Growing numbers of credit unions looking to increase liquidity to expand their mortgage programs are turning to the Federal Home Loan Banks' fledgling secondary mortgage market program, known as Mortgage Partnership Finance.
The six-year-old program, started by the FHLB of Chicago but since adopted in some form by all 12 FHLBs, is still experiencing growing pains but is taking an increasing bite of the secondary market for mortgages still dominated by Fannie Mae and Freddie Mac. Through the end of the third quarter the MPF had more than $80 billion of home loans outstanding.
"We feel consistently that for some of our loan sales we are much better off doing business with the Federal Home Loan Bank than with Fannie Mae," said Mark Spenny, chief lending officer for CEFCU, Peoria, Ill., which sells its loans to the Chicago bank.
While posing many similarities to the traditional secondary market programs as Fannie Mae and Freddie Mac, the FHLBs' program has some distinct differences, and advantages. First, the FHLBs provide low-cost funding enabling its members, including more than 700 credit unions, to originate the loans. Then, the home loan banks buy the loans under the MPF to provide more funding for lending.
The major difference in the programs is that Fannie Mae or Freddie Mac will buy the loans and assume all of the credit risk in exchange for a guarantee fee, some times as much as 25 basis points. But under MPF, lenders such as credit unions, and FHLBs share the risks. The lenders, who know their customers/members best, manage the credit risk on the loans, and the FHLB provides expertise in in hedging and managing the interest rate risk on the loans.
Under the MPF program, the FHLB buys the loans but the lender retains the risk and is paid a "credit risk enhancement" fee by the FHLB based on the loss history of the portfolio. This fee averages around 10 BPs a month, according to spokesman David Feldhaus.
So instead of paying Fannie Mae or Freddie Mac to assume the risk on mortgage loans, which have extremely low charge-offs rates, anyway, CUs retain the liability for losses-after private mortgage insurers-and get paid a fee for retaining the liability. "We take on some additional credit risk on our mortgage program, but our losses are pretty low, " said James Carlin, vice president of Communication FCU, Oklahoma City, which has sold $1.5 million of mortgages to the FHLB of Topeka's MPF program over the past few months.
"We're not selling loans to manage credit risk, we're selling loans to manage interest rate risk. With the FHLB's program you get rewarded for doing that," said Spenny.
Carlin, who plans on doing all his secondary market business with the FHLB, said the MPF also provides more flexibility than Fannie Mae or Freddie Mac to sell both older loans and smaller loans, and non-conforming loans.
In addition, MPF participants retain the servicing on their loans, and with it, the member/customer relationship.
To Timothy Reinert, CFO at Mutual First FCU, Omaha, the advantages are obvious. "The Mortgage Partnership Finance program gives us a better return," said Reinert, who has sold $15 million of mortgages to the program since Feb. 1.
