Federal Home Loan Bank presidents sought on Tuesday to downplay a possible systemwide impact from a Federal Housing Finance Agency (FHFA) decision to bar the Seattle bank from redeeming stock.

Richard Riccobono, the president of the Federal Home Loan Bank of Seattle, suggested Friday's decision from the FHFA was simply another example of the regulator keeping capital in the system.

"I don't think Friday's decision impacts the rest of the system," he said in an interview, "other than reinforcing the Finance Agency's desire to ensure that as much capital as possible remains in the system until we all better understand the full impact" of souring private-label mortgage-backed securities.

Alfred DelliBovi, the president of the Federal Home Loan Bank of New York, backed Riccobono up.

The FHFA's action "helps Seattle do what they have been working for several years to do, which is to return to profitability," DelliBovi said in a separate interview.

Moreover, members are not rushing to get their stock back, both presidents argued.
"When you take capital out, then you're withdrawing essentially from the cooperative," DelliBovi said. "The question then is why did you join in the first place?"

At issue in Seattle is a written agreement from December 2004 that banned stock redemptions for five years in light of heavy losses from an unwieldy mortgage purchase program. The Seattle bank returned to profitability for a period after the agreement but as the five-year mark approaches, its MBS portfolio is now causing headaches; credit-related charges on the holdings totaled $263.5 million for the first nine months of 2009.

On Friday, the FHFA said the Seattle bank remained undercapitalized despite technically meeting its capital requirements for the third quarter. The agency said it used its discretionary authority to make the determination based in part that a small amount of losses could cause a capital shortfall.

As a result, the Seattle bank was barred from allowing members to redeem stock.
But Riccobono said that is not a big blow to members because the stock — which trades at a par value of $100 — is not a money-making tool.

"An investment in a Federal Home Loan bank is not a traditional equity investment," he said in an interview. "Our members buy stock in the cooperative so that they can have access to liquidity."

Outside observers do not concur. Several said fallout from the Finance Agency's decision could extend well beyond Seattle.

"It's certainly likely this will make banks think about what's the time period in which they could get their stock back," said Brian Harris, an analyst at Moody's Investors Service.

Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s First Financial Capital Markets Corp., agreed that the impact could be widespread. The fear is that member banks will start to worry they can never withdraw their stock.

"It all goes to what members can count on with regards to the liquidity of their capital commitment," Vogel said. "The less liquidity, the smaller the membership base. The smaller the membership base, the possibly thinner profit the system is going to have, which further reduces dividends. You begin a march toward much smaller institutions with … cost burdens that are troubling."

Riccobono continues to take issue with the way other-than-temporary impairment charges are calculated on his MBS portfolio. Under changes to accounting rules approved earlier in the year by the Financial Accounting Standards Board (FASB), Home Loan banks run just the credit-related portion of other-than-temporary impairment (OTTI) charges against their earnings. The remaining amount is taken against other comprehensive income.

But Riccobono said the move helped only so much.

"The change the FASB made amounts to something less than half a loaf," he said.

The problem, he contended, is that while the FASB narrowed the amount of OTTI charges that would run through earnings, it lowered the bar for what would be considered credit-related. Before the FASB changes, charges were levied when a credit loss was probable. Now they are taken when a credit loss is more than likely to occur, a standard that is seen as broader.

Many Home Loan banks have been hit hard by OTTI charges. But the problems in Seattle are especially acute. The bank has lost key customers, including the failed Washington Mutual, and posted heavy losses. Last month the Seattle Home Loan bank said it lost $144.3 million for the first nine months of the year.

Still, Riccobono remains confident in his bank's underlying strength.

"There should be no question about the future of the Federal Home Loan Bank of Seattle," he said. "We hold $2.9 billion of tangible capital, and that's after having booked $264 million of projected credit losses. To date, these investments have continued to perform, and we have received all cash flows due."

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