The Federal Home Loan Bank of Boston posted a net loss of $4.2 million in the second quarter largely because of write downs in mortgage-backed securities clobbered by bank repo homes. In the second quarter last year, the bank posted a net income of $71.4 million.

In the second quarter this year, the bank posted $211.1 million in write downs, with approximately $71 million directly affecting the bank’s net income.

Meanwhile, the bank’s average advances dropped to $48.1 billion in the first 6 months of 2009, a decrease of $11.8 billion from the same six-month period in 2008.

According to FHLB, the decline in advances was prompted by the decision of member banks to deleverage their balance sheets in an effort to preserve their capital levels. Member banks also depended less on advances from FHLB as they experienced significant increases in deposits. Investors deposited their funds in banks after experiencing substantial stock market losses.

The June 30 statement by FHLB showed that its capital was $2.6 billion, lower than the $3.4 billion reported 6 months earlier. The decrease has been attributed by bank executives to investments in securities backed by Alt-A home loans.

FHLB said that the biggest risk faced by the bank is its portfolio of $3.22 billion Alt-A mortgage-backed securities. Alt-A mortgage loans are risky because they were provided to borrowers with little financial documentation and weak credit scores. According to the bank’s statement, most of the Alt-A investments, amounting to $2.5 billion, are junk-rated mortgage securities.

The bank also added that because of the continued rise in defaults and foreclosures on Alt-A mortgage and subprime loans, prices for subprime and Alt-A mortgage-backed securities have been trading for lower than 50 cents on the dollar.

Meanwhile, in a letter sent to member banks by FHLB of Boston CEO and president Edward Hjerpe III on August 12, Hjerpe explained that the bank could suffer additional losses in certain investments due to uncertainties in the capital and housing markets. To protect the bank’s capital and retained earnings, he said that the bank is extending its moratorium on quarterly dividend payouts and excess stock repurchases despite its negative impact on members.

However, Hjerpe assured members of the status of FHLB of Boston as a strong low-cost source of funding despite the economic downturn. He reiterated that the bank remains compliant with all regulatory bank capital ratios as of the end of the second quarter.