What The Rating Agencies Say

S&P reaffirmed the FHLBank AAA rating in June 2008, while Moody's reaffirmed the Aaa rating on the FHLBank System in December 2007. The following are some highlights from these analyses.

"...The "AAA" rating on the debt of the Federal Home Loan Bank (FHLB) System reflects the System's status as a government-sponsored enterprise (GSE), its important role in the U.S. mortgage market, and the combined financial strength of the 12 district banks (FHLBs), which issue debt...on a joint and several basis through the Office of Finance, the System's fiscal agent.

The distressed mortgage markets in 2007 provided the perfect opportunity for the System to justify its existence, which it did in extremely strong fashion. Without adding unwarranted credit risk, System Banks afforded members a consistent and reliable liquidity channel that may have been taken for granted without this scenario...The FHLB System became, and continues to be, a trusted source of liquidity for all lenders who participate in the U.S. housing market.

Each FHLB is a cooperative, the members of which consist of commercial banks, thrifts, credit unions, and insurance companies. The System has the public policy mission of supporting its members' housing and community investment activities by serving as a reliable source of liquidity through secured financing. The FHLBs also directly support affordable housing and community investment programs delivered through members...(The FHLBs are viewed as policy-based entities under Standard & Poor's Ratings Services' government support methodology)...The Federal Housing Finance Board (Finance Board) closely regulates the FHLBs. The consolidated obligations are commonly viewed as "agency" obligations and are priced at a narrow spread over U.S. treasuries, affording the FHLBs and their members the benefit of low funding costs.

...the System is among the largest providers of mortgage credit. In the highly unlikely event that the System were to experience financial distress, the federal government would have a strong incentive to provide financial support to ensure stability of the housing and capital markets, as demonstrated indirectly in 2007. The U.S. Treasury has authorization to purchase up to $4 billion of consolidated obligations. Nevertheless, the 'AAA' rating on the consolidated obligations does not rely on any specific assumptions about whether such support would be forthcoming, or the form it might take.

Ratings on individual FHLBs reflect their very high asset quality and exceptional liquidity and funding capabilities, including the benefits that accrue from being core members of the FHLB System. The FHLBs' key function is to make advances (i.e., loans) to members. These advances are well overcollateralized, and there has not been a single loss on an advance since the inception of the FHLB System. For liquidity purposes and to earn incremental spread income, the FHLBs all hold substantial portfolios of high-quality investments...the FHLBs' profitability and capitalization...are satisfactory in view of the low-risk nature of these banks' assets and operations. Funding flexibility is superior, given the ability of the FHLBs to borrow by means of consolidated obligations. The Finance Board closely regulates the underwriting, investing, liquidity management, and capital-raising activities...The closely integrated nature of the FHLB System limits the downside risk for the FHLBs, and explains why the individual FHLB ratings are in a narrow band, even though the operating and financial profiles vary.

We expect the FHLB System, as a GSE, to continue to benefit from the implied support of the U.S. government for its consolidated debt obligations. Operating performance and capitalization standards have been under some pressure, but we expect all the FHLBs to maintain acceptable levels..."
Standard & Poor's, June 2008

"...The Aaa rating of the Federal Home Loan Bank System reflects its strong capital base, position as a key funding source to its member institutions, as well as the substantial support of the U.S. Government...The FHLBank System's baseline credit assessment reflects its excellent asset quality, adequate risk-adjusted profitability, as well as the benefits associated with the joint and several liability for the FHLBank's debt. Asset quality remains a core strength of the FHLBank System, having never incurred a loss on an advance, which represents over 65% of total assets. The FHLBank System's profitability reflects the lower risk profile of the System...The FHLBanks conservatively manage their interest rate risk exposures through the use of debt with similar characteristics as the FHLBanks' assets, as well as derivative contracts...interest rate risk exposures are moderate.

The quality of the FHLBanks' assets continue to be strong and a key credit strength. The FHLBanks' assets are comprised primarily of advances (secured loans to members), and to a lesser extent of mortgages acquired through the Banks' MPP and MPF programs as well as of investment securities, primarily Agency and highly rated private label MBS. The FHLBanks' asset quality of advances has been consistently outstanding, and we expect this to continue. To date, no credit loss has ever been incurred on advances. The FHLBanks' assets consist primarily of advances, investments and mortgage loans purchased from members. Advances represented 67.1% of assets at September 30, 2007...Moody's expects advances to increase in the overall asset mix going forward due to FHLBanks' renewed focus on this business...the recent liquidity crunch in the mortgage markets which impelled many members to heighten utilization of the FHLBanks' advances to fund mortgage assets is likely to contribute to growth in the FHLBanks' advance business. The FHLBanks' collateral requirements on advances, and their preferred creditor status, supports credit quality in the event a member defaults on its advances. Each FHLBank has sole credit approval power, and establishes its own underwriting standards and eligible collateral, within FHFB guidelines.

Credit risk performance of MPF and MPP programs has been very good to date exceeding that of programs of Fannie Mae and Freddie Mac. This excellent track record reflects the high quality of mortgage assets purchased into FHLBanks' MPF and MPP programs...The FHLBanks generate consistent albeit modest returns given the stability and low risk profile of their core low-margin advance businesses...Moody's views the FHLBanks' liquidity position as strong, given the System's own liquidity base, and particularly its GSE status, which provides the System with extensive debt market access. Its GSE status is a key liquidity strength...The joint and several liability of the individual FHLBanks for the consolidated debt securities (rated Aaa) issued in the name of the System is a major structural support of the FHLBank System...High dependence and support levels for the FHLBank System reflects the importance of the System to its member institutions and their ability to support housing finance and community development. The FHLBanks are an important and relatively inexpensive source of credit to its member institutions. Housing remains a key political issue in the USA, and the FHLBanks' successful role in facilitating housing finance is therefore an important rating factor..."
Moody's Investors Service, December 2007