"Until now, we'd always been a small-volume portfolio lender," says Allen T. Sterling, president and chief investment officer of Auburn Savings & Loan Association in Maine.

Assets at this $52.5 million institution had doubled in size over the past four years, but deposit growth had not kept pace. Unless management was willing to forgo lending opportunities, and the valuable customer relationships they bring, the institution needed an outlet for its production of one- to four-family, fixed-rate mortgages.

"We had excellent residential mortgage requests that we wanted to fund. We also needed to continue to make those loans to cross-sell our other products and services," says Mr. Sterling.

Like many smaller-volume mortgage lenders, Auburn Savings & Loan had been left out of the traditional secondary market. Since November of last year, however, the member has sold more than $4 million in residential mortgages, thanks to the Federal Home Loan Bank of Boston's new Mortgage Partnership Finance® (MPF®) program.

Through the MPF program, the Federal Home Loan Bank of Boston buys or funds eligible mortgages originated and serviced by members approved as participating financial institutions (PFIs). PFIs retain a portion of the loans' credit risk and, in return, receive credit-enhancement fees from the Bank. Unlike the traditional secondary market, the MPF program rewards participating members based on the credit quality, not volume, of the loans sold.

The MPF program builds on what the Bank and its members each do best. Members manage the origination, servicing, credit risk, and customer relationships associated with mortgage lending, while the Federal Home Loan Bank of Boston funds the assets and manages the interest-rate risk.

In return for retaining a portion of the credit risk, members are paid a credit-enhancement fee. This improves on the traditional secondary-market business model, which requires the seller to pay a guarantee fee to transfer this risk to the loans' purchaser.

In addition, the price paid for loans sold through the MPF program is extremely competitive with existing secondary-market conduits. When combined with the credit-enhancement fee, this price execution will provide for increased spreads of up to 100 basis points for smaller originators and 20 basis points or more for originators with significant secondary-market activity.

Although it differs from the traditional secondary market in several ways, the MPF program has been designed to conform to most of its operational conventions. Loans eligible for sale through MPF include 15-, 20-, or 30-year, fixed-rate mortgages, of conforming size, for one- to four-family properties.

"We like [the MPF program] because it is far easier than selling to the agencies," says Mr. Sterling, citing the program's flexible remittance options as an important reason for this ease of use.

That the MPF program allows lenders to control their own underwriting process and all aspects of their customer relationships is also appealing, says Mr. Sterling. "Our biggest selling point is that we know our customers when they call us."

Auburn Savings & Loan has already opened its second master commitment and expects to deliver another $3 million in loans this year, selling the Bank 15- to 30-year, conforming mortgages as they are closed.

Funding mortgages in this way suits Auburn Savings & Loan's needs — and is just another benefit of belonging to the cooperative Federal Home Loan Bank of Boston.

Says Mr. Sterling: "We've always liked how the Bank does business. We're made to feel like we're not a small shop at all."

This article originally appeared in the Winter 2000 edition of Executive Briefing.

"Mortgage Partnership Finance" and "MPF" are registered trademarks of the Federal Home Loan Bank of Chicago.