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Since the introduction of the Mortgage Partnership Finance®
(MPF®) program in April 2000, 118 members have been approved
to participate in the program. In general, members selected
MPF to improve their profitability and better manage their
liquidity and interest-rate risk.
Before members enroll in MPF, the Federal Home Loan Bank
of Boston ensures that they are well informed of the impact
their participation will have on their organization. As a
cooperative, FHLB Boston helps members evaluate the MPF program
through member visits, training sessions, and educational
forums.
As a supplement, we also provide the following list of frequently
asked questions to assist members in better understanding
the benefits and requirements of the MPF program. The Bank's
relationship managers and MPF representatives are available
to meet with members to further discuss these and other questions.
Finance
Will MPF provide more economic value
than the secondary-market program where the member currently
sells loans?
Most pricing comparisons indicate that MPF, on
an "all-in" basis, outperforms the member's other
secondary-market source. In fact, those comparisons usually
indicate that the execution price alone is more favorable.
To do the pricing comparison properly, the member should consistently
compare all cash flows under MPF and the alternative program.
For MPF, those cash flows include: execution price, credit-enhancement
fee, float, FHLB Boston dividend, and potential losses. Your
relationship manager and MPF representative are available
to help you perform the pricing comparison.
How does MPF accounting work?
The mortgage-sale accounting for MPF should adhere to FAS
140. Apart from the recognition of the servicing asset, if
applicable, the credit-enhancement fee and credit-enhancement
obligation need to be properly accounted for. Treatment should
be confirmed with the external auditor of the member's financial
institution. The member's call report has sections that should
be completed for the credit-enhancement obligation and loans
sold under recourse.
How much capital stock must be held
under the MPF program?
At present, the required capital stock is 4.5 percent of the
unpaid principal balances of the loans sold. For further details,
please reference the Information Statement (dated December
31, 2003) on FHLB Boston's re-capitalization plan.
What additional costs are related
to implementing MPF?
There is no application cost. Under the service-retained MPF
program, members with established servicing and agency-underwriting
capability should not incur any new set-up costs. Members
without requisite servicing infrastructure can utilize the
recently launched MPF servicing-released program to avoid
overhead costs.
Credit
Explain why taking on some credit
risk under the MPF program may benefit our financial institution?
Under the MPF program, the member receives a credit-enhancement
fee (ranging from seven to 10 basis points per annum) for
assuming some credit risk. In addition, under the MPF original
program, the member's loss-exposure is cushioned by a First
Loss Account (FLA), which accumulates at four basis points
per annum on the balance of sold loans, which is borne by
FHLB Boston. Members have told us that the FLA and credit-enhancement
fee, together, exceed historic and anticipated charge-off
levels by an ample margin. Moreover, the MPF program rewards
members for strong credit quality, unlike some programs that
charge a guaranty fee substantially in excess of a member's
actual credit experience.
Underwriting
What are the underwriting standards
for MPF?
MPF accepts Loan Prospector (LP) or Desktop Underwriter (DU),
with some minor exceptions. The MPF Originations Guide underwriting
section, outlines the underwriting requirements. Any questions
should be reviewed and discussed with the FHLB Boston staff
or the MPF help desk.
What is the credit-enhancement process
and what does it entail operationally?
The credit-enhancement feature represents the basic difference
between MPF and other sold-loan programs. Under MPF, the credit-enhancement
obligation represents the limit of the member's exposure in
the event of a chargeoff, and is determined after a loss runs
through the prior protection levels — equity, primary
property mortgage insurance, and the First Loss Account borne
by the FHLBBoston. It is, in effect, the loss-sharing necessary
to bring the loan rating up to required standards for purchase
by FHLB Boston. It is calculated using the S&P LEVELS®
model. Using selected information from the loan application,
the S&P LEVELS model evaluates the probability that a
loan will go into default.
The credit-enhancement process is performed in an automated
format uploaded nightly to the Federal Home Loan Bank of Boston
or on a loan-by-loan basis via the member's computer terminal
on the eMPF® Web site.
Does MPF have a "box"
that approves loans that are sold into the secondary market?
No. MPF guidelines allow either the Loan Prospector (LP) or
Desktop Underwriter (DU) automated underwriting systems to
be utilized as well as manual underwriting in accordance with
the MPF Origination Guide. The credit-enhancement process
used to determine the contingent liability does not affect
the underwriting. Members decide whether or not to sell the
loan to MPF.
Is a quality-control policy required?
Yes. Each member requires a quality-control policy. This policy
must cover the requirements needed to review loans sold into
the MPF program. The quality-control policy must cover a 10
percent sample of the loans sold into the program as well
re-verification of 10 percent of the initial 10 percent. It
is not unlike the requirements of Freddie Mac and Fannie Mae.
Servicing
What system changes need to be made
to assure accurate processing and reporting of all loans sold
into the MPF program?
The member's loan-origination and loan-accounting systems
should properly report the loan data in accordance with the
MPF Servicing Guide. Most systems should allow for electronic
transmission. MPF staff can assist members in evaluating the
efficiency of their system configuration for MPF reporting.
Secondary Market
How does the delivery-commitment
process work under the MPF program?
After rate-lock or origination of a loan, a member will select
a delivery-commitment date using the MPF pricing sheet. The
delivery commitment is entered into by authorized personnel
utilizing the eMPF Web site or by telephone. The delivery
commitment is mandatory, meaning that the member will be subject
to "pair-off" costs if the loan is not delivered
into the commitment.
How is a member funded for a loan
under MPF?
Loans are funded on the Web site in a straightforward process.
A loan funding can be done on a loan-by-loan basis or through
a pool of loans with a similar coupon (for example, 25 basis
points up or down). After selecting the funding date, FHLB
Boston places the funds in the member's IDEAL Way account.
How does the master commitment work?
A master commitment in the MPF program is a best-efforts agreement.
It sets forth the terms under which loan sales will take place,
plus key information such as total master commitment amount
(limit on loans sold), expiration date, remittance style,
PFI name and number, amount of first-loss account, amount
of credit-enhancement fees paid to the PFI, and amount of
credit-enhancement obligation.
On the master commitment, the credit-obligation amount is
initially estimated and then recalculated based on actual
credit-enhancement scoring for sold loans into the commitment.
The member should monitor master commitments. Once the commitment
is close to being filled, it should look into extending the
master commitment or opening a new one. Master commitments
are "firewalled" between each other; for example,
loans serviced according to one remittance style cannot be
sold into a commitment with a different remittance style.
For more information about the Bank's MPF program, please
call 888-675-0556, or call Lisa Graham at 617-292-9672, William
Dolan at 617-292-969, or Paul Pouliot at 617-292-9641.
John Baity is a relationship manager and Lisa Graham is
director of Mortgage Partnership Finance quality assurance
at the Federal Home Loan Bank of Boston.
(Photo: Pictured,
from the left, are: John Baity, the Federal Home Loan Bank
of Boston's relationship manager for northern New England;
Francine Anton, vice president / loans at member Biddeford
Savings Bank; Lisa Graham, the Bank's director of MPF quality
assurance; and Wayne Sherman, president of Biddeford Savings
Bank. The group met at the member's Main Street office in
Biddeford, Maine.)
"Mortgage Partnership Finance" and "MPF"
are registered trademarks of the Federal Home Loan Bank of
Chicago.
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