Four Federal Home Loan Banks deeply hurt by investments in private-label mortgage-backed securities nearly quadrupled their second quarter earnings from a year earlier thanks to lower credit losses and rising interest income.

On a combined basis, the Federal Home Loan Banks of Seattle, Chicago, Pittsburgh and Boston reported net income of $171.1 million in the second quarter after reporting $47.4 million in the year-ago quarter. Each bank reported positive net income in the quarter.

Their regulator, the Federal Housing Finance Agency, has labeled the banks “troubled” because of their 2009 to 2010 losses in private-label MBS.

The Federal Home Loan Bank of Seattle earned $22.9 million in the second quarter, a year after losing $28.1 million (of the four banks, it was the only one to lose money in the second quarter of 2011). The bank attributed the reversal to lower credit-related charges on private-label MBS determined to be other-than-temporarily impaired, or OTTI, and increased net interest income.

The Seattle Bank has recorded $5.6 million of credit losses on its private-label MBS so far in 2012, significantly lower than the $88 million of such credit losses this time in 2011. The losses in both periods were due to changes in assumptions regarding future housing prices, foreclosure rates and loss severity rates and their adverse effects on the mortgages underlying the securities.

The Seattle Bank continues to address the requirements of the consent order issued by the FHFA effective Oct. 25, 2010. The consent order clarifies the steps the bank must take to stabilize its business, improve its capital classification, and return to normal operations, including repurchasing, redeeming and paying dividends on its capital stock. As of June 30, the bank said it met all minimum financial requirements under the consent order but remains classified as "undercapitalized" by the FHFA.

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

The Federal Home Loan Bank of Chicago recorded net income of $69 million for the second quarter, 68% higher than the $41 million it earned a year earlier. A strong base of net interest income, reduced OTTI charges ($14 million compared to $23 million in the second quarter of 2011), and the elimination of its REFCORP assessments contributed to the elevated net income.

The Federal Home Loan Bank of Pittsburgh, meanwhile, reported that its net income rocketed up 83% to $23.2 million in the second quarter from $12.7 in the year-ago period. The improvement was driven by higher net interest income and, again, lower OTTI credit losses on the bank’s private-label MBS investment portfolio.

The FHLBank of Pittsburgh said the vast majority of the securities in its private-label MBS portfolio were AAA-rated at the time of purchase. However, based on the performance of certain securities, among other information, the underwriting standards represented in the offering materials for these securities were not followed, the bank contends.

As a result, the Pittsburgh bank owns private-label MBS on which it had to recognize losses. It has filed lawsuits against certain issuers, underwriters and rating agencies related to these alleged misrepresentations.

The Federal Home Loan Bank of Boston earned $56 million in the second quarter, nearly tripling the $21.8 million it reported in the second quarter of 2011.

Credit-related OTTI charges on certain private-label MBS at the Boston bank totaled $1.5 million in the second quarter, a reduction of 95.8% from the $35.8 million incurred in the year-ago period. The bank said the charges were attributable to projected incremental credit losses on the collateral underlying certain private-label MBS.

“We are pleased to report steady, improve financial performance as we continue to meet our members’ funding needs in this challenging economic environment,” said Edward Hjerpe, chief executive of the FHLBank of Boston. “We have made it a top priority to help members take advantage of current low interest rates and manage their interest-rate risk in the future.”

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