The FHLBank will fund and portfolio MPF loans originated by its members and establish a first-loss credit reserve funded by a portion of MPF loan interest payments. The FHLBank will be compensated for managing the liquidity, interest rate and options risk associated with funding the MPF loans. A recent analysis has shown that over an eight year period investors in double-A rated mortgage pools have had zero losses. Prior to program implementation, the Finance Board will undertake a supervisory review to ensure that appropriate monitoring and control policies and procedures are in place. A fact sheet on MPF is attached.
Financial institutions tend to pool loans they originate for sale into the secondary market.
The Chicago pilot unbundles the risks associated with home mortgage lending and allocates them between the FHLBank of Chicago and its members in a manner that uses the cooperative structure of the FHLBank System to maximize their respective core competencies. The FHLBank of Chicago would fund and retain in portfolio the home mortgage loans originated, serviced and credit-enhanced by its members. In this way, the component risks involved in home mortgage lending would be optimally allocated. In summary, under the Chicago proposal, funds would be channeled into residential housing finance in a manner functionally similar to, but technically more sophisticated and more targeted than when a FHLBank makes an advance to a member . For this reason, the Federal Housing Finance Board's Office of General Counsel has concluded that the Federal Home Loan Bank of Chicago is statutorily authorized to operate this program, with Finance Board approval, as an activity incidental to an express statutory authority.