Federal Home Loan Bank system overall reduced its holdings of mortgage assets in 2011. However, those assets remain the greatest market risk for the 12 FHLBanks, according to a report to Congress from their regulator, the Federal Housing Finance Agency.

Mortgage assets are typically longer-dated instruments than most other FHLBank assets and have less predictable cash flows. In the case of private-label mortgage-backed securities, those assets are experiencing the widest swings in market value.

At year-end 2011, the FHFA stated in its report, FHLBanks held $53.4 billion in whole loan mortgages and $101.2 billion in mortgage securities, down from $61.2 billion and $146.9 billion, respectively, at the end of 2010.

During 2011, the FHLBanks of Topeka, Kan., and Cincinnati, Ohio, increased their holdings of mortgage assets, both in dollar volume and as a percentage of assets. The Chicago and Pittsburgh, Pa., banks reduced their holdings by both measures. The Des Moines, Iowa, and Indianapolis banks reduced their dollar volumes of whole loan mortgages, but increased their holdings as a percentage of assets because of declining asset volumes.

“Although the FHLBanks with declining mortgage portfolios should ultimately face lower market risk, they face potential asset and liability mismatches during the transition,” the FHFA remarked. “Some FHLBanks with significant mortgage holdings hedge the market risk by extensive use of callable bonds, often with American call options, to fund those assets.”

In the report, the agency noted the importance of the market value of an FHLBank's capital stock to equal or exceed the par value of $100 a share because all stock transactions occur at par. The FHLBank system’s market value of equity — the estimated market value of its assets less the market value of its liabilities — indicates the banks’ ability to redeem stock at par.

Market value of equity fell to $30.5 billion, or 54% of par stock, at the end of 2008, but since then has substantially recovered, the FHFA reported. At the end of 2011, the market value of equity for the system stood at $46.4 billion, or 106% of par stock. The recovery in the market value of equity to par stock ratio is a result of improved values of mortgage-related assets, slower-than-expected prepayments, rising prices on private-label MBS and increased retained earnings.

The banks are required to hold sufficient capital to meet the greater of the total capital requirement or the risk-based capital requirements. All FHLBanks met these by year-end 2011, including the Chicago bank, which converted its capital structure to that required by the Gramm-Leach-Bliley Act of 1999. In April, the FHFA terminated the cease-and-desist order the bank operated under since late 2007.

At the end of 2011, the FHLBanks had 7,768 members — 1,044 savings associations, 5,347 commercial banks, 1,121 credit unions and 256 insurance companies. Approximately two-thirds of members were also FHLBank borrowers.

jhilley@housingwire.com

@JustinHilley