WASHINGTON — The regulator for the Federal Home Loan banks may have given their mortgage purchase programs a significant boost by allowing the Topeka bank to sell participations in newly issued pools of mortgage loans.

The Federal Housing Finance Agency gave the Federal Home Loan Bank of Topeka approval last week to allow members to invest in mortgage assets that are part of the Mortgage Partnership Finance program. The approval would allow banks and credit unions who belong to the Topeka bank to have an additional mortgage investment opportunity beyond Fannie Mae and Freddie Mac mortgage-backed securities. It also gives the Topeka Home Loan Bank new business opportunities.

"We think it has a lot of merit and it keeps the value of the mortgages within the district and the cooperative," said Dan Hess, the Topeka bank's chief business officer.

He added that if members can purchase mortgage participations, the Topeka Home Loan Bank can "provide advances to help the members fund and hedge their mortgage assets." 

The FHFA's approval of the Topeka initiative has generated "some buzz" within the Federal Home Loan Bank System, according to Ron Haynie, a senior vice president at the Independent Community Bankers of America. If the program expanded to other districts, it would allow a financial institution that can't generate enough mortgage assets in its market to turn to another Home Loan Bank to buy loans.

"If you think about it, it's sort of a natural type product for the Federal Home Loan Banks," Haynie said in interview.

Such an expansion seems likely, according to a top official with the Federal Home Loan Bank of Chicago.

"Other FHLBs in the MPF program are expected to follow suit," said John Stocchetti, an executive vice president at the Chicago bank, which started the Mortgage Partnership Finance program.

Under the FHFA's approval, Topeka members can purchase participations in pools of newly originated MPF single-family mortgages.

The "buyers benefit from owning credit enhanced loans that have a similar credit profile to agency mortgage-backed securities while potentially offering higher returns," said Andrew Jetter, President and CEO of the Federal Home Loan Bank of Topeka, in a press release last week.

The Topeka Home Loan Bank purchased $1.1 billion in MPF loans from its members in 2014. Mortgage participations could range from 1% to 95% of the loan amount. The Topeka FHLB will retain at least 5% of the credit risk.

The originating member institution — a bank, thrift, credit union, insurance company -- will continue to assume the same credit risk as when they sold the loan to the Topeka FHLB.

"Their credit enhancement requirements wouldn't change nor would their on-going fee income," which is based on the performance of the loans, said Hess. The originating institution is "not affected by the sale of the participation on the back end."

The Topeka bank is currently lining up members and would like to launch the loan participation program this summer. Hess said that new participation program is also generating interest at other Home Loan Banks.

Analysts said the move helps address constraints at the Topeka Home Loan Bank.

"It appears to us to be a carefully-crafted effort at solving the challenges of a small, heartland Home Loan Bank dependent on the increasingly flagging fortunes of rural community banks," wrote Federal Financial Analytics in a note to clients last week. "From the Topeka Bank's perspective, this offers the potential for new business not just for advances, but possibly other products to new or existing members."

Nine of the 12 Home Loan Banks (soon to be 11 after the merger between the Seattle and Des Moines banks is completed) offer the MPF program which was pioneered by the Chicago bank in the 1990s. The Indianapolis and Cincinnati Home Loan banks offer a similar option, called the Mortgage Purchase Program, to their members.

Joe Pigg, the senior vice president of the American Bankers Association, said the mortgage purchase programs are popular among the Home Loan Bank members, which would likely view the purchase of MPF participations as low risk investments.

He also said that the approval is consistent with FHFA's efforts to encourage more private sector risk sharing at Fannie and Freddie.

"The GSEs are doing more securitizations with risk-sharing involved." The Topeka loan participation program "seems consistent with those initiatives," Pigg said.

ICBA's Haynie said that the loan participation program could evolve into nationwide net that would allow a community bank in Des Moines, for example, to purchase MPF participations from the Atlanta Home Loan Bank.

"It would provide geographical diversity and bring capital to capital starved areas," Haynie said.

Before inter-FHLB district loan participation could flourish, the ABA's Pigg said it would likely require another approval by the FHFA.

Chicago Home Loan Bank executives expect the Topeka loan participation sales will strengthen the MPF program.

"More investors strengthen the overall program, among other things, by improving pricing and flow capacity. This is expected to lead to enhanced loan volume," said Stocchetti.

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