With the introduction of a callable auction system and a 469% increase in the amount of loans outstanding in the Mortgage Partnership Finance Program, the Federal Home Loan Bank System is building the blocks to become a formidable competitor to Fannie Mae and Freddie Mac.

The FHLBank System finished 1999 with $1.8 billion in loans outstanding in the MPF program. By June 30 this year, that number was $10.2 billion. Whether this is an indication of built-up demand brought on by a new rule removing the cap on MPF loans or a coincidence is unknown.

"I think the program, even though it's $10.2 billion in outstanding loans, that's a drop in the bucket compared to the overall mortgage market," said a FHLBank source. The program has master commitments to obtain $93 billion to $95 billion in additional loans within the next six months to a year.

"We've also had good growth in the FHA [Federal Housing Administration] and VA [Veteran's Administration] insured loans that we began purchasing in January," he added.

"So it's showing good prospects for future continued growth, but nonetheless, the overall purpose of the program is to become a very viable competitor to Fannie Mae and Freddie Mac as well as to loans that would otherwise be sold into Ginnie Mae guaranteed pools."

Callable Auctions

The FHLBank System's Office of Finance has set up a callable auction system, similar to its TAP program for non-callable products, to increase liquidity based on member banks' demand.

"Callables are a little trickier for [investors] when they hold them as far as risk, so we recognized that and we wanted to add some structure to that process," said Mike Cielo, spokesman for the Office of Finance.

Under old callable auction guidelines, auctions could be called at any time, as many times a day as needed, but doing so ran the possibility of putting the first dealer at risk. The new system standardizes the times and provides lockout protection for the dealers that bid.

"So they know if we do one of these in the morning, they're not going to see another one like it the rest of the day. So, we believe that that will make them feel more confident in their dealing with us and it should support the market better," Cielo said.

However, the system is different from the issuance auctions done by Fannie Mae and Freddie Mac, in that these are not done on a regular basis, but on an as-needed basis. "So we don't warehouse money," Cielo said. "We'll do it when we need it, so we have to remain flexible and our funding practices have to remain flexible in that way. At the same time, we have to make sure that we have protections in place for the dealer community as well."

Callables issued by the FHLBanks peaked at $177 billion in 1998, with only $37.9 billion in issuance this year as of June 30. The lifting of the MPF cap - if the MPF Program takes off as predicted - can only help increase issuance in callables for the FHLBanks. "All we know right now is we're doing some callables and some of those are probably directly related to that," Cielo said.

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