| 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 MI, 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.
