Bud Conrad, an investment pro who claims a Harvard MBA, a past corporate career and the title Chief Economist at Casey Research up in Vermont, says he's worried the $1.2 trillion-asset Federal Home Loan Bank system, which funds home lending for more than 8,000 U.S. banks, will follow Fannie Mae and Freddie Mac into expensive default and government bailout.
With piles of California adjustable-rate mortgages up for repricing over the next couple of years, "if, in total, the FHLB ultimately suffers defaults equal to just 10% of the face value of their assets, a reasonable expectation, they'll be forced to write down more than $110 billion" - which is double the system's $46 billion capital reserve, Conrad wrote in the current Casey Report. "That sets the stage for another government takeover... more bailouts, and eventual Fed monetization to fund it."
I ran Conrad's report past John von Seggern at the Federal Home Loan Bank Board. He said the home loan banks "are well reserved" against the losses they face, and have already written off several billion dollars in capital to cover bad loans.
Conrad responds, "Fannie and Freddie didn't tell us they were bankrupt... The FHLB is not going to tell us that they have the same kinds of problems because that would put them out of business." If FHLB's member banks have made loans similar to Freddie's and Fannie's, they're facing similar losses. "My opinion is that they have not recognized all the problems." Obama says he'll take up mortgage-finance reform early next year.
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