The Federal Home Loan Bank of Pittsburgh is on the brink of breaching its regulatory capital requirement due to the significant deterioration of mortgage bond investments in the fourth quarter.

The troubled investments include bonds backed by loans made to prime borrowers, a worrying sign that growing unemployment is squeezing homeowners with good credit.

In a conference call Friday, the bank said it could be forced to increase the fees it charges its 323 member banks, in an attempt to increase its capital cushion that stood at $72 million, as of Nov. 30.

The bank is expected to report its results later this month, at which time its capital positions will be clear.

FHLB Pittsburgh with its $99 billion in assets is one of the larger organizations in the 12-branch FHLB system, which is a cousin to mortgage finance companies Fannie Mae (FNM) and Freddie Mac (FRE). The FHLB banks are a prime source of funding for U.S. banks.

The Pittsburgh bank's announcement comes days after FHLB Seattle said it was short of this critical requirement and a week after ratings agency Moody's Investors Service warned that many of the FHLB banks face similar capital constraints. The banks' regulator, the Federal Housing Finance Agency, said it is considering proposals including a reset of the capital ratios at these banks.

The Pittsburgh branch already has embarked on a series of cost-control measures including canceling its dividend for the fourth quarter of 2008 and share buy-back program.

It warned, however, that such measures may not be enough to offset losses in its investment portfolio.

The precipitous dip in mortgage bond values last year resulted in a significant drop in the market value of the investment portfolios held by the FHLBs. For instance, the FHLB Pittsburgh's $8.8 billion investment portfolio dropped to $6.4 billion as of Dec. 31, 2008, the bank said on Friday.

Kris Williams, the FHLB Pittsburgh chief financial officer, said the bank valued bonds backed by loans made to prime borrowers at 77 cents on the dollar, as of the end of December. Bonds backed riskier Alt-A loans were valued at 65 cents on the dollar.

As recently as September, the ratings on the bank's mortgage bonds retained their investment-grade ratings. However, within the quarter, only 85% of these bonds were still high-grade, she said.

As a result, the bank's risk-based capital requirement rose to $4.24 billion as of the end of November, from just $1.95 billion at the end of the third quarter. The bank's capital on hand is $4.31 billion.

Some of the fund-raising measures that could be taken, with board approval, include charging member banks for unused borrowing capacity, increased charges on advances and on new loans under the mortgage financing program, said Craig Howie, group director of the bank's member services department.

-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071; prabha.natarajan@dowjones.com

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