With FHLBank Indianapolis' Lender Risk Account (LRA), approved mortgage sellers can earn additional income based on the performance of the loans sold.

How does it work

The Advantage MPP LRA is funded by the Bank at the time the loan is purchased, building an immediate buffer against loan losses and providing an additional layer of credit support after borrower's equity and mortgage insurance. If loan losses are low, funds are returned to the seller over time based on a release scheduled established in the Master Commitment Contract. If loan losses are high and LRA funds are depleted, the Bank will absorb the additional credit losses -- the seller does not replenish the account. No other secondary market program rewards you for selling quality, performing loans.

Valuing the LRA - Advantage MPP

Master commitments issued after November 2010, are under the improved Advantage MPP structure in which the LRA is funded up front.  Because the Bank funds the LRA up front, LRA balances and the seller's valuation are no longer subject to prepayment speeds, making LRA valuation simpler and less volatile. To help sellers estimate the potential value of the LRA, we've designed a model that estimates both the net present value and cash flows under various loss scenarios. By determining the present value of the potential future cash flows, the LRA model helps sellers see the value that is in addition to the selling price in order to better compare alternatives and achieve the best loan sale execution.

Below is an example of the potential LRA value under Advantage MPP given an assumed discount rate and loss characteristics.  See model (link accessible below) for assumptions and disclosures.

Advantage MPP LRA Valuation (.xlsx file)

LRA

• What is the LRA?

  The LRA is a Lender Risk Account established as a form of credit enhancement for all loans within the pertaining Master Commitment Contract (MCC).  The LRA is funded based on each loan balance purchased within the MCC.  If the loans continue to perform and the LRA is not used to cover losses, the LRA is then released back to the selling Member over time.

• When do LRA releases occur?

  LRA releases are based on the terms of the Master Commitment Contract (MCC). Since 2011, all MCCs include terms for an annual release.  The LRAs become eligible for releases beginning on the 5th anniversary of the MCC closing date.  The release occurs upon the month-end processing at the conclusion of the anniversary month.

• How are LRA releases calculated?

  All LRA release calculations are based on the ‘original’ LRA balance which is the balance as of closing of the pertaining MCC.  The retention schedule located on page 3 of each MCC indicates the percentage of the LRA to be retained at each release interval.  Any funds in excess of the calculated retention amount is eligible for release. (The original LRA amount may be adjusted down if a loan purchase is reversed due to a QA repurchase or early payoff.)

• Why do releases not occur in some cases?

  The LRA is established as a form of credit enhancement to cover incurred losses.  If the pertaining MCC/LRA includes loans with pending losses, the LRA is “locked” to prevent releases until the pending loss is resolved.

• If a release doesn’t occur in a given year, what happens to the LRA funds?

  Unless used to cover losses, the LRA funds remain, and they become eligible for release to the Member in subsequent years.

• When is the LRA Balances report available in Member Link?

  The LRA balances are recalculated as part of the month-end processing which is completed on the first business day of each month.  Consequently, the LRA Balances Report becomes available on the second business day of the month.