Federal Home Loan Banks (FHLBs) have been purchasing single-family mortgages from their member banks and thrifts since 1997 — when the Chicago FHLB first launched its flagship Mortgage Partnership Finance (MPF) program.
Most of the 12 FHLBs participated in the early MPF initiative and a similar offshoot known as the Mortgage Purchase Program. MPF grew rapidly in the early 2000s and its founder, then-Chicago FHLB president Alex Pollock, even sought regulatory approval to securitize MPF loans, but never got the green light.
But unbeknownst to most of the mortgage industry, the Chicago FHLB and five other FHLBs still have active MPF programs that generate about $7 billion a year of product. Roughly half of the loans require the lenders to retain some of the credit risk—the trademark of the MPF program.
In 2010, about $3.5 billion of mortgages purchased by the FHLBs were originated under the MPF “Xtra program” and sold to Fannie Mae. The other $3.5 billion were standard MPF loans where the lender retained 2% to 5% of the credit risk.
The Topeka FHLB only offers the standard MPF product where the lender must have skin in the game. On a $150,000 conventional loan, the MPF originator might retain 4.38%, or $6,570 of the credit risk.
“The quality of that loan portfolio is nothing short of superb,” said Topeka chief operating officer David Fisher.
Topeka MPF lenders have sustained about $800,000 in loan losses over a 10-year period. During the same period, MPF originators have collected $29 million in credit enhancement fees from the Topeka bank. “They get compensated for underwriting good mortgages,” Fisher said.
The serious delinquency rate (90 days or more past due) on Topeka’s MPF portfolio is 0.67%, compared to 4% on Fannie Mae’s entire single-family portfolio.
In a recent speech at George Washington University, Pollock said the MPF program has “produced the highest quality mortgage portfolio in the U.S.”
The Mortgage Purchase Program treats risk retention as a business where originators are rewarded for underwriting good loans, the former Chicago FHLB president said.
The resident fellow at the American Enterprise Institute noted the Dodd-Frank Act Congress passed in 2010 imposes risk retention on the securitizers and treats it as a “punishment.”
“It only makes sense at the originator level where the credit decision is actually made,” Pollock added.
Today there are more than 1,000 lenders participating in the MPF program. Most are community banks with less than $1 billion in assets. “For every dollar of losses they have taken on their risk retention, they have been paid $24 in fees. That’s pretty good,” Pollock said.
The Boston, Chicago, Des Moines, New York, Pittsburgh and Chicago banks still purchase MPF loans from their members. The Chicago bank continues to handle most of the administrative and processing duties for the traditional MPF program. And the Cincinnati FHLB and the Indianapolis FHLB still offer the MPP program to their members.
However, most of the FHLBs are experiencing steady declines in their mortgage portfolios, or at best, are treading water. At the same time, the FHLBs are experiencing a decline in their main business of making advances to member institutions.
However, Topeka’s mortgage portfolio grew by $600 million during the first three quarters of this year to $4.8 billion. With advances declining and its mortgage portfolio reaching 11% of assets, Topeka tested the waters by selling $100 million of MPF loans for a net gain in the second quarter.
It appears a member institution purchased the MPF loans, but the FHLB would not disclose the member’s name. The COO of the Topeka bank stressed that the sale will not impact the risk retention structure of the MPF loans or performance payments to lenders.