The Federal Home Loan Banks, which have suffered heavy investment losses and declining creditworthiness this year, yesterday ran into more strife when Standard & Poor's threatened to lower the ratings of another three banks. S&P said it had changed its outlook on the counterparty credit rating on home loan banks in Chicago, Indianapolis and Seattle to "negative" from "stable" amid concern over how the banks manage interest rate risk in their investment portfolios.
The action comes less than two months after S&P assigned negative outlooks to banks in Pittsburgh and Atlanta, and cut the ratings of the home loan bank in New York after it reported a Dollars 183m investment loss. The home loan banks, which were established by the government to provide funds for mortgage loans and run large investment portfolios, have been buying an increasing proportion of residential- related mortgage securities in recent years.
At the end of September, the 12 home loan banks held some Dollars 108.5bn in mortgage loans, up from Dollars 60.6bn nine months earlier. S&P is worried that some of the banks may struggle to manage their investments when interest rates rise if they have not hedged their mortgage portfolios adequately. Most of their mortgage investments consist of long-term, fixed- rate mortgages, and the value of fixed-rate investments diminishes in a rising interest rate environment.
Meanwhile, regulators are casting a closer eye over the federal home loan banks. Like mortgage financiers Fannie Mae and Freddie Mac, their close ties to the government have allowed them to issue low-cost, AAA- rated debt and to avoid registering with the Securities and Exchange Commission. But a financial scandal at Freddie Mac earlier this year has prompted calls for closer supervision of all government-sponsored entities, and the home loan banks' regulator has told the banks they must register with the SEC.
The action comes less than two months after S&P assigned negative outlooks to banks in Pittsburgh and Atlanta, and cut the ratings of the home loan bank in New York after it reported a Dollars 183m investment loss. The home loan banks, which were established by the government to provide funds for mortgage loans and run large investment portfolios, have been buying an increasing proportion of residential- related mortgage securities in recent years.
At the end of September, the 12 home loan banks held some Dollars 108.5bn in mortgage loans, up from Dollars 60.6bn nine months earlier. S&P is worried that some of the banks may struggle to manage their investments when interest rates rise if they have not hedged their mortgage portfolios adequately. Most of their mortgage investments consist of long-term, fixed- rate mortgages, and the value of fixed-rate investments diminishes in a rising interest rate environment.
Meanwhile, regulators are casting a closer eye over the federal home loan banks. Like mortgage financiers Fannie Mae and Freddie Mac, their close ties to the government have allowed them to issue low-cost, AAA- rated debt and to avoid registering with the Securities and Exchange Commission. But a financial scandal at Freddie Mac earlier this year has prompted calls for closer supervision of all government-sponsored entities, and the home loan banks' regulator has told the banks they must register with the SEC.
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