Bankers' interest in MPF program grows again after long hiatus

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WASHINGTON — The Federal Home Loan Bank of Chicago's mortgage originations rose sharply in 2016 thanks to a reintroduction of its traditional Mortgage Partnership Finance loan product.

The bank purchased $3.1 billion in mortgage loans in 2016, up 78% from 2015. It said 40% of the increase was attributable to traditional MPF products.

"The re-introduction of the MPF Traditional products contributed to this substantial increase," the bank said in a letter to its members.

The increase in demand is primarily a result of a successful marketing campaign that helped the bank net new members last year, according to a spokeswoman for the bank. She also credited attractive pricing and servicing income that members can earn as helping the increase.

Alex Pollock, the president of the Chicago bank at the time, launched it in 1997 to create a secondary mortgage market for members of the Federal Home Loan Bank System. But the Chicago bank stopped offering the program in 2008 amid the housing crisis because of a large concentration of mortgage products on its balance sheet.

With home prices rising again, delinquency rates falling and banks looking for additional sources of fee income, the MPF traditional products was reintroduced in 2015.

"As the Bank's members seek ways to increase their non-interest income, the volume in the traditional MPF products has continued to grow as well," the Chicago Home Loan Bank said in an Oct. 27 summary of its third-quarter financial results.

Under the traditional MPF program, the originating member sells the loan to the Chicago bank and the seller earns a fee for providing a credit enhancement based on the performance of the loans.

"In creating MPF, we put the member in the role of Fannie Mae. Instead of paying Fannie Mae a guarantee fee, the member bank provides the credit enhancement and receives the guarantee fee," Pollock, now with the R Street Institute, said in an interview.

Last year participating Federal Home Loan Bank members earned $2 million in credit support income. "It gives them a strong interest in originating high-quality loans. And they are getting noninterest income in the form of enhancement fees," Pollock said.

For some time, the Chicago bank's MPF portfolio eroded as MPF mortgage balances paid down. In the third quarter, MPF loan volume helped "offset" the pay downs.

MPF loans held in portfolio increased to $5 billion by the end of 2016 from $4.8 billion in 2015, the Chicago bank said, as "new MPF loan purchases began to outpace paydown and maturity activity."

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Originations Federal Home Loan Bank of Chicago