Home Loand Banks May More Mortgage Securities

The agency that regulates the Federal Home Loan Banks has given them more scope to acquire mortgage-backed securities, marking the latest attempt by the U.S. government to restore confidence in the country's housing market. Under rules announced Monday by regulators at the Federal Housing Finance Board, the 12 regional banks will be able to increase their holdings of mortgage securities issued by Fannie Mae and Freddie Mac by more than $100 billion. Though created by Congress and federally regulated, the home-loan banks are owned by more than 8,000 banks, thrifts, credit unions and insurance companies. The home-loan banks' main role is to provide loans, known as "advances," to their owners, which are called "members." Because investors assume that the government would bail out the home-loan banks in a crisis, they can borrow cheaply in the international bond markets. Countrywide Financial Corp. and other ailing mortgage lenders have relied heavily in recent months on advances from the home-loan banks as other sources of credit dried up. 6 times leverage The home-loan banks previously could have holdings of mortgage securities of no more than three times their capital. Effective immediately, the regulator is raising that to six times capital for the next two years. At the end of 2007, the banks had combined capital of about $54 billion, and they held $136 billion of mortgage-backed securities as of Sept. 30, the latest data available. But the regulator said the banks must submit a plan to manage the risks of additional holdings before they embark on purchases that would take them over the old limit. In theory, the new rules would allow the banks to increase their holdings of the securities by a maximum of around $160 billion, but they are considered very unlikely to bump up against the limits, a spokesman for the regulator said. In the past, critics at the regulator and in government sometimes argued that the home-loan banks held too many mortgage securities and that such holdings did little to support the banks' "mission" of providing funds for housing. The critics argued that there were plenty of other investors willing to buy mortgage securities and that the home-loan banks should focus on providing advances to local banks. Today, such criticism has vanished as regulators search for ways to ensure a steady flow of money into mortgage securities.