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 over time from interest paid on the loans, so it builds gradually to a pre-specified percentage or release point of the outstanding loan balances. If loan losses occur, they will reduce the LRA balance. LRA balances in excess of the release point are remitted on an annual basis to the seller.

After the end of the eleventh year, the LRA is liquidated and returned to the member. Subsequently, the commitment to fund the LRA expires, resulting in increased cash flow for the seller.

What factors impact LRA value?
The LRA is impacted by the following factors:
1. Amount of spread dedicated to LRA (based on the MCC)
2. The LRA release point (based on the MCC)
3. Product Mix
4. Amount and timing of mortgage prepayments
5. The discount rate used to calculate the LRA's present value

LRA Valuation Model
This model has been designed to give the user a basic idea of the potential value of the LRA. There are a few assumptions that must be made and a few key inputs that must be entered. The model will estimate both net present value and cash flows under various loss scenarios. Click below to download model in Excel format:
> LRA valuation model

LRA PowerPoint Presentation
Walk through the basic features of the LRA account with this slideshow. The presentation shows LRA payout charts under various loss scenarios and multiple prepayment rates.
> LRA slideshow

Updated: May 23, 2008