Bankers' Interest in MPF Program Grows Again After Long Hiatus

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The Chicago Federal Home Loan Bank experienced a significant jump in mortgage originations in 2016 due to a "re-introduction" of its traditional Mortgage Partnership Finance loan product.

The bank purchased $3.1 billion in mortgage loans in 2016, up 78% from the year prior. And 40% of the increase was due to traditional MPF products.

"The re-introduction of the MPF traditional products contributed to this substantial increase," the bank said in a letter to its members.

The increase in demand is primarily due to a successful marketing campaign that helped the bank net new members last year, according to a spokeswoman for the bank. She also credited attractive pricing and servicing income that members can earn as helping the increase.

Alex Pollock, the then-president of the Chicago bank, launched it in 1997 to create a secondary mortgage market for members of the Home Loan Bank system. But the Chicago bank stopped offering the program in 2008 in the midst of the housing crisis due to a large concentration of mortgage products on its balance sheet.

With home prices rising again, delinquency rates falling and banks looking for additional sources of fee income, the MPF traditional products was re-introduced in 2015.

"As the bank's members seek ways to increase their non-interest income, the volume in the traditional MPF products has continued to grow as well," the Chicago Home Loan Bank said in an Oct. 27 summary of its third quarter financial results.

Under the traditional MPF program, the originating member sells the loan to the Chicago bank and the seller earns a fee for providing a credit enhancement based on the performance of the loans.

"In creating MPF, we put the member in the role of Fannie Mae. Instead of paying Fannie Mae a guarantee fee, the member bank provides the credit enhancement and receives the guarantee fee," said Pollock, who is now with the R Street Institute, in an interview.

During 2016, participating FHLB members earned $2 million in credit support income. "It gives them a strong interest in originating high-quality loans. And they are getting non-interest income in the form of enhancement fees," Pollock said.

For some time, the Chicago FHLB experienced an erosion of its MPF portfolio as MPF mortgage balances paid down. In the third quarter, MPF loan volume helped "offset" the paydowns.

MPF loans held in portfolio increased to $5 billion by yearend 2016 compared to $4.8 billion in 2015, the Chicago FHLB reported, as "new MPF loan purchases began to outpace paydown and maturity activity."

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