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Understanding the Lender Risk Account (LRA)

Understanding the Lender Risk Account (LRA). presented by Jon Griffin, CFA Vice President, Credit Services Director. Lender Risk Account. What is the Lender Risk Account?. MPP credit losses are absorbed in the following order: Borrower equity Private mortgage insurance

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Understanding the Lender Risk Account (LRA)

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  1. Understanding the Lender Risk Account (LRA) presented by Jon Griffin, CFA Vice President, Credit Services Director

  2. Lender Risk Account What is the Lender Risk Account? • MPP credit losses are absorbed in the following order: • Borrower equity • Private mortgage insurance • Lender Risk Account • Supplemental mortgage insurance • FHLBI • The Lender Risk Account (LRA) provides MPP participants with the opportunity to create an annuity of fee income • Non-interest bearing account • The LRA builds over 5 years and after the 5th year the excess over the threshold is paid out • LRA is dissolved after 11 years www.fhlbi.com

  3. Lender Risk Account LRA Modeling Assumptions • MPP sale is a single $10 million transaction • 6.25% WAC mortgages (80% - 30 year and 20% - 15 year) are sold to MPP • LRA funding level of 0.07% • Release point of 0.30% • 5 year lockout, 11 year liquidation • Discount rate of 8.0% • Prepayment speeds of 6%, 12% & 30% CPR • Annual LRA distribution • Assumes all loan losses occur uniformly until year 11, after which LRA becomes a pass through to the seller www.fhlbi.com

  4. Lender Risk Account LRA Value by Loan Loss & Prepayment Assumptions www.fhlbi.com

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