| Transaction Type |
The participating financial institution
(PFI) will sell closed loans to its applicable Federal
Home Loan Bank (MPF Bank).
|
| Process |
The PFI will obtain a master commitment
from the MPF Bank. From data submitted by the PFI
for the loans, the MPF Bank will determine the credit
enhancement (CE) equivalent to rating agency "AA"
credit risk. The PFI will arrange for an approved
private mortgage insurance (MI) company to provide
supplemental mortgage insurance (SMI) to the MPF
bank and will be responsible for the premium payments
due under such SMI policy.
|
| MPF Bank First-Loss
Account (FLA) |
A first-loss account (FLA) will be
established equal to a specified percentage of the
scheduled principal balance of the loans as of the
sale date. Losses for each master commitment up
to this amount will be applied against the FLA.
|
| SMI Coverage |
The SMI policy shall provide loan-level
coverage down to a loan-to-value and aggregate coverage
level as required by the MPF Program CE ratings
system. Final coverage requirements will be determined
at the time the master commitment is filled. The
deductible to the SMI policy is an amount equal
to the FLA.
|
| PFI Credit-Enhancement
Obligation |
An amount equal to the total credit
enhancement for the master commitment less the FLA
and the coverage provided by the SMI to bring the
total credit enhancement to the "AA" required
amount. The PFI will pay losses for the master commitment
in excess of the FLA and not covered by the SMI,
not to exceed the amount of the PFI's credit-enhancement
obligation. The PFI's credit-enhancement obligation
is an undertaking under the terms of the PFI Agreement.
The PFI's credit-enhancement obligation may be adjusted
at the time the master commitment is closed if (i)
less than 300 loans have been sold and/or (ii) the
loans are geographically concentrated to achieve
a "AA" rating under MPF Program credit-enhancement
ratings system.
|
Credit Losses in
Excess of the PFI
Credit-Enhancement Obligation |
The MPF Bank will absorb credit losses
in excess of the PFI's credit-enhancement obligation.
|
Credit-Enhancement
Fee |
A mutually agreed upon percentage
of the remaining scheduled principal balance of
the loans in the master commitment at the end of
each month, split into fixed and performance credit-enhancement
fees. The fixed credit-enhancement fee will be paid
beginning the month after delivery, and the performance
credit-enhancement fee will accrue and be paid to
the PFI monthly commencing the thirteenth month
following each delivery of loans. Performance credit-enhancement
fees will be reduced to reflect loan performance
by an amount equivalent to loan losses, up to the
maximum of the FLA. If losses exceed the performance
credit-enhancement fee due in any period, such excess
will be carried forward and applied against future
performance credit-enhancement Fees.
|
| PFI Obligation to
Maintain MI Coverage |
If the MI company's credit rating
falls below "AA-", the PFI will have six
months to replace the SMI policy with coverage from
another approved MI company, or at its option, accept
the obligation at its own undertaking. After such
six month period, the performance credit-enhancement
fee will not be paid until replacement coverage
is secured.
|
| Credit-Enhancement-Obligation
Reset |
The total credit enhancement required
for a "AA" level of credit risk will be
recalculated periodically (such time periods to
be mutually agreed upon), and, if the PFI's recalculated
credit-enhancement obligation is lower than the
remaining obligation, the PFI's credit-enhancement
obligation will be reset to the new, lower level.
|
| Capital Treatment |
For depository institutions, there
is no leverage-capital requirement. The PFI's credit-enhancement
obligation will receive, for risk-based capital
purposes, low-level recourse treatment resulting
in a capital requirement equal to 100 percent of
the PFI's credit-enhancement obligation.
|
| Other Fees |
In addition to the credit-enhancement
fee, the PFI will receive a servicing fee from the
MPF Bank. |
"Mortgage Partnership Finance"
and "MPF" are registered trademarks of the Federal
Home Loan Bank of Chicago.
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