The Federal Home Loan Banks (FHLBs) stopped purchasing private-label MBS in 2008, but losses on those bad investments have been a major drag on earnings ever since. But that may be changing.

Due to passage of time and the recent stabilization on the housing market and home prices, PLS losses are rapidly shrinking. Credit-related losses on private-label MBS totaled just $31 million in the first quarter, compared to $275 million a year ago.

The 12 FHLBs reported combined earnings of $733 million in the first quarter, double the net income posted in the first quarter of 2011, according to the system’s Office of Finance.

FHLB officials hope that the worst is behind them, although the regional banks still have $28 billion in residential and commercial private-label MBS on their books.

FHLB Office of Finance spokesman David Messerly pointed out that the carrying value of the PLS ($28.5 billion) is close to the fair value ($27.9 billion). That “suggests the FHLBs have recognized most of the losses on those securities,” he said.

Over the past three quarters the trend has been positive.

The 12 regional banks reported combined earnings of $1.6 billion for all of 2011 after recognizing $856 million in credit-related losses on private-label MBS.

In the second half of 2011, the FHLBs recorded only $140 million in credit-related losses on the private-label securities. Overall, the FHLBs have taken $4.4 billion in credit-related charges on their PLS investments since the first quarter of 2009.

Despite these PLS losses, the FHLB System has remained profitable throughout the financial crisis and recession.

While the FHLBs were piling into PLS during the housing boom, they also purchased single-family loans from member institutions through the Mortgage Purchase Program and the Mortgage Partnership Finance Program. These investments have performed much better.

The Chicago FHLB launched the MPF program in 1997 and two other FHLBs launched their MPP programs in the early 2000s.

Both mortgage purchase programs require the originating bank/thrift to retain a portion of the credit risk and to ensure sound underwriting. The performance of those FHLB loans is very good compared to Fannie Mae, Freddie Mac and Federal Housing Administration loans.

The FHLBanks currently hold $52.7 billion in single-family MPF and MPP loans in portfolio that are backed by a $145 million loan loss allowance.

As of March 31, the serious delinquency rate on the $32.9 billion in conventional MPF loans was 2.3%. There are $13.3 billion of conventional MPP loans and 2.2% are 90 days or more past due or in the foreclosure process.

The $6.8 billion in FHA-insured loans originated through the FHLB risk-sharing programs have a 5.8% serious delinquency rate. FHA recently reported that the serious delinquency rate on its entire single-family program is 9.4%.

The serious delinquency rate on Fannie and Freddie is 3.67% and 3.5%, respectively.

Members of the Chicago FHLB and five other FHLBs originated $1.6 billion in MPF loans in the first quarter of 2012. For the full year, FHLB members originated $7 billion in MPF loans in 2011.

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