Commendation to Community Lenders for Over a Decade of Solid Performance

Commendation to Community Lenders for Over a Decade of Solid Performance

Earlier this year, the Obama Administration released its long-awaited report to Congress: “Reforming America’s Housing Finance Market.” The following is an excerpt from the Administration’s report worth noting.

In the years leading up to the recent crisis, a robust expansion in credit, fueled by processes and financial instruments designed to shift risk away from originators, combined with other factors, fed a rising demand for housing that lifted prices well above sustainable values. By mid-2006, housing prices across a broad range of markets began to turn, eventually declining consistently for the first time since the 1930s. Almost no one in the housing finance market was prepared. Homeowners, investors and financial institutions — including Fannie Mae and Freddie Mac — did not have enough capital supporting their investments to absorb the resulting losses. In 2008, credit markets froze. Our nation’s financial systems — which had outgrown and outmaneuvered a regulatory framework largely designed in the 1930s — was driven to the brink of collapse. Millions of Americans lost their jobs, families lost their homes, and small businesses shut down. Fannie Mae and Freddie Mac experienced catastrophic losses and were placed into conservatorship, where they remain today.

Yet, there is another story — the story of responsible community lenders that underwrote loans based on the ability of the borrowers to repay, and they made sure the loans were supported by reasonable and realistic property appraisals. In July 1997, a secondary mortgage market program emerged in the Mid-west for these responsible community lenders — the Mortgage Partnership Finance® (MPF®) Program.

The MPF Program was created to offer member-lenders a unique program that rewards lenders for the quality of the loans they originate. These lenders were not looking to shift the credit risk of their loans to others, but were willing to share in the credit risk for a competitive advantage in the fixed-rate mortgage loan market. This was a novel idea fourteen years ago, and today several other Federal Home Loan Banks (FHLBanks) throughout the country offer this credit-sharing program to their member-lenders. The cooperative strength of the FHLBanks and their members was, and remains, an ideal setting to launch and grow a competitive secondary mortgage program.

The MPF Program requires the Participating Financial Institutions (PFIs) to retain credit risk in the mortgage loans they originate and rewards the PFIs for sharing in the credit risk of the loans sold by paying a Credit Enhancement (CE) fee.

MPF Program Performance History (1997-2010)

Over the history of the MPF Program, the performance of the loans sold by PFIs has been nothing short of outstanding, as demonstrated in the chart.

Since the Program’s inception in July 1997 to December 31, 2010, more than $152 billion in conventional whole loans, involving more than one million loans nationally, have been funded under the MPF Program. Currently, 1,250 member PFIs are approved to sell mortgage loans under the MPF Program. Small-sized community lenders with assets under $1 billion make up 83% of PFIs; 17% are mid-sized and larger lenders with over $1 billion in assets.

The MPF Program works well because PFIs typically originate very high-quality mortgages with low losses. This risk-sharing arrangement between the FHLBanks and PFIs has played a key role in the high performance level of the total portfolio.

The strong performance is best illustrated by the MPF Program’s conventional delinquency rate, which based on loan count, amounted to 3.55% compared to the national average of 7.63% (as of December 31, 2010). In addition, the 90+ day delinquency rate amounted to 1.67% compared to the national average of 4.57%, with loans in foreclosure amounting to 0.77% compared to 2.67% nationally. These significant differences are depicted in the following Conventional Loan Performance chart. The MPF delinquency rate has grown over time, but the growth is more a reflection of the economy’s condition than PFIs’ underwriting.

MPF Program Conventional Loan Performance

Credit losses have occurred over the past fourteen years, but those credit losses have amounted to $36 million — just 0.02% of the total conventional loans funded nationally, involving 1,982 loans (0.19%). To address credit losses under the MPF Program, either the FHLBank or the PFI involved will absorb a portion of the credit loss and/or the PFI involved will forgo future CE fees to enable their FHLBank to recoup the loss. Of the $36 million in credit losses, the PFIs involved were only required to pay $154,489 in total, or 0.4%. The majority of losses were or are being recouped from future CE fees to be paid to the PFIs involved, with the FHLBank absorbing any losses that are not recouped.

What is even more remarkable, during the same period, PFIs were paid more than $608 million in CE fees for sharing in the credit risk of the loans sold under the MPF Program — a win-win situation for PFIs warranted by their sound underwriting practices.

The statistics provided are evidence that PFIs have done an exceptional job being responsible community lenders — and the unique structure of the MPF Program has rewarded them well for their efforts. Although the nation will read about and likely experience mortgage housing reform in the years to come, recognition should be given to the community lenders that did not waiver from their underwriting tasks. Underwriting mortgage loans the right way certainly does not go unnoticed at the FHLBanks, and we commend PFIs for their exemplary performance.

MPF Program Performance at the HLB
HLB MPF Program Performance History (1999-2010)

Reviewing the MPF Program’s national performance is surely representative of the program’s performance here at the Federal Home Loan Bank of New York (HLB). However, specifically how well the HLB’s MPF portfolio has performed is also worth highlighting.

The HLB started offering the MPF Program in April 1999 and has purchased more than $3.5 billion in loans through yearend 2010. Total losses on all loans have amounted to less than $300,000. Of those losses, the HLB has recovered, or is in the process of recovering, all but $16,200 of those losses by stopping future CE fee payments to the PFIs involved. Although the future stream of CE income will be impacted for the PFIs involved in losses, those PFIs did not have to pay the HLB directly for losses incurred in the HLB’s twelve-year history.

Since the HLB has offered the MPF Program, PFIs collectively have been paid approximately $10 million in CE fees for their responsible underwriting. Healthy loan performance deserves strong rewards!

Why PFIs Prefer the MPF Program

The HLB has recently experienced a surge in interest for the MPF Program from non-participating members. Many of the inquiring institutions have an existing secondary market outlet, but are becoming concerned with increased loan level price adjustments, and more importantly, the possibility of future increases in guarantee fees (one of the recommendations from the Obama Administration).

MPF Program Appeals to Lenders of All Sizes

Aside from the additional fee income earned from CE fees, pricing is another attractive feature of the MPF Program. Small- and mid-sized institutions find the pricing advantageous over what the agencies are offering, especially since MPF Program pricing is the same regardless of the volume of loans delivered. Larger-sized PFIs view MPF Program pricing as competitive with the agencies for loans up to the conforming loan limits, and even better for highbalance loans. The following chart illustrates the composition of PFIs at the HLB. One active PFI commented that they can even tell which of their competitors are also MPF Program participants by simply comparing mortgage rates; competitors offering the most aggressive pricing are usually other PFIs.

In addition, the MPF Program doesn’t charge any adverse market fees nor loan level price adjustments — a win-win situation for both PFIs and their customers.

To round out the benefits, PFIs enjoy the convenience of using the eMPF® website for electronic transaction processing, and they have access to a number of live educational webinars offered throughout the year to help address particular secondary market issues and provide training opportunities.

If you are interested the MPF Program, becoming a PFI, or would like a refresher on how your participation can potentially help you increase profitability, ensure liquidity, and earn more fee income for the loans you originate, contact an MPF representative at (212) 441-6701.

HLB Dividend Update

On May 20, 2011, the HLB distributed a first-quarter dividend at 4.50% (annualized). The dollar amount of the dividend was approximately $50 million.

Dividend Announcement First Quarter of 2011
Dividend History

At the HLB, providing our members with advances remains central to our business. At the end of the first quarter of 2011, advances comprised 78% of our total assets. This continued focus on advances has driven our solid performance throughout the recent difficult operating environment and has allowed us to provide our members with a fair and consistent dividend.

The dividend reflects the HLB’s low-risk profile/conservative investment strategy and is reflective of the continuation of a low interest rate business environment coupled with increased earnings volatility related to evolving accounting standards. The payout represents approximately 70% of net income for the quarter. The remaining 30% of net income will be put towards retained earnings. The HLB will continue to maintain retained earnings at calibrated levels to help ensure future regulatory compliance and provide additional protection for the capital investment of our stockholders. After the dividend payment, unrestricted retained earnings as of March 31, 2011, will be approximately $667 million. 

Primarily due to the effects of conforming with current accounting rules, please note that our Board intends to continue to vote on dividend declarations at least six weeks (or longer) after the close of the calendar quarter.

Since the MPF Program participants are required to purchase activity-based HLB stock, participants should be aware of the level of the HLB dividends and retained earnings. The current purchase requirement amounts to 4.5% of any new MPF delivery commitment amounts issued. Although the stock purchase requirement is mandatory under the MPF Program, most of the participants view the requirement as a benefit considering the level of dividends having been paid versus other earning assets in the market. However, there is no guarantee that the level of future dividends to be paid will reflect the level of dividend payouts currently being made.

Free MPF Program Industry Workshops

These workshops are open to all HLB members, regardless of MPF Program participation. Attend as many times as you like, free of charge, in the comfort of your own office.

To register for these online workshops, visit and click on the register link next to the workshop for which you would like to register. For easy access to future MPF Workshops, you can bookmark the MPF Workshop page by clicking on the “+Add to Favorites” link.

  • June 7: Underwriting Workshop | 10:30 am EST (2 hours)
    This workshop is mandatory before an approved PFI may deliver loans under the MPF Program. Prerequisites: MPF Bank Credit Reporting Review and MPF Bank Appraisal Review Webinar.
  • June 8: MPF Program 101 | 3:00 pm EST (1 hour)
    Recommended for secondary market personnel and CFOs.
  • June 13: Liquid Assets | 10:30 am EST (1 hour)
    Recommended for underwriters and quality control auditors.
  • June 13: Expedited Refinance | 3:00 pm EST (30 minutes)
    This course is recommended for loan officers, loan processors, underwriters, and quality control auditors.
  • June 15: Risk/Reward | 3:00 pm EST (1 hour)
    Recommended for secondary market personnel and CFOs.
  • June 23: Investor Reporting | 3:00 pm EST (90 minutes)
    This presentation is recommended for the mortgage accounting and/or servicing staff.

Free MPF Workshops

Latest Issues

Spring/Summer 2011
Commendation to Community Lenders for Over a Decade of Solid Performance

Winter 2011
Mortgage Rates are on the Decline Have You Considered the MPF® Program Lately?