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Funding-Strategy – Details


Funding 30-Year Mortgages for Asset-Sensitive Members

March 17, 2016

The Bank has a number of members whose balance sheets are structured to benefit when interest rates rise. For members with this risk profile who want to hold 30-year mortgages, FHLB Boston advances offer a viable funding opportunity to earn sizeable net interest income while reducing exposure to declining interest rates.

With the current rate on 30-year mortgages hovering around 3.75 percent, now is an opportune time to hold these loans and fund them using FHLB Boston advances.

Let's explore funding these mortgages using 25 percent each of one-month, one-year, two-year, and three-year Classic advances. This funding mix allows you to hedge falling interest rates while protecting net interest income should rates increase. The cost of the advances ranges between 0.57 and 1.52 percent, and the weighted average initial cost of the advances is 1.10 percent, resulting in an initial net spread of 2.66 percent.

In the table below, net interest spread averages 0.93 percent in years one through seven if rates increase 300 basis points. It should be noted that after year three, when all of the advances have matured, the entire portfolio of loans will be funded using one-month Classic advances. The rate on the one-month advance increases or decreases depending on the rate scenario being modeled. Even though all the funding will be short-term, there will still be a positive spread in years four through seven in all rate scenarios.

While an asset-sensitive institution will experience a widening margin as interest rates rise, that margin will compress should interest rates decline. As the table below indicates, this funding mix offers an effective hedge if interest rates decline. The net interest spread averages almost 300 basis points in the falling-rate scenarios but the spread produces less dollars of net interest income because prepayment speeds increased resulting in fewer mortgages outstanding.


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This is just one example of how FHLB Boston advances can help you achieve your profitability goal and, at the same time, manage your exposure to changes in interest rates. Let us customize a funding strategy for you to help you examine funding alternatives and hedging interest rate risk for assets you are prepared to hold on your balance sheet.

Please contact Kevin Martin Email icon Office Phone icon 617-292-9644, or your relationship manager if you are interested in seeing how FHLB Boston advances can help you examine different funding alternatives for your balance sheet.



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