In what is being described as an evolutionary process in the secondary mortgage market, three Federal Home Loan Banks are working on a new secondary market option for their member lenders.
The program is likened to the mortgage partnership finance pilot program that was created by the Chicago FHLBank. This new program, which does not have an official name yet, is being jointly developed by the Indianapolis, Cincinnati and Seattle FHLBanks and is designed to buy mortgages from their members.
What makes the program different from Chicago's program, according to Beth Nellist, finance communications manager at the Indianapolis FHLBank, is, "We are creating a credit-risk sharing structure with the members. Ours is designed to use supplementary insurance to backstop the credit risk that the member would buy."
A small percentage of each mortgage is deposited into a supplemental fund, which is used to pay off credit risk, if it is necessary. If not, "We use that fund to pay off credit risk," she said. "If it's not necessary, we will refund that to the member over a period of time. If a member still has a good credit risk loan, he's got a chance at getting money back."
"It's a blind leap of faith, but one worth taking," Tony DiGiovanni of the Indianapolis FHLBank said of the program at the America's Community Bankers annual National Real Estate Lending Conference in Phoenix early this month.
The program is designed to emulate Fannie Mae's and Freddie Mac's purchase programs. "But instead of their guarantee fees, we're using this dual structure of putting money aside in an account that could be paid back later, plus the supplementary insurance," Nellist said.
"It certainly builds a tremendous amount on what was done before," she added, noting since being granted approval to go forward with the program, the Chicago FHLBank - after adding many additional programs to its partnership program - is moving in the direction of Indianapolis' program.
So far, the program has been well received by their members, particularly the smaller ones, "who do not always have a good chance to sell the Fannie Mae and Freddie Mac," Nellist said. "But really, members of all sizes have thought it was interesting."
While the FHLBanks participating in this new program aren't probing additional expansion programs, Nellist noted that the member lenders are "always interested in getting more competition for people who try to buy their loans."