The condition and performance of half the Federal Home Loan Bank system is "less than adequate," according to the nation's GSE regulator.

Federal Housing Finance Agency (FHFA) acting director Edward DeMarco, who cited continuing losses on investments in private-label MBS at six regional GSEs, told a congressional panel that he wants to see a gradual reduction in the FHLBs' investment portfolios.

"FHFA is looking for the FHLBs to return to more traditional operations and activities with a focus on advances," DeMarco said.

He stressed that the FHLBs have never experienced losses on making advances to their members.

The GSE regulator did not mention mortgage purchase programs that several FHLBs engaged in, which caused financial problems at the Seattle and Chicago banks.

Separately, FHFA issued a proposed rule to establish affordable housing goals for the mortgage purchase programs. The comment period ends in 45 days.

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