Displaying items by tag: Mortgage Banking

Wednesday, 21 May 2008 05:00

The process and pain of reintermediation

The following excerpt amplifies the anecdotal point that I made in my recent post on commercial bank loans . In particular, the amount of securitized loans banks have created, the increasing amount they started holding for thier own account, and the abrupt disruption of the market which pretty much forced them to keep everything. Keep this chart in mind as you read through William Dudley's speech.

The primary benefit of securitization was the virtualization of the bank's balance sheet. Through securitization, banks were able to underwrite a vast amount of risk relative to their balance sheet capacity, by selling off the risk to the open markets. Despite this, banks have steadily increased the amount of risk kept on (and off, through SPEs) their books over the last 20 years, with a forced increase of this concentration in 2007 when the securitization market simply shut down - cutting off the liquidity spigot for these assets. Starting at about 2004 near the height of the securitization bubble , banks increased the pace of securitized asset retention.


Excerpt from the New York Fed web site :

May You Live in Interesting Times: The Sequel

William C. Dudley, Executive Vice President

Remarks at the Federal Reserve Bank of Chicago's 44th Annual Conference on Bank Structure and Competition, Chicago

Exhibits (slides) PDF

I gave a speech last October entitled “May You Live in Interesting Times.” In that speech I listed a number of events that I never, ever expected to see. These included AAA-rated mortgage backed securities selling at 85 to 90 cents on the dollar, asset-backed commercial paper backstopped by real assets and a full bank credit support yielding more than unsecured commercial paper issued by the same bank, and a Treasury bill auction that almost failed at a time that there was a flight to quality into Treasurys going on.

The list has gotten much longer since then. To mention just a few: AAA-rated collateralized debt obligations (CDOs) that may turn out to be worthless; monoline guarantors, some still with AAA ratings, but with credit default swap spreads higher than many non-investment grade companies and a major investment bank’s demise in a few short days in March.

The number of liquidity facilities developed and introduced by the Federal Reserve is another list that has gotten much longer. Policymakers have responded to the persistent pressures in funding markets by introducing several new liquidity tools.

Today, I want to focus on what we’ve been up to in terms of these liquidity-providing innovations. Before I begin in earnest let me underscore that my comments represent my own views and opinions and do not necessarily reflect the views of the Federal Reserve Bank of New York or of the Federal Reserve System.

Let me first define the underlying problem. The diagnosis is important both in influencing the design of the liquidity tools and in assessing how they are likely to influence market conditions.

As I see it, this period of market turmoil has been driven mainly by two developments. First, there has been significant reintermediation of financial flows back through the commercial banking system. The collapse of large parts of the structured finance market means that banks can no longer securitize many types of loans and other assets. Also, banks have found that off-balance-sheet exposures—such as structured investment vehicles (SIVs) or backstop lines of credit that are now being drawn upon—are adding to the demands on their balance sheets.

Second, deleveraging has occurred throughout the financial system, driven by two fundamental shifts in perception. On one side, actual risks—due to changes in the macroeconomic outlook, an increase in price volatility, and a reduction in liquidity—and perceptions about risks—due to the potential consequences of this risk for highly leveraged institutions and structures—have shifted. Many assets are now viewed as having more credit risk, price risk, and/or illiquidity risk than earlier anticipated. Leverage is being reduced in response to this increase in risk.

On the other side, the balance sheet pressures on banks have caused them to pull back in terms of their willingness to finance positions held by non-bank financial intermediaries. Thus, some of the deleveraging is forced, rather than voluntary.

In some instances, these two forces have been self-reinforcing: In March, the storm was at its fiercest. Banks and dealers were raising the haircuts they assess against the collateral they finance. The rise in haircuts, in turn, was causing forced selling, lower prices, and higher volatility. This feedback loop was reinforcing the momentum toward still higher haircuts. This dynamic culminated in the Bear Stearns illiquidity crisis.

During the past eight months, the financial sector as a whole has been trying to shed risk and to hold more liquid collateral. This is a very difficult task for the system to accomplish easily or quickly for two reasons. First, the financial sector, outside of the commercial banking system, is several times bigger than the banking system. So, with some hyperbole, you are, in essence, trying to pour an ocean through a thimble. Second, this process of deleveraging tends to push down asset prices for less liquid assets. The decline in asset prices generates losses for financial institutions. Capital is depleted, increasing the pressure on balance sheets.

One consequence of this reintermediation and deleveraging process has been persistent upward pressure on term funding rates. For example, the spreads between 1- and 3-month LIBOR and the comparable overnight index swap rates have widened sharply during this period. The overnight index swap rate is the expected effective federal funds rate over the stated maturity of the swap. As shown in the two exhibits on page two, this pressure on term funding rates has occurred in the United States, Euroland, and the United Kingdom. It is a global phenomenon.

In fact, the increase in LIBOR to overnight indexed swap (OIS) spreads may understate the degree of upward pressure on term funding rates. Note that after a Wall Street Journal article on April 16 questioned the veracity of some of the LIBOR respondents and the British Bankers Association threatened to expel any banks that they discovered had been less than fully honest—LIBOR spreads increased further.

The foreign exchange swap market indicates that the funding costs for many institutions may be even higher than suggested by the dollar LIBOR fixing. As shown in the next slide, the funding cost of borrowing dollars by swapping into dollars out of euros over a 3-month term is about 30 basis points higher than the 3-month LIBOR fixing.

So what explains this rise in funding pressures more precisely? Some have argued that the rise in term funding spreads reflects increased counterparty risk; others that the rise stems from a reduction in appetite of money market funds to provide term funding to banks. Over the past eight months, there is some validity to both of these arguments. But neither explanation provides a very satisfactory explanation.

Credit default swaps spreads for major commercial banks have narrowed considerably over the past two months. This indicates that counterparty risk assessments are improving—yet LIBOR-OIS spreads widened over this period. Thus, it is hard to pin this widening in LIBOR-OIS spreads on an increase in counterparty risk.

Similarly, the notion that money market mutual funds have lost their appetite for term bank debt has not been particularly compelling recently. The split of money market fund assets between Treasury-only versus prime money market funds has been relatively stable, the weighted average maturity of the funds has been increasing, and prime funds have increased their allocation to both foreign and domestic bank obligations. In contrast, when there was a flight to quality to Treasury-only money market funds last August, this was a more compelling explanation.

So what has been driving the recent widening in term funding spreads? In my view, the rise in funding pressures is mainly the consequence of increased balance sheet pressure on banks. This balance sheet pressure is an important consequence of the reintermediation process. Although banks have raised a lot of capital, this capital raising has only recently caught up with the offsetting mark-to-market losses and the increase in loan loss provisions. At the same time, the capital ratios that senior bank managements are targeting may have risen as the macroeconomic outlook has deteriorated and funding pressures have increased.

The argument that balance sheet pressure is the main driver behind the recent rise in term funding spreads is supported by what has been happening to the relationship between other asset prices—especially the comparison of yields for those assets that have to be held on the balance sheet versus those that can be easily sold or securitized. Consider, for example, the spread between jumbo fixed-rate mortgages and conforming fixed-rate mortgages, which is shown in the next slide. As can be seen, this spread has widened sharply in recent months, tracking the rise in the LIBOR/OIS spreads.

Why is this noteworthy? Jumbo mortgages can no longer be securitized, the market is closed. Thus, if banks originate such mortgages, they have to be willing to hold them on their balance sheets. In contrast, conforming mortgages can be sold to Fannie Mae or Freddie Mac. Because the credit risk of jumbo mortgages is likely to be comparable to the credit risk of conforming mortgages, the increase in the spread between these two assets is likely to mainly reflect an increase in the shadow price of bank balance sheet capacity.

If this is true, then the same balance sheet capacity issue is likely to be an important factor behind the widening in term funding spreads. After all, a bank has a choice. It can use its scarce balance sheet capacity to fund a jumbo mortgage or to make a 3-month term loan to another bank.

If balance sheet capacity is the main driver of the widening in spreads, this suggests that there are limits to what the Federal Reserve can accomplish in terms of narrowing such funding spreads. After all, the Fed’s actions cannot create bank capital or ease balance sheet constraints materially.

That said, the Fed can reduce bank funding risks by providing a safe harbor for financing less liquid collateral on bank and primary dealer balance sheets. Reducing this risk may prove helpful by lessening the risk that an inability to obtain funding would force the involuntary liquidation of assets. The ability to obtain funding from the Fed reduces the risk of a return to the dangerous dynamic of higher haircuts, lower prices, forced liquidations, and still higher haircuts that was evident in March.

In essence, the Federal Reserve’s willingness to provide liquidity against less liquid collateral allows the reintermediation and deleveraging process to proceed in an orderly way, which reduces the damage to weaker counterparties and funding structures. One can think of the Federal Reserve’s actions as smoothing and extending the adjustment process—not preventing it—so that the adjustment causes less damage to the financial system and less pernicious macroeconomic consequences.

The Federal Reserve has introduced three

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Impac's Earnings: Impac reported full-year results very late last night. The release seems to follow a pattern for poorly performing companies - corporate communications released this close to midnight usually do not contain good news. I suppose they think that if we're sleepy enough...

Impac Mortgage Holdings, Inc. a real estate investment trust ("REIT"), reports a net loss of $(2.0) billion, or $(27.10) per diluted common share for 2007, as compared to a net loss of $(75.3) million, or $(1.18) per diluted common share for 2006. The net loss was primarily the result of a $1.4 billion provision for loan losses as a result of deteriorating market conditions, higher delinquencies and higher severities.

Estimated taxable loss available to common stockholders for 2007 was $(136.0) million or $(1.79) per diluted common share, as compared to estimated taxable income of $79.5 million or $1.05 per diluted common share for 2006.

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 I fancy myself to be a pretty good investor. While I think I'm a pretty bright guy, I know I am not at the level of the rocket scientist known to be hired by the quant funds. While I am fairly creative, I am far from an artist. While I am not a high school drop out, I don't have a PhD. So, what makes me a good investor? I have this uncanny knack of being able to smell bullsh1t a mile away!

Now, for those banking CEOs, homebuilder CEOs (ex. Mr. Hovnanian), monoline CEOs and government officials (ex. Mr. Paulson), who claim that the worst is behind us - I can smell you guys!

I am starting to come clean on my commercial bank research and personal investment positions. I do not publish my research until after I have established
my positions, but I do release broader market and macro stuff early -
figuring it can do little harm.

So, I hear Paulson says the
worst is behind us!? I am assuming he is referring to the subprime
mess, and the capital market melee that followed. Well, I don't believe
the subprime mess is over, but if it is we still have to contend with
at least 5 other failing categories of bank products that are imploding
due to securitization imprudence - all rivaling or surpassing that of

Let's go over my research trail on the Current US
Credit Crisis. Sections 1 through 5 are background material that is probably known to the professional in this arena, but will make good reading for the lay person. I used it to make sure I made judgments based on observable facts vs. media representation and/or personal bias. I feel the section on counterparty risk should be required reading for everybody, though. The report on PNC basically outlines, in full detail, why I chose that bank out of 329 others, to initiate my short foray into the regionals.

  1. Intro:
    The great housing bull run – creation of asset bubble, Declining
    lending standards, lax underwriting activities increased the bubble – A
    comparison with the same during the S&L crisis
  2. Securitization – dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble – declining home prices and rising foreclosure
  3. Counterparty risk analyses – counterparty failure will open up another Pandora’s box
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  5. Municipal bond market and the securitization crisis – part I
  6. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital

Now, let's take a more mundane look at the banking sector in general. Looking at how much of the banking industry's portfolio is concentrated in real estate, one should be concerned when housing priced drop precipitously (no spell checker, and I'm tired). We are in much more heady territory than in the S&L crisis (started by CRE lending), and the housing price drop is much worse as well.


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To begin with, I would like to remind all that I am a private investor, not an analyst, nor a reporter or media professional. Hence, expect me to be short anything that I am bearish on, and long anything that I am bullish on. Very strong investment results are my goals, with the blog being a hobby. With that being said, I am bearish on the regional banking sector with large concentrations of commercial real estate, consumer finance and 2nd lien residential real estate risk. I screened about 330 S&Ls, regional and small/mid-cap banks and the finalist of this contest was... PNC. Below is my (textual) take on PNC. Later, I will post some other banks that I have looked at along with additional info on the state of the industry that emboldens me to hold short positions during this bear rally. I will also be posting updates on the homebuilders.

This analysis was very richly formatted with plenty of charts and graphs, hence I decided to leave most of it out of the blog post. Anyone who wishes to see it in its full fidelity should simply register (for free) and download the pdf version - icon PNC Report 050508 revised (711.95 kB 2008-05-15 12:26:16).

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This is a DRAFT of part 4 of Reggie Middleton on the Asset Securitization Crisis – Why using other people’s money has wrecked the banking system: a comparison to the S&L crisis of 80s and 90s. As was stated in the earlier parts, I periodically have third parties fact check my investment thesis to make sure I am on the right track. This prevents the "hubris" scenario that is prone to cause me to lose my hard earned money. I have decided to release these "fact checks" as periodic reports. This installment covers consumer finance, an aspect at risk in the banking system that is both overlooked and underestimated, in my opinion.

I urge discourse, conversation and debate on this post and the entire series. To me, it is necessary to make sure the world is as I percieve it.

The Current US Credit Crisis: What went wrong?

  1. Intro: The great housing bull run – creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble – A comparison with the same during the S&L crisis
  2. Securitization – dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble – declining home prices and rising foreclosure
  3. Counterparty risk analyses – counterparty failure will open up another Pandora’s box
  4. You are here => The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  5. To be Published: Credit rating agencies – an overhaul of the rating mechanisms
  6. To be Published: An oveview of my personal Regional Bank short prospects

And now, on to the report...

Reggie Middleton on the Asset Securitization Crisis and Consumer Finance

As with the mortgage market, the consumer lending market reported significant growth since the beginning of this decade largely due to lax lending standards of financial institutions, imprudent lending and poor assessment of payback abilities of customers and more importantly, securitization!!!

Consumer credit is generally classified as revolving and non-revolving. Revolving consumer credit includes credit card lending, lines of credit, home equity line of credit (HELOC) and similar products. These types of lending products do not have a fixed number of payments; there is a limit assigned to the borrower up to which he can borrow and pay the principal and interest within a certain period. The method of functioning in this case is very similar to that of a credit card.

On the other hand, non revolving consumer credit includes loans such as automobile loans, loans for mobile homes, education, boats, trailers, vacations, etc. Unlike revolving credit, these require fixed number of payment over a period of time. Over the last 27 years, non revolving credit on an average has constituted 68.8% of the total consumer credit market.

Consumer credit outstanding (US$ bn)


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Source: Statistical Releases of the US Federal Reserve

Growth in consumer credit registered its peak during the S&L crisis, as it grew 18.4% y-o-y to US$517.2 billion at the end of 1984. Over the last 20 years (1988 to 2007), total consumer credit outstanding in the US economy has grown at a CAGR of 6.7%, making it a US$2.57 trillion industry at the end of 2007.

The growth proceedings were dominated by revolving consumer credit (CAGR of 9.0%) due to the rising demand for HELOCs over the years, a result of the booming housing market. Moreover, with low interest rates in the earlier years, borrowers found it easy to get their credit limits enhanced. As opposed to this, non revolving credit grew at a lower CAGR of 5.7% over the same period simply due to the dominance of mortgage lending over other lending forms. The faster growth in revolving credit led to a change in the composition of the market. Revolving consumer credit constituted 37.3% of total consumer credit outstanding in 2007, from 25.2% in 1988.

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Wednesday, 07 May 2008 05:00

The credit crisis is (not) waning

Paulson says he sees the credit crisis waning, despite the fact that banks are lending to each other less (reference LIBOR revelations of false reporting) then they did earlier and more importantly they have curtailed lending to mainstreet and corporations. This tells me that not only has the credit crisis not waned, it has officially spread past the confines of Wall Street into the real economy. Mortgages are harder to get and more expensive. Working capital and buyout loans are harder to get. Credit lines (secured and unsecured) in many places are akin to 4 letter words...

From the WSJ:

Paulson Sees Credit Crisis Waning

Treasury Secretary Calls Fed's Moves 'Inflection Point'

Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that "the worst is likely to be behind us," marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.

Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats' response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.

"There's no doubt that things feel better today, by a lot, than they did in March," Mr. Paulson said. He pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as "an inflection point" in the crisis.

The Treasury secretary was careful to predict that there would be further "bumps along the road," and that it will take "some months longer" for the market distress to fully dissipate.

The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration's response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.

Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.

House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush's support for a more sweeping plan to enlarge the FHA's authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.

But in threatening to veto the bill, the White House has upped the ante, reversing its earlier, more restrained reaction. It said the FHA program would constitute a "bailout" and also objected to a provision that would permanently increase the size of loans that Fannie Mae and Freddie Mac are allowed to purchase...

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Tuesday, 06 May 2008 05:00

Mr. Mortgage on Lehman, again

This guy explains the fodder that went into the Lehman portfolio. It makes one wonder exactly how they "hedged" all of that risk. I think it's safe to assume that those hedges have a decent amount of counterparty risk and potential slippage inherent.

Although the condensed version of his 9 minute video is still 9 minutes, it's still worth watching.


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Back to Mr. Mortgage on Wells Fargo, et. al.


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This is part 2 of Reggie Middleton on the Asset Securitization Crisis – Why using other people’s money has wrecked the banking system and similarities to the S&L crisis of 80s and 90s. I periodically have third parties fact check my investment thesis to make sure I am on the right track. This prevents the "hubris" scenario that is prone to cause me to lose my hard earned money. I have decided to release these "fact checks" as periodic reports. To some they state the obvious, to others they are enlightening. To me, it is necessary to make sure the world is as I percieve it. The recent bear market rally took back a decent amount of the directional, unhedged profit (that's right, I'm a cowboy), but it appears that is over and we will soon resume our descent back into reality. Just in case, let's review some history. I will also release some of my personal bank short research to illustrate how I am implementing these expected stresses to the banking system to my advantage.

The Current US Credit Crisis: What went wrong?

  1. Intro: The great housing bull run – creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble – A comparison with the same during the S&L crisis
  2. You are here => Securitization – dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble – declining home prices and rising foreclosure
  3. To be Published: Credit rating agencies – an overhaul of the rating mechanism
  4. To be Published: US Federal reserve to the rescue
  5. To be Published: The counterparty risk analyses – the counterparty failure will open up another Pandora’s box

Now, on to part two of the report...

Asset Securitization and the Crisis of Confidence in Securitized Assets

Securitization is the process of creating and issuing securities, in which the returns of the investors purchasing such securities are dependent upon the cash flows generated by the underlying asset, or in most cases, pool of assets upon which the security was created. These cash flows are payments of principal and interest from the underlying pool of assets.

Broadly, such securities are classified under two heads:

  • Mortgage backed securities, or MBS, where the underlying asset is a pool of mortgage loans of a bank or any authorized lending institution. MBS are also called pass through securities as their primary nature dictates that they are meant to pass on the principal and interest payments realized from mortgages to the investors
  • Asset backed securities, or ABS, where the underlying assets can be any non mortgage assets which are capable of generating future cash flows

The first MBS were issued in 1970 by the Government National Mortgage Association, well known as Ginnie Mae, followed by similar issuances from Federal National Mortgage Association (Fannie Mae) and Federal Home Loan and Mortgage Corporation (Freddie Mac). These three entities are also called Government Sponsored Enterprises, or GSEs. In the context of asset securitization, they are also called agencies. To date, MBS dominates the entire asset backed securities market across the globe.

The first ABS were issued by Sperry Lease Finance Corporation in 1985, and were based on the expected cash flows from its computer equipment leases. Today, the ABS market encompasses various assets including auto loans, credit card receivables, home equity loans, manufactured housing loans, student loans etc.

Initially, before MBS and the ABS were launched, investors had traded whole loans in the secondary mortgage market, which was relatively illiquid. Due to this illiquid nature, there was a high risk of holding the loans as they were susceptible to interest rate fluctuations. Moreover, trading a whole loan meant tedious paperwork which increased the execution time for such transactions. This reduced the overall attractiveness of the market.

However, with the advent of MBS, the liquidity issue was significantly resolved and the transaction time came down, both of which were beneficial for the investors. For loan originators, this meant the earlier offloading of risk from their balance sheets and reduced exposure to interest rate fluctuations. This led to immense demand for such securities.

A typical securitization process starts with the originator of the loan i.e. the lending institution which disburses the loan(s) to the borrower(s). Then, the originator creates pools of these mortgages (or any assets capable of generating future cash flows).

Next, a Special Purpose Vehicle (SPV or SPE) is created by the originator which acts as a conduit for payment flows. The loans to be securitized are now transferred to the SPV. This process is also called “asset transfer” or “true sale”. This ensures that investors can only turn to this SPV for their due payments, not the originator.

After the asset transfer, the SPV approaches the underwriter, who takes on the risk of buying the issue of the securities and selling them to investors. In most cases, the underwriter also consults on the structure of the MBS/ABS, decides the target investor etc. After this, issuance of the securities is carried out by the underwriter on behalf of the SPV. A broker-dealer may be involved in distributing and marketing these securities or it may be done by the underwriter itself.

Investors then purchase these securities from the underwriter/ broker-dealer entity if involved, which deducts its charges. The residual amount is further forwarded to the issuer and then to the originator. As the originator begins to realize the cash flows on underlying assets, it forwards them to the investor representative entity who then distributes it amongst investors.


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There are certain supporting activities that go on during the securitization process. Generally, the originator, to attract investors, resorts to credit enhancements (S1 and S2), which can be internal or external. Internal enhancements include tranching (senior, sub-senior and subordinate) and over collateralization, while external enhancements include letters of credit from a financial institution and credit default swaps (such as those from the monoline insurers. As an example, Ginnie Mae, Fannie Mae and Freddie Mac enhance the credit of securities by guaranteeing the investors complete repayment of principal as well as the interest.

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Hey, if they don't trust each other, why should I trust 'em?

From Reuters :

NEW YORK (Reuters) - The Federal Home Loan Banks said on Monday the amount of loans made to its member banks rose to a record high in the first quarter as a credit crunch crimped other funding sources for banks.

The system of 12 regional FHLB banks, the largest collective source of U.S. home funding, has increased in importance to the housing market since the credit crunch shriveled up other sources of funds for mortgage lenders.

The group makes low-cost loans to its members, which it funds by selling debt in the capital markets.

Advances, or secured loans, rose 4.3 percent to $913 billion in the first quarter, representing 69.0 percent of total assets, FHLBanks said in a statement.

The volume of loans the FHLB provides to members belonging to the network has soared since last summer as lenders such as Countrywide Financial Corp boosted requests for the funding.

FHLBanks on Monday also preliminarily reported a 12.2 percent rise in first-quarter net income to $697 million, from a year earlier.

"The overall profitability of the FHLBanks is going to make people, for now, rest easy," said Jim Vogel, agencies analyst, at FTN Financial Capital Markets in Memphis, Tennessee.

"If you have a check list of the things you are watching out for, you can check off the FHLBanks and move on to the next item on your list after today's report," he said.

FHLBanks, Fannie Mae, Freddie Mac, and the Federal Housing Administration have become favored vehicles of the Bush administration as it makes efforts to stem surging mortgage defaults, falling home prices and rising foreclosures.

In late March, the Federal Housing Finance Board said it would enable banks in the Federal Home Loan Bank System to expand holdings of securities issued by Fannie Mae and Freddie Mac.

Although profitable in the first quarter, combined net income was hampered by a net loss of $78 million at the Federal Home Loan Bank of Chicago.

The FHLB of Chicago in the past decade has been criticized for lax interest-rate risk management, in part due to the growth of a program known as the Mortgage Partnership Finance Program, analysts said. The bank launched the program in the late 1990s to share the risk of managing mortgages with lenders...

From Bloomberg :

Federal Reserve Chairman Ben S. Bernanke may need to step up his effort to unfreeze bank funding markets as a surge in borrowing costs blunts the impact of the cash auctions the central bank introduced in December.

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