WASHINGTON (Dow Jones)–A U.S. housing regulator should do a better job overseeing 12 regional institutions that provide funding for home loans amid financial problems at four of the those banks, a government watchdog report said Wednesday.
The report by the inspector general of the Federal Housing Finance Agency examined the agency’s oversight of the 12 Federal Home Loan Banks, which are chartered by the federal government but owned by their member banks and other lenders. They lend money to more than 7,800 banks, thrifts and credit unions, which then use that money to make their own mortgages.
Four of those institutions–those in Boston, Chicago, Pittsburgh and Seattle–have suffered financially due to investments in mortgage-backed securities that went sour, causing about $1.9 billion in losses in 2009 and 2010. Regulators have taken formal action against the Seattle and Chicago banks but not those in Boston and Pittsburgh, a lack of action criticized by the inspector general.
The inspector general criticized the housing regulator for not having a written policy on when it will formally issue an order to correct problems at a home loan bank. It also said the regulator doesn’t have automated systems that provide updates on examinations and doesn’t document some interactions with the home loan banks.
“While FHFA has taken positive steps to improve oversight of the troubled Federal Home Loan Banks, the agency has not established policies, systems, and documentation standards that could strengthen its oversight,” said the inspector general, Steve Linick. “It should do so in the near term.”
In a written response to the report, the FHFA said it has taken steps to improve the financial position of each of the four troubled institutions and noted that all four of the troubled institutions had replaced their chief executives since 2008.
All four banks, the FHFA noted, were profitable in 2010 and 2011. Their “condition and performance have improved irrespective of whether the particular (home loan bank) was subject to a formal enforcement action,” wrote Stephen Cross, the FHFA’s deputy director for home loan bank regulation.
Congress chartered the home-loan banks in 1932 as a way of propping up thrift institutions ravaged by the Great Depression. The home-loan banks make loans, called advances, to their members, with collateral frequently consisting of home mortgages or related securities.
Since the home loan banks were chartered by Congress investors assume the government would stand behind them in a crisis. As a result, they can borrow at attractive interest rates.