Secondary Market: Are LLPAs and Best Efforts Hurting Your Bottom Line?
OverviewAs mortgage rates hover above 4% and the refinance market contracts from a 37% share of the market in 2017 (per Freddie Mac data†), it’s important to make sure you’re getting the best value from the mortgages you originate when selling into the secondary market. The Federal Home Loan Bank of Chicago (FHLBank Chicago) can partner with your institution every step of the way, with attractive mortgage pipeline advance funding, Downpayment Plus® homebuyer grant assistance, and the Mortgage Partnership Finance® (MPF®) Program. Recent changes to the credit enhancement calculation can help you earn a better return on risk-based capital for new loans sold through MPF Traditional products.
Are You Paying Too Much in LLPAs?Many correspondents charge loan-level pricing adjustments, or LLPAs, on all loans. You know the borrowers in your footprint well and are comfortable with their credit profiles. If these loans are disproportionately penalized by LLPAs, consider MPF Traditional products, which allow you to share in the credit risk of the loan and earn credit enhancement fee income. The green and yellow sections in the table below illustrate the types of loans that are good candidates for MPF Traditional products,given no LLPAs, expected credit enhancement fee income, and the cost of risk-based capital.
The Member Strategy and Solutions team can model loans already delivered through the MPF Program or to other investors to identify loans that would benefit from the MPF Traditional products. Contact your Sales Director to learn more about this free service.
Best Efforts or Mandatory Delivery?Some MPF products allow you to enter into either best efforts or mandatory delivery commitments. Best efforts removes the risk of a pair-off fee if a loan falls out, but at the cost of a lower premium. Is the tradeoff worth it? In a rising rate environment, you may want to reassess which commitment offers the best value. For example, mandatory commitments that fall out as rates rise may actually result in no pair-off fees to your institution.
And as rates rise, loans are less likely to fall out because customers have locked in a lower rate. You may be able to enhance your yield by using mandatory commitments for most of your mortgages, while reserving best efforts for a portion of your loans. In 2017, only 4.4% of mandatory delivery commitments in the MPF Program required the payment of a pair-off fee.
To Learn MoreFor further information, contact your Sales Director at firstname.lastname@example.org to find out more about the products, strategies, and tools you can use to develop competitive lending solutions to access the secondary market.
Director, Member Strategy and Solutions
Managing Director, Member Strategy and Solutions
The scenarios in this paper were prepared without any consideration of your institution’s balance sheet composition, hedging strategies, or financial assumptions and plans, any of which may affect the relevance of these scenarios to your own analysis. The Federal Home Loan Bank of Chicago makes no representations or warranties about the accuracy or suitability of any information in this paper. This paper is not intended to constitute legal, accounting, investment, or financial advice or the rendering of legal, accounting, consulting, or other professional services of any kind. You should consult with your accountants, counsel, financial representatives, consultants, and/or other advisors regarding the extent these scenarios may be useful to you and with respect to
any legal, tax, business, and/or financial matters or questions.
“Downpayment Plus,” “Mortgage Partnership Finance,”and “MPF” are registered trademarks of the Federal Home Loan Bank of Chicago. †
Provided by Freddie Mac®
Federal Home Loan Bank of Chicago | Member owned. Member focused. | September 2018