Another government supported mortgage mortgage agency is in trouble. The Federal Home Loan Bank (FHLB) of Seattle joins the San Francisco FHLB in announcing steps to shore up their capital reserves against toxic residential mortgage assets.

Yesterday, the Seattle FHLB announced that it would halt dividends and "excess" stock repurchases to guard capital reserves. Capital shortfalls were caused by "unrealized market value losses" on residential mortgage bonds, according to aBloomberg report citing SEC Commission filings.

The Federal Home Loan Banks are 12 government supported financial institutions that provide stable, low cost funding to member banks. Banks purchase stock, which is not publicly traded, within their regionalFHLB to access this source of funding. These regional institution do not directly lend to homeowners, but are the largest collective source of mortgage and community lending in the US.

The FHLB is another Great Depression era fix that is failing in this current economic crisis. The FHLB system was chartered in 1932 to provide affordable funding for "building and loan" institutions. This was a major legislation to restart the mortgage market with affordable consumer financing for mortgages.

Like Fannie Mae and Freddie Mac these moves are symptomatic of a systemic weakness that still holds the mortgage and financial markets. Again, returning focus to the impact of these toxic mortgage assets that still remain on many bank balance sheets.

According to a January 8, 2009 report from Moody's only 4 of the 12 FHLB institutions are currently maintaining their required capital levels. This could be signalling a second round of conservatorship take-overs on the scale of Fannie Mae and Freddie Mac.

Published on January 14, 2009