Lender Life

FHLBank program buys government-guaranteed mortgages

By Howard Schneider

More community banks nationwide should soon have a new option to sell government-backed mortgages that they originate into the secondary market.

Chicago’s Federal Home Loan Bank is expanding its Mortgage Partnership Finance (MPF) Program to include purchases of government-insured home loans, considered a first step before other regional FHLBanks offer similar mortgage-purchase programs. However, the $63.5 billion-asset FHLBank of Chicago views the MPF Program expansion primarily as “a platform to support community lenders,” says Matt Feldman, the cooperative bank’s president and CEO.

Until now, the FHLBank cooperatives have steered away from purchasing government-backed mortgages. Under the MPF Program’s change, which ICBA worked with the Chicago FHLBank officials to consider, mortgages that qualify for Federal Housing Administration, Veterans Administration and other government-insured guarantees can now be purchased by the Chicago FHLBank from originating lenders. In turn, the Chicago FHLBank will sell those mortgages to Ginnie Mae, which will package and sell them as investment securities in the secondary market.

Gaining approval from the Federal Housing Finance Agency to allow the MPF Program to package the loans it backs is a sign that regulators acknowledge that maintaining liquidity and competitive pricing for community banks is an important objective.

Initially, the MPF Program will purchase government-backed mortgages from Chicago FHLBank member institutions in Illinois and Wisconsin. A broader expansion of the program is planned for 2014 as other regional FHLBanks get involved.

Building internal systems to support the MPF Program’s secondary market channel for government-backed mortgages has required “several years of work,” Feldman says. “We’re very excited,” he adds, talking about the Chicago FHLBank allowing the program to provide more mortgage funding options to community banks.

Community banks typically find it hard to obtain competitive pricing when they must sell government-guaranteed mortgages to a small group of loan aggregators, Feldman says. However, the MPF Program plans to function as “a correspondent program with a cooperative hat,” he says. “We’re not looking to make as large of a profit as we could.”

Community banks that sell government-backed mortgages through the MPF Program can choose whether to retain their servicing rights. However, the program’s pricing on servicing rights should be more competitive than what lenders receive when they sell as a correspondent, Feldman says.

Having a profitable secondary market option should give community bankers more reason to provide government-insured home loans for their customers. The Chicago FHLBank will also assist community banks with the special documentation required by the FHA, the VA and other agency loan programs, including offering quality control reviews of community bank paperwork, says Will McGrath, vice president of the MPF Program’s product development at the Chicago FHLBank.

McGrath says such support will make the MPF Program “a good way [for community banks] to get started in government loans.”

Some community banks stopped originating FHA loans in 2010, when HUD changed its eligibility requirements to include a yearly audit for approved lenders, says Ron Haynie, ICBA’s senior vice president of mortgage finance policy. “A lot of HUD-approved community banks couldn’t justify the cost of an outside audit,” he says.

However, the MPF Program changes, along with other factors, may spur some community banks to get back into FHA and other government-backed mortgage lending, Haynie says. First, HUD has subsequently revised that policy and now accepts call reports as documentation from community lenders.

Second, purchase mortgage demand is increasing, and FHA and rural housing loans feature low down payments, which make them ideal for first-time homebuyers.

Third, the challenge to generate profitable loans in today’s low-margin credit environment is pushing more community banks to take a fresh look at any untapped residential mortgage lending options.

For that reason, community banks’ use of the MPF Program—an alternative to Fannie Mae and Freddie Mac programs that have recently focused more on larger sellers and servicers—has grown over the last three to five years, Haynie says.

ICBA continues to work with the FHLBanks to suggest ways to expand or improve their programs for community banks. As a result, Haynie says jumbo loans eventually may be added to the MPF Program’s product menu.

Having ICBA closely work with FHLBanks for community banks “is a natural fit,” Haynie says, because those efforts will help community banks profitability offer mortgages, allowing them to get paid for the credit quality of their loans while maintaining their ability to transfer their long-term interest rate risk to a responsible third party.

Howard Schneider is a financial writer in California.