Mortgage - Home Loan, Commercial Loan

There is no limit to the amount of money the Federal Home Loan Bank system can lend to support the mortgage finance industry as long as investors are willing to keep on buying its debt at moderate prices, said the system’s regulator.

“I do not think there is anything that sets a maximum amount of potential advances,” Ronald Rosenfeld, chairman of the Housing Finance Board, said in an interview with the FT.

“If the market were to perceive some excess and therefore began to resist buying our securities, that would obviously impose a limitation,” said Mr Rosenfeld. “I simply could not begin to quantify that nor do I see it coming in the near future.”

Since the onset of the credit crisis, the FHLB - a government-sponsored network of 12 co-operative banks - has emerged as a vital source of finance for mortgage lenders. In the third quarter its lending grew at an annualised rate of roughly three-quarters of a trillion dollars a year. To fund this massive expansion the FHLB issued $210bn debt in November alone.

Mr Rosenfeld said the FHLB would not lend without limit to individual financial institutions in need of cash. “At this time prudence would suggest that an individual bank does not go beyond a certain point with any particular member. I am sure that will continue to be a topic of discussion.”

At the end of September, the three biggest borrowers were Citigroup (NYSE:C), Countrywide (NYSE:CFC) and Washington Mutual (NYSE:WM).

Mr Rosenfeld said the FHLB was doing what it was created to do in 1932: providing a backstop source of liquidity for mortgages when the normal private sources of finance dried up. “The role has not changed. The numbers have changed.”

He said the FHLB provided an essential “safety buffer” for private markets. “If the members of the system could obtain funds elsewhere at better prices or on better terms they would do.”

He added: “I think that matters of market liquidity such as we are talking about require an entity that has a greater purpose in life than just pure profit.

Some top former economic officials worry about the massive expansion of debt that is seen as carrying a government guarantee. But he said: “I do not look at this in context personally of risk to the American taxpayer . . . more in the context of benefit to Americans.

“There is always a risk,” he admitted. “But the reward in my opinion is enormously more significant than the risk.” The FHLB was protected against credit risk on its lending by tough collateral rules and a requirement to post de facto margin. The regulator was on “high alert”. But there was no prohibition on posting complex or illiquid securities as collateral for loans.

“Once we start saying we will not take something that is hard to value, it exacerbates liquidity problems in our system.”

The 12 FHLBs have investment portfolios with $130bn (EU90.4bn, £64.4bn) in mortgage-backed securities. This includes some subprime loans. Finance Board staff estimate that the dollar-weighted exposure to securities backed by subprime loans is less than 10 per cent of the private label MBS holdings.

“We believe after very extensive analysis that there is very minimal credit risk in the MBS held by the banks,” Mr Rosenfeld said.

“If house prices were to depreciate 20 to 30 per cent you would simply have enormous problems in this country.” One of the ways to try to ensure that did not happen was to “ensure we continue to provide liquidity”.