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Lender Risk Account
What is the Lender Risk Account?
The Lender Risk Account (LRA) provides MPP sellers the opportunity to earn additional income based on
the performance of the loans sold. The LRA provides an additional layer of credit support after borrower's equity and MI.
MPP sellers retain the residual interest in the LRA. If loan losses are low, then funds will be released to the seller
over time. If loan losses are high and LRA funds are exhausted, SMI and the FHLBI will absorb additional credit losses.
There is no downside to owning an LRA.
How does the LRA work?
The LRA is a non-interest bearing account that is funded by the FHLBI. If loan losses occur,
they will reduce the LRA balance. LRA funds not used for loan losses are released over time to
the member based on a release schedule established in the Master Commitment Contract (MCC).
Fixed LRA/MPP Advantage
Funds for the MPP Advantage have fixed LRA funds and are established at the time of loan acquisition.
The LRA is enhanced since there is no additional SMI credit enhancement under this structure. All
new master commitments will be under the MPP Advantage LRA structure. A model has been designed to
give the user an estimate of the potential value of the LRA. The model will estimate both the net
present value and cash flows under various loss scenarios. Unlike the spread LRA model below,
the MPP Advantage structure is not impacted by prepayment speeds. Click below to download model in
Excel format:
> MPP Advantage LRA valuation model
Above is an example of the potential LRA value under MPP Advantage given an assumed discount rate and loss
characteristics. See model for assumptions and disclosure.
Spread LRA
Funds for the spread LRA structure are established monthly from remittances retained by FHLBI.
This LRA type is for master commitments issued prior to November 2010. A model has been designed
to give the user an estimate of the potential value of the spread LRA. The model will estimate
both the net present value and cash flows under various loss scenarios. Click below to download
model in Excel format:
> Spread LRA valuation model
Our MPP staff can assist with any questions regarding the LRA determination or value. Please
contact us at 1-800-274-4636.
Updated: December 15, 2010
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