Nov. 26 (Bloomberg) -- Countrywide Financial Corp. fell more than 10 percent in New York Stock Exchange trading after U.S. Senator Charles Schumer urged the regulator of the Federal Home Loan Bank system to probe cash advances to the largest U.S. mortgage lender.

Schumer said he was alarmed by the volume of advances the system's Atlanta bank has made to Countrywide considering ``the rapid deterioration'' in the credit quality of some of the Calabasas, California-based company's mortgages. Schumer expressed his concerns in a letter sent today to Federal Housing Finance Board Chairman Ronald Rosenfeld.

The Atlanta bank has made $51.1 billion in advances to Countrywide as of Sept. 30, representing 37 percent of the bank's total outstanding advances, Schumer wrote, citing U.S. Securities and Exchange Commission filings.

``The loans being pledged by Countrywide to secure these advances may pose a risk to the safety and soundness of the'' 12 home loan banks, wrote Schumer, a New York Democrat.

Countrywide fell $1.01, or 11 percent, to $8.64 in New York Stock Exchange composite trading today. The stock has fallen 80 percent this year.

Schumer has repeatedly criticized Countrywide in recent months for its lending practices, calling a news conference in August to ask the company to stop paying higher commissions to brokers who steer borrowers to high-cost loans.

Surge in Foreclosures

His letter reflects growing concern in Congress over the recent turmoil in mortgage and credit markets, spurred by the plunging value of bonds backed by home loans. Schumer, chairman of the congressional Joint Economic Committee, led a hearing this month where he urged Federal Reserve Chairman Ben S. Bernanke to confront the surge in mortgage foreclosures to head off an economic crisis.

Daris Meeks, counsel to the chairman at the Washington- based Federal Housing Finance Board, and Chris McEntee, a spokesman for the Atlanta home loan bank, declined to comment on the letter. Countrywide spokeswoman Amber Cousins didn't immediately respond to a request for comment.

Schumer's letter urged Rosenfeld to review the Atlanta bank's collateral evaluation policies and Countrywide's pledged collateral. The senator also asked Rosenfeld to consider barring more advances based on collateral that doesn't meet federal bank regulators' guidelines for subprime mortgage lending.

Relative Safety

The Schumer letter spooked credit markets. Investors fled to the relative safety of U.S. government securities, pushing yields on U.S. 2-year notes to as low as 2.88 percent, the lowest since December 2004. Yields on U.S. 10-year notes touched 3.79 percent, the lowest since March 2004.

``You had Schumer talking about Countrywide, and doing all this funding through the home loan banks,'' said John Roberts, managing director at Barclays Capital Inc. in New York. Along with purchases of Treasuries by mortgage-servicing firms, ``the combination seemed to light the market. It just took off.''

Countrywide has been aggressive in seeking to raise cash through deposits, partly because the company can't rely solely on Home Loan Bank advances and partly because deposits can offer cheaper funding, Chief Executive Officer Angelo Mozilo said in a telephone interview on Nov. 19.

``You can't just get a charter and go in and borrow from the bank, and that's it, that's your franchise,'' Mozilo said. `You have to have a reliable source of deposits.''

Countrywide, which has announced plans to add 70 banking branches, will ``do what we have to do to make sure the company is going to be OK'' when it comes to the rates it offers on certificates of deposits and other savings products, Mozilo said.

Home Loan Banks

The Federal Home Loan Banks are cooperatives created by President Herbert Hoover in 1932 to spur mortgage lending. The system's 8,100 owners and customers range from New York-based Citigroup Inc., the largest U.S. bank, to the single-branch Custer Federal Savings & Loan in Broken Bow, Nebraska. They borrow in the bond market and lend the money to their members.

Lenders turned to the banks as two main sources of funding, short-term IOUs backed by mortgages and mortgage-bond sales, began to dry up in August.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: November 26, 2007 18:02 EST