The Mortgage Partnership Finance Program

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The Mortgage Partnership Finance Program

• Annual Fall Conference
• November 17-18, 2003

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What is the Mortgage Partnership Finance Program?

• FHLB alternative to funding fixed rate mortgage
  loans
• Risk sharing program between member banks and
  FHLB
• Innovative, competitive and efficient funding
  source for member banks.

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What is the MPF Value Proposition?

• Enhance mortgage profitability
• Streamline mortgage processes
• Improve customer service
• Retain customer relationship

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MPF Program Income Sources

• Competitive Price Paid Upfront
• Credit Enhancement Fee
• Servicing Fee or Servicing Release Premium
• Dividend on Home Loan Bank Stock

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MPF Market Acceptance (12 month period
ending 9-30-03)

• MPF Assets up 136 to 81.8 billion
• MPF 3rd QTR 03 fundings 23.8 billion
• MPF membership up 66
• 890,000 families served since 1997
• 0.11 90 day delinquency rate

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FHLB DM Market Acceptance (12 month period
ending 9-30-03)

• Doubled number of participating lenders
• Fourfold increase in community lender assets
  acquired.
• Tenfold increase in community lender master
  commitments.
• 14.5 billion MPF Assets

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Objectives

• I. MPF Basics
• II. MPF Credit Enhancement
• III. MPF Credit Products
• IV. MPF Economic Benefit

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I. MPF Program Basics

• The MPF Partnership
• Mortgage Credit Risk
• Interest Rate Risk

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The MPF Partnership
Member PFI Secondary Seller Portfolio Lender
MPF Bank Home Loan Bank of Des Moines
MPF Provider Home Loan Bank of Chicago
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MPF Program Basics

• The MPF program is a partnership program designed
  to share risk between the Home Loan Bank and
  our members.

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MPF Program Basics

• The MPF program allows mortgage loan credit risk
  to be shared between the Home Loan Bank and the
  Participating Financial Institution (PFI).

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MPF Program Basics

• The MPF Program considers the competitive
  advantage of the participants. The Home Loan Bank
  assumes interest rate and prepayment risk, the
  PFI maintains the customer relationship.

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II. Credit Enhancement

• Credit Enhancement Fee
• Credit Enhancement Obligation
• Credit Enhancement Structure

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Credit Enhancement Fee

• Paid to members for assuming credit risk
• Determined by the quality of the loans at pool
  level
• Fee paid monthly over the life of the loans

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Credit Enhancement Fee

• 10.75 basis points or 13.75 basis points based on
  the amount of credit risk
• Based on the outstanding loan balances
• Example
• 10,000,000 times 10.75 basis points
• divided by 12 equals 895 per month

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Credit Enhancement Obligation

• Credit risk is determined on a loan level basis
  by using loan characteristics
• Standard Poors LEVELS model assigns risk
  score
• Weighted average credit enhancement at the
  pool level defines the maximum credit risk
  exposure
• Credit quality evaluation is automated through
  the eMPF website

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Credit Enhancement Obligation

• PFI Credit Enhancement is collateralized
• Off balance sheet contingent liability
• Recourse treatment resulting in risk-based
  capital charge is 8 or 100 of Credit
  Enhancement Obligation

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Credit Enhancement Structure

• Loan Loss Absorption
• First Loss Account
• PFI Credit Enhancement
• Examples

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Loan Loss Absorption
Loss Progression
Home Owner Equity
PFI
Primary MI
First Loss Account
Credit Enhancement
AA Rating
Home Loan Bank
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First Loss Account

• Established on behalf of member to reduce credit
  risk
• Provides protection for normal and expected
  losses
• Contingent liability account established by MPF
  Bank
• Account is the liability of MPF Bank with respect
  to realized losses

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Credit Absorption Example

• Assume 10,000,000 Pool, 2.50 Total CE
  Required, 1.00 First Loss Account
• Total CE Required 250,000
• FLA 100,000
• PFI CE Obligation 150,000

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Credit Absorption Example
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III. MPF Credit Products
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III. MPF Credit Products
CE Fee for 100/125 and Plus is based on Credit
Performance. In addition the Plus
requires a Supplemental Mortgage Insurance
Policy.
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IV. MPF Economic Benefit

• Value of Credit Enhancement Fee
• Best Execution Comparison
• Internal rate of return on Risk Based Capital

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Credit Enhancement Fee

• Based on the outstanding loan balances
• 10.75 basis points or 13.75 basis points
• Example
• 10,000,000 times 10.75 basis points
• divided by 12 equals 895.83 per month

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Credit Enhancement Fee
Present Value Assumptions

• CEF 10.75 bps
• PSA 250

• Reinvestment Rate 6
• Mortgage losses 0.2

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Execution ComparisonMPF vs. Secondary Market
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Seamless Loan Process

• Utilize existing origination and loan processing
  procedures
• Minimal changes to the loan funding and selling
  process
• Easy delivery and loan purchase methods
• Standard servicing requirements with minimal
  changes

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The MPF Program is a value added product for
Home Loan Bank members
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Thank You!?? Questions ??
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Contact Information

• FHLB Des Moines MPF
• Steve Schuchmann 800.544.3452 x1007
• Bill Venema 800.544.3452 x1410
• Donna Iddins 800.544.3452 x1043
• Help Desk 877.463.6673 (830-430 CST)
• Email mpf-help_at_fhlbc.com
• Website www.fhlb-mpf.com

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Glossary of Terms

• Credit Enhancement (CE)
  The amount of support that a loan needs to
  qualify for an AA rated security.
• Credit Enhancement Obligation (CEO) The
  maximum amount of risk the PFI is responsible for
  which is the credit enhancement less
  the first loss account
• Credit Enhancement Fee (CEF)
  Fee paid to PFIs for sharing the credit risk

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Glossary of Terms

• MC Master Commitment
• MPF Mortgage Partnership Finance
• MPF Bank Home Loan Bank of Des Moines
• MPF Provider Home Loan Bank of Chicago
• PFI Participating Financial Institution