The Federal Home Loan banks' Mortgage Partnership Finance program is poised to become a bigger competitor in the secondary market.
Their regulator, the Federal Housing Finance Board, has proposed a rule that would promote the pilot program to permanent status and remove its $9 billion ceiling on loan purchases.
"We are very pleased with the idea of removing the cap," said Alex J. Pollock, the president and chief executive officer of the Chicago Home Loan Bank, which started the program in 1997. "We are moving onward and upward."
The program lets Federal Home Loan banks buy loans from member institutions and manage the interest rate, funding, liquidity, and prepayment risks, much as Fannie Mae and Freddie Mac do. But unlike Fannie and Freddie, which assume the credit risk, the Home Loan banks leave that with the lenders, which consequently pay no guarantee fees.
Last year Fannie's and Freddie's guarantee fees averaged close to 20 basis points per year of the outstanding principal balance of each loan, according to a source at one of the Home Loan banks. In contrast, the Home Loan banks pay participating institutions 7 to 13 basis points per year for managing credit risk, the source said.
The Home Loan bank program offers a net-present-value advantage of at least 20 basis points on FHA loans that would otherwise be bought by Ginnie Mae, the source said. It also gives lenders an incentive to originate high-quality loans, because as long as their loans perform as expected, the lenders will not suffer losses, he said. Furthermore, he said, they receive credit enhancement fee income, which can go into profits - profits that would be lost if the loans were sold to Fannie or Freddie.
The rule is to be published in the next couple of weeks, a Finance Board spokesman said. Because the board wants to act fast, it will allow only 30 days for comment, he said.
Then work will begin on a final rule, which it expects to publish this fall, he said. The cap will be abolished when the final rule is published, the spokesman said.
Seven Home Loan banks are already participating in the program, the Topeka bank's application is close to being approved, and the board of the San Francisco bank has voted to apply.
The Home Loan banks in Indianapolis, Seattle, and Cincinnati are developing a comparable program tailored to those districts.
Though the new program has a much smaller share in the secondary market than the other government-sponsored enterprises, Fannie Mae wants the program to be subject to the same kind of oversight as Fannie and Freddie.
Fannie and Freddie are given goals to invest in low- and moderate-income areas, and their regulator, the Office of Federal Housing Enterprise Oversight, is proposing a risk-based capital rule. Fannie Mae spokesman David Jeffers said new participants in the secondary market should have similar requirements.
Freddie Mac declined to discuss the Finance Board's program. But a spokesman for one of the Home Loan banks said, "We would love to play by their rules."
The Home Loan banks operate under a stricter regime than Fannie and Freddie do, he said. For example, Home Loan banks use 20% of their profits to pay the interest on bonds that were issued to help bail out the savings and loans, and they are required to donate another 10% of their annual profits to affordable housing, he said. Also, he said, the banks have to hold more capital as a percentage of assets than Fannie and Freddie.