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Developed in 1997 by the Federal Home Loan Bank of Chicago (FHLBC), the Mortgage Partnership Finance® Program (MPF) was designed to promote access to the secondary mortgage market for small- and mid-sized financial institutions.
FHLB member institutions that have taken advantage of the opportunities offered to them through the MPF Program have enjoyed the benefits of increased competition in the form of real profit.
The first MPF mortgage loan was funded in 1997 in partnership through LaSalle Bank, FSB, a member of the FHLBC. This loan helped a young immigrant couple purchase their first home. Within its first 12 months, the MPF Program had funded $195 million in MPF loans. By the beginning of 2008, the MPF Program had funded 1,179,984 loans totaling $166.2 billion. Thanks to the enthusiastic demand from Participating Financial Institutions (PFIs), the MPF Program has continued to grow, and is now offered by seven Federal Home Loan Banks (FHLBs).
The Evolution of Mortgage Finance
Prior to the introduction of the MPF Program, lenders had only two choices when making conventional, fixed-rate mortgage loans, both of which had drawbacks:
- Hold the mortgage loans in their own portfolio; or
- Sell the mortgages directly or through a conduit to a secondary market agency that charges lenders guarantee fees.
From a lender’s standpoint, 15- and 30-year fixed-rate mortgages, which are preferred by a majority of homebuyers, can be complicated assets to hold given their long-term nature, fixed interest rate, and complex options characteristics resulting from the borrower’s freedom to prepay the loan without penalty at any time. By holding these loans in portfolio until they are refinanced, paid off, or mature, the lender bears all the risk associated with them, including the credit, interest rate, liquidity, prepayment, and servicing risks.
Traditionally many lenders, particularly community banks and thrifts, have had difficulty funding and hedging the interest rate and prepayment risks of these loans properly. For these institutions it is simply not practical or, in many cases, prudent to retain these risks. To mitigate these risks over the years, mortgage lenders began to sell their fixed-rate loans to secondary market investors, including Government Sponsored Enterprises.
Prior to the development of the MPF Program, selling mortgages in the secondary market typically involved the lender paying costly “guarantee fees” charged by the secondary market to protect against credit losses on those mortgages. In recent years, these fees have approached 20 basis points per year of the principal balance whereas these loans have historically experienced losses of only 3 to 5 basis points. Smaller community banks and thrifts are typically charged even more because they are not able to generate sufficient volumes to qualify for the discounts given to larger originators even though they originate loans that are of a high credit quality.
A New Approach
Noting the lack of competition in the secondary market for these high-quality loans, the FHLBC recognized an opportunity to be a competitive outlet for funding mortgages, and so designed the MPF Program. The MPF Program’s premise rests on the simple, yet powerful, idea that by combining the credit expertise of a local lender with the funding and hedging advantages of an FHLB, a stronger, more economical and efficient method of funding residential mortgages will result.
The MPF Program gives mortgage lenders the best of both models of mortgage lending -- lenders can retain the credit risk and customer relationship of their loans while shifting the interest rate and prepayment risks to the FHLB. PFIs are able to preserve their customer credit relationships and are paid to manage the credit risk of their own customers. Rather than paying guarantee fees in the secondary market, PFIs receive credit enhancement fees from the FHLB for the life of the loans that they deliver.
Looking Ahead
In 2007, the MPF Program celebrated 10 years of adding value to its PFIs businesses through innovation. In that same year, the MPF Government product was introduced and a new servicing option known as Servicer Initiated Transfer of Servicing was developed. At a time when other secondary market participants are increasing delivery and guarantee fees, PFIs continue to be paid credit enhancement fees by the FHLBs. The FHLBs intend to continue assessing the needs of PFIs and updating our products as often as necessary to empower PFIs and their customers with the financial strength they need to increase homeownership in their communities. |
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