The Mortgage Partnership Finance® Program was designed to promote access to the secondary market for small and mid-sized financial institutions. FHLBank 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 Evolution of Mortgage Finance
Prior to the introduction of the MPF Program, community lenders had two choices when originating conventional, fixed-rate mortgage loans; both of which had drawbacks:
- Hold the mortgage loans in their loan portfolios; or
- Sell the loans directly or through a conduit to a secondary market investor
The mortgage preferred by a majority of homebuyers is a 15 or 30 year fixed-rate mortgage; however, these can be complicated assets to hold given their long terms and inherent complex options such
as a borrower’s ability to prepay the loan without penalty. Holding these loans in portfolio until they are paid off through a refinance or at maturity requires the lender to bear all the risks associated with
them, which includes credit, interest rate, liquidity, prepayment and servicing.
Many community lenders have traditionally had difficulty properly funding and hedging the interest rate and prepayment risks of long term fixed rate mortgage loans. For these institutions it is simply not
practical or, in many cases, prudent to retain these risks. To mitigate the risks over the years, mortgage lenders began to sell their fixed-rate loans to secondary market investors, including Government
Selling mortgages in the secondary market typically involved the lender paying ‘guarantee fees’ charged by secondary market investors to protect against credit losses on those mortgages. Recently, these
fees have risen to 25-35 basis points per year of the principal balance of the loans sold. Smaller community lenders are typically charged higher fees because they are not able to general sufficient
volumes to qualify for the discounts that may be given to larger originators even though they originate loans that are of a high credit quality.
A Solid Approach
Noting the lack of competition in the secondary market for these high-quality loans, the FHLBanks 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 a FHLBank, a stronger, more
economical and efficient method of financing residential mortgages would result.
The MPF Program gives mortgage lenders the best options of mortgage lending – lenders retain the credit risk in their loans and transfer the interest rate and prepayment risks to the FHLBank. PFIs are
able to preserve their customer relationships and are paid to manage the credit risk of their customers. And for the MPF risk sharing products, instead of paying guarantee fees, PFIs receive credit
enhancement fees from the FHLBanks for the life of the loans that they deliver.
The MPF Program is proud to celebrate over 15 years of adding value to its PFIs through product innovation and service. At a time when other secondary market participants are consolidating their services
and/or increasing delivery and guarantee fees, PFIs may be paid credit enhancement fees by the FHLBanks. The FHLBanks continually assess the needs of PFIs and provide products and services to
empower PFIs and their customers with the financial strength they need to increase homeownership in their communities.