A secondary market program that provides loan sellers with an alternative to government-sponsored enterprises is gaining steam.
The Mortgage Partnership Finance programs in the districts of the Chicago and Dallas Federal Home Loan banks have made commitments to buy $1.5 billion of mortgages and have bought $665 million worth since their inception in June 1997, according to the Federal Home Loan Bank of Chicago.
Bank United Corp. of Houston said it sold its second batch of loans-$88 million of mortgages-to the Federal Home Loan Bank of Dallas last week.
The Federal Home Loan banks of New York and Pittsburgh have made applications to the Federal Housing Finance Board to open secondary markets, and another Home Loan bank has also expressed interest, said sources familiar with the program.
Most of the loans have been made by lenders in Illinois and Wisconsin, states served by the Federal Home Loan Bank of Chicago. The Dallas bank's district includes members in Arkansas, Louisiana, Mississippi, New Mexico, and Texas. The average size of a partnership loan is $97,000, but loans up to $227,150-the conforming loan limit for loans sold to the private mortgage buyers, Fannie Mae and Freddie Mac-are eligible for the program.
The partnership program brings more competition to the secondary market, said Alex J. Pollock, president and chief executive of the Chicago Home Loan Bank.
"By creating a more competitive market in the secondary mortgage sector, the customers win," he said. Banks and thrifts also earn more money when they deal with a Home Loan bank for their secondary market transactions, he said.
Participation by the Home Loan banks of New York and Pittsburgh could step up the market clout of the Mortgage Partnership Finance program in a hurry. The banks have 300 and 377 members respectively, including some big lenders in the New York district.
To participate, lenders must be members of a Home Loan bank. The program divides the risks of mortgage loans between the lender and the corresponding Home Loan bank by separating credit risk and interest-rate risk.
The Home Loan bank handles the rate risk, and banks and thrifts handle the credit risk. Banks and thrifts continue to handle customer relationships, including origination and servicing, but the Home Loan bank handles the funding, interest rate, liquidity, and prepayment risks of the mortgage loans.
There are 36 approved participating financial institutions, in Illinois, Wisconsin, and Texas, said Mr. Pollock. An additional 150 are evaluating the program, he said.
A Fannie Mae spokesman suggested that the new program ultimately would have to operate under rules similar to those for the government-sponsored enterprises. "If their intention is to spark competition, that is welcome, but of course they will have to be called upon to pay taxes, have a real regulator, and (devote) a percentage of their business, just like ours, to low- and moderate-income homebuyers."