Introducing the Principal-Deferred Advance
September 2007 |
The Federal Home Loan Bank of New York (”HLB”) is happy to introduce a new hybrid advance product, combining the Fixed-Rate Advance and the Amortizing Advance: the Principal-Deferred Advance (”PDA”). The PDA allows you to choose a specific amount of time to defer the principal payment of an advance followed by monthly principal and interest payments.
PDA Highlights
Example: 30-year PDA with a 5 year Principal-Deferred Period
Features
- Rate is predetermined and will not change over the life of the advance
- Day count basis: 30/360
- Initial payment frequency: first business day of each month
- Term: 1-30 years after principal-deferred period
- Maximum principal-deferred period: 5 years
- Maximum settlement: 12 months out
- Prepayable: yes
Benefits
- Enhances your asset/liability management positions
- Option to select fully amortizing or a variety of other structures with varying balloon choices
- Mirrors characteristics of a typical construction deal with a permanent take-out
- No embedded options in the advance
Note: Advances may be collateralized with eligible mortgages or securities identified in the Member Products Guide.
Members have expressed a growing need for an advance whose principal payments are deferred. The HLB has responded with a new funding idea to assist our community-based member-lenders. Beginning October 1, the HLB is pleased to introduce the Principal-Deferred Advance (“PDA”). The PDA is a hybrid advance combining elements of the Fixed-Rate and Amortizing Advance products.
The PDA begins as a Fixed-Rate Advance, allowing members to choose a specific amount of time they would like to defer the principal payment of the advance, up to 5 years. When the lockout, or principal-deferred period ends, the advance becomes an Amortizing Advance, where the member makes principal and interest payments on the loan, up to another 30 years. Members are able to select fully amortizing or a variety of other structures with varying balloon choices, just like a regular Amortizing Advance. The rate on the PDA is determined at the time the member takes down the advance and will not change. Further, there are no call or put options. Like other amortizing advances, the PDA is based on the 30/360 day count basis, with interest and principal due monthly.
Construction-to-Permanent Lending:
The PDA can help provide the competitive advantage that members have been looking for when bidding on construction loans where the borrower is also interested in locking in permanent financing. In addition, asset/liability management can be enhanced since the PDA allows members to match- fund construction-to-permanent loans without assuming undue interest rate risk. This also allows members to lock in the maximum spread during the construction phase, as the rate on the PDA never changes.
Pre-Funding Branches:
The PDA can also be a potentially good funding option for members interested in pre-funding branches. By borrowing from the HLB with the PDA, members can immediately begin investing the money they plan to acquire with soon- to-be branch deposits. Furthermore, with the average cost of a new branch running $2 to $3 million, pre-funding using the PDA can help manage this expense.
The PDA can also enable members to price more efficiently instead of paying up by offering very high rates to attract deposits quickly. Whether members are funding loans in their community or funding securities for their investment portfolio, borrowing now and paying down the borrowings as deposits come into the new branch can be a potentially effective method of capitalizing on membership at the HLB.
Contact your Calling Officer today at 212-441-6700 to discuss the PDA and its possible effectiveness for your institution. Please note that the HLB is always looking for new ways to meet the needs of its members. We value your input and would like to hear from you if you have suggestions for new programs or enhancements to current ones.
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If you have a particular subject that you'd like to see in an upcoming Advantage issue,
please email goldstein@fhlbny.com and we will try to accommodate your requests.
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