Building Partnerships. Serving Communities.

Understanding the Lender Risk Account (LRA)

presented by

Jon Griffin, CFA Vice President, Credit Services Director

Building Partnerships. Serving Communities.

What is the Lender Risk Account?

Lender Risk Account

MPP credit losses are absorbed in the following order:1. Borrower equity2. Private mortgage insurance3. Lender Risk Account4. Supplemental mortgage insurance5. 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

Building Partnerships. Serving Communities.

LRA Modeling Assumptions

Lender Risk Account

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

Building Partnerships. Serving Communities.

LRA Value by Loan Loss & Prepayment Assumptions

LRA Net Present Value% of Total Loans Sold

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.0% 0.1% 0.2% 0.3% 0.4% 0.5% 0.6% 0.7% 0.8% 0.9% 1.0%

Total Loan Losses/Total Loans Sold

NP

V%

NPV %Loans Sold (12% CPR) NPV %Loans Sold (6% CPR) NPV %Loans Sold (30% CPR)

Lender Risk Account

www.fhlbi.com

5

Building Partnerships. Serving Communities.