Description for MPF 35 and Credit Risk Sharing
This infographic shows the waterfall of losses when mortgages sold to the MPF Program at FHLBank Boston incur credit losses.
The structure of the visual shows absorption of credit losses in order of increasing severity.
The first tranche is borrower equity, which reflects an increase in the value of the underlying property since the origination of the loan.
The second tranche, subordinated to the first, is private mortgage insurance or PMI, if it exists.
The third is the First Loss Account or FLA, which is provided by FHLBank Boston.
Please note, however, if the FLA is compromised, future payments associated with the Credit Enhancement Obligation, called “Credit Enhancement Fees,” may be withheld to replenish the account.
The fourth tranche is the PFI’s Credit Enhancement Obligation, which is only tapped after the FLA is depleted. The Credit Enhancement Obligation is held as collateral at FHLBank Boston. The value of necessary collateral associated with a Master Commitment can be determined in advance of the sale of the underlying loans.
The fifth and final tranche absorbs all losses after the depletion of the PFI’s Credit Enhancement obligation, and these losses are incurred entirely by FHLBank Boston.
