INDIANAPOLIS - The Federal Housing Finance Board has given the Federal Home Loan Banks of Cincinnati, Seattle, and Indianapolis approval to buy loans from their members, the Indianapolis bank said.

The Mortgage Purchase Program is meant to provide lenders an alternative to selling loans to Fannie Mae and Freddie Mac and using the Home Loan Banks' Mortgage Partnership Finance Program.

Under the Mortgage Purchase Program, the three banks will buy conventional one- to four-family mortgages to hold in portfolio. Unlike Fannie and Freddie, which take on the entire credit risk of the loans they buy and charge the loan seller a guarantee fee for them, the Home Loan banks will share the credit risk on the loans with the originator.

The Home Loan banks will partially protect themselves from the risk of credit losses by buying supplemental mortgage insurance on the loans.

For each pool of loans they buy, the banks will set aside funds in a lender risk account. As they experience credit losses, they will reimburse themselves through the accounts. But if any funds remain, the Home Loan banks will give them back to the originators. Therefore, the better the loans sold to the Home Loan banks perform, the more income the originator gets back.

The Indianapolis bank said pricing is expected to be competitive with that of other secondary market purchasers at the time of the loans' sale.

Though the program was developed jointly by the three banks, each will run its own Mortgage Purchase Program independently.

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