Members of the Federal Home Loan Bank System are starting to take a new look at the old mortgage purchase programs that were developed back in the 1990s.
The Chicago FHLB pioneered the Mortgage Partnership Finance program allowing the FHLBs to purchase loans from member banks and thrifts that agree to retain 2% to 5% of the credit risk.
“In our district, we have a lot of members that are showing interest in the traditional MPF products,” said Eric Schambow, the director of Chicago's MPF program.
“There are a lot of members interested in re-activating their selling ability into MPF or signing up for MPF for the first time,” he said.
An annual survey by the American Bankers Association found that community banks sold 7% of their loan production to the FHLBs in 2011, compared to 5% in 2010.
There is a sense among some FHLB officials that the community banks are looking for an alternative secondary market execution as Fannie Mae and Freddie Mac raise their guarantee fees.
“Weakening competition from Fannie Mae and Freddie Mac could increase the attractiveness of the MPF program,” the Boston FHLB says in its 2011 annual report.
The Topeka FHLB purchased $1.6 billion in MPF loans in 2011 and it is signing up more participants.
“We've experienced growth in members that are selling into the program,” said Dan Hess, the director of member products for the Topeka FHLB. He told NMN that member participation in the MPF program increased from 143 in 2010 to 167 in 2011.
There are 12 FHLBs. But only six offer the MPF program to their members—the Boston, Chicago, Des Moines, New York, Pittsburgh and Topeka banks. The Indianapolis and Cincinnati FHLBs operate a similar program they call the Mortgage Purchase Program.
“There are other FHLBs expressing interest in offering MPF in their districts,” Schambow said in an interview.
Under the MPF program, the lender retains a portion of the credit risk and they are paid “credit enhancement fees” based on the performance of the loans. In other words, they get compensated for underwriting good mortgages.
Topeka's MPF portfolio has a 0.6% serious delinquency rate. Sellers can retain the servicing or sell the loan servicing released.
System-wide, FHLB members originated $7 billion in MPF loans in 2011, including $2.5 billion in the fourth quarter. “It is still going strong,” Schambow said. Chicago members originated 32% of the fourth-quarter MPF production.
In 2010, lenders originated $7.8 billion in MPF loans.
Due to supervisory issues, the Chicago FHLB cannot hold new MPF loans in its portfolio. Newly originated MPF loans are shipped to the Boston FHLB under a special agreement.
“We are looking to work with other investors that are interested in partnering with us,” Schambow said. The Chicago FHLB senior vice president also noted that there are members of FHLBs interested in acquiring MPF loans.
Due to capital constraints, there are limits on how many mortgages the FHLBs can hold in portfolio.
The Topeka FHLB sold a $120 million pool of MPF loans in the second quarter last year that resulted in a $4 million gain.
The sale was designed to test the market, Hess said. “At some point it could become difficult to grow that portfolio so we need to look for different off-balance-sheet strategies,” the Topeka SVP said.
