The bank for banks sits atop MBS risk

The $84 billion Federal Home Loan Bank of Boston, a key source of funding for more than 450 banks and credit unions in New England, is sitting atop a potential powder keg of risky mortgage-backed securities that threatens to trigger big losses if real estate prices continue to tank.

During the first six months of this year, FHLB of Boston experienced $1.1 billion in unrealized losses in its portfolio of mortgage-backed securities, up from just $155.4 million as of Dec. 31. The continued broad-based deterioration of mortgage loan performance and housing prices could expand those losses and possibly trigger a permanent impairment of those investments.

One possible implication is that FHLB’s advances to banks will become more expensive. The FHLB of Boston already has reduced its dividend, which means less revenue for participating banks.