You are most likely aware of the Mortgage Partnership Finance® (MPF) Program and its availability to you as a member of FHLBank Topeka for delivering eligible loans into the secondary market. You may also be aware of our Homeownership Set-aside Program (HSP) which provides down payment, closing cost and repair assistance for first-time homebuyers. What you may not be aware of is how well these two programs can work together.
HSP grants provide down payment assistance through a forgivable grant with a 5-year retention period. This means that if the borrowers stay in the home and carry the loan for five years, they do not need to pay back the grant. These funds can be used in a variety of ways to assist in the closing of a home loan and can be used in conjunction with other assistance programs available in your markets. This grant program is great for new homebuyers just starting out or individuals adjusting to a new life situation in need of assistance. In either case, HSP grants can help make someone’s American dream a reality.
While the main purpose of this article is to address how well HSP grants work in conjunction with the MPF Program, the two programs don’t have to be used together. HSP grants are eligible to be used with a variety of investors and even on loans you wish to hold in your own portfolio.
As you can see from the graph the usage of HSP has increased in recent years. The number of grants increased by 370 from 2016 to 2017 and the dollar amount increased by over $1.8 million. That is a lot of opportunity, especially when you consider we started 2018 with another $7.8 million in HSP, which equates to 1,560 potential grants.
The MPF Program allows our members the ability to deliver long-term fixed rate financing to your customers and avoid the interest rate risk associated with holding these loans in portfolio. The MPF Program gives every institution the ability to offer competitive fixed rate loan products no matter the size of your institution or the volume of home loan business you do.
We believe you are the expert on your borrowers; meaning, we don’t need to add fees to the loan upfront before your customer makes their first payment. Instead, we create an off-balance sheet risk carried by the member against the loans sold under the MPF Program. For holding this risk, you are paid an ongoing income stream in addition to the premium at the time of sale and the service-released premium or servicing fee income.
As you can see from the graph below, the reward compared to the risk has been quite substantial. Since 2000, members have received over $58 million in CE Fee income while only paying out roughly $2.9 million in their share of risk (CE Obligation).
While these two products are useful individually, when you combine them you are able to take advantage of additional benefits.
LTV and TLTV
Normally with the MPF Program, the maximum LTV or TLTV is 95% but when you utilize the HSP, we allow the LTV to go up to 100% and the TLTV to 105%. This means you can offer loans with little down payment (only $500 is required) to qualified borrowers similar to government programs, but you can underwrite to conventional loan standards and follow most conventional loan documentation requirements.
Long-term fixed rates
Many of you have used HSP grants for loans you hold in your portfolio. In doing so, you most likely closed them as adjustable-rate mortgages (ARMs). That is understandable as it would allow you to avoid interest rate risk. By using the grant and selling the loan into the MPF Program, you can then offer up to 30-year fixed-rate financing while avoiding any interest rate risk.
The ability to eliminate a down payment for your borrowers can be a major benefit in today’s purchase market. When several offers are on the table for a home sale, the one with the most attractive circumstances usually wins (i.e., sellers not having to pay any closing costs). Real estate agents will be extremely interested to hear from you on how you can get more of their clients into homes. As we have moved into a purchase market, your success is more dependent on relationships with realtors to generate activity. Any time you can get in front of realtors with products that can help them close deals, they will listen and remember.
As you can see from the graph below comparing October through March 2016/2017 to October through March 2017/2018, all months with the exception of February have shown an increase in purchases as a percentage of our activity of nearly 5% year over year. That trend should only continue to grow.
As the housing markets in most of our district become tighter and tighter, you need every advantage you can find. HSP grants and the MPF Program provide valuable tools you can use to generate loans and build new relationships in your lending areas.
Contact me at 866.571.8171 or our Housing and Community Development staff at 866.571.8155 for more information on how you can get started.