FHLBank loans soar following subprime bust
Pittsburgh Business Times - by Patty Tascarella
The national credit crunch has triggered a business boom for the Federal Home Loan Bank of Pittsburgh, as borrowers and investors lose trust in many nontraditional mortgage lenders and funding dries up.
FHLBank Pittsburgh said lending shot up a record 23 percent between July 1 and Aug. 31, according to CEO John Price. That slightly outpaced the nationwide increase of 20 percent, as the nation's 12 FHLBanks saw collateralized loans hit $769 billion by Aug. 31 -- up from $640 billion at the second quarter's close.
FHLBank spokesman Neil Cotiaux said new loans, or average borrowings, during the July to August period were $56.4 billion, a $10.6 billion increase over the amount it lent during the entire second quarter. Average borrowings refers to outstanding loans divided by the number of days in the quarter.
Price said the increase was due to diminished trust in subprime mortgage lenders that dominated the industry in recent years, handing out loans to people who couldn't afford to make their payments. As defaults climbed this summer, many of these mortgage providers cut back or folded. Their funding also dried up as investors shunned pools of mortgages sold as securities to underwrite even more mortgages. As a result, more consumers are turning to banks for mortgages, which in turn are going to FHLBanks for loans.
"This is a market correction and there will be more of it," said Price, who expects "continued turbulence" in the mortgage industry through the next 18 months.
FHLBank Pittsburgh is one of 12 government-sponsored entities created by Congress in 1942 to provide a steady stream of low-cost housing finance.
They operate as cooperatives, owned by member financial institutions -- commercial banks, thrifts, credit unions and insurance companies. FHLBank Pittsburgh has 335 members in its three-state territory of Pennsylvania, West Virginia and Delaware. About 40 are based in southwestern Pennsylvania, ranging in size from one-branch Compass Savings Bank of Wilmerding to PNC Bank, the retail division of Downtown-based financial giant PNC Financial Services Group Inc.
'We've been mesmerized'
The increase over the past two months is the highest since the fourth quarter of 1999, when loans shot up $8 billion, to a then-high of $36 billion, in anticipation of a market disruption related to computer system conversions for the year 2000. Those disruptions were not realized.
Norman Robertson, chief economist at Smithfield Trust Co., Downtown, said the FHLBank loan increases indicate that some areas of the mortgage arena are basically unscathed.
"Any numbers that are at all encouraging are very welcome," Robertson said. "We've been mesmerized by these numbers on subprime loans, and we tend to forget they're a relatively small segment of the mortgage market."
Wilson Smith, director of financial services research at investment firm Boenning & Scattergood Inc., West Conshohocken, Pa., said the subprime loan fallout has investors avoiding all sorts of mortgage-backed securities, even those pools of "good" mortgage loans by banks.
"The banks, who are trying to take care of their customers and they have good loans, now have no place to source it to. No one is willing to buy (mortgage-backed securities) now," Smith said. "So they're temporarily holding loans and getting securitizations from the FHLBanks."
Price said borrowing has increased from member banks of all sizes, but would not comment on specific financial institutions or geographic regions.
'The Lender of Choice'
William Schenck, former Pennsylvania secretary of banking who resigned last summer to launch TriState Capital Corp., based Downtown, said the mortgage industry problems had been of great concern in Harrisburg for the past few years.
"I'd guess (the increase) is concentrated to some big borrowers and not spread around," Schenck said.
"This is replacing other funding sources that were supporting the mortgage business and shows that FHLBanks are valuable institutions in a time of disruption in the marketplace."
TriState, which began operations in January, is an FHLBank member. Though it has not "at this point" used its services, Schenck expects it will do so in the future.
Andrew Hasley, CEO of Lawrenceville-based Allegheny Valley Bancorp, said its mortgage activity is "about the same" as it was a year ago and wouldn't comment on whether its borrowing from FHLBank Pittsburgh has changed.
AVB had acquired one-branch Troy Hill Bank early in 2006, largely for its mortgage business. Hasley believes the winnowing of mortgage brokers will ultimately create more opportunities for banks.
"I think you'll see a decline in the number of mortgage brokers in Pittsburgh as some of their funding sources go out of business," he said.
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