With the recent addition of the San Francisco branch to the Federal Home Loan Bank of Chicago's Mortgage Partnership Program - bringing the total to ten participants out of the twelve Federal Home Loan Banks - the spotlight is again focused on the program that a year ago almost brought Ginnie Mae down.

When the program's $9 billion cap was lifted last year, it coincided with market conditions that made buying FHA/VA loans through the MPF program much more attractive on an execution basis compared to purchasing these loans via Ginnie Mae.

As a result, the program grew at the expense of Ginnie. As a redeeming measure, the bank agreed to limit its purchases of FHA/VA loans to a maximum of 1/3 of the bank's total purchases.

With the program's continued expansion, the possibility of the past repeating itself becomes eminent. However, a recent report by Countrywide Securities Corp. says this isn't so.

"We expect that if there is an effect on the Ginnie market, it would tend to make Ginnie I/II swaps more rational," said Bill Berliner, senior mortgage strategist at Countrywide.

According to the report, over the last two months, Ginnie II 6 production has been more than twice Ginnie I 6s. This has largely contributed to pushing the swap out. This type of production is an "excellent candidate" to be put into the MPF programs, given the fact that it would not be hard for the Home Loan Bank to beat GNII 6 execution.

Decreased production of Ginnie II 6s should result in the convergence of GNI/II swap in this coupon.

According to the report, the success of the program - which was originally intended to compete with the cash windows of Fannie Mae and Freddie Mac - will serve as a way for smaller originators to sell their production as whole loans as opposed to securitizing them. This could result in Freddie and Fannie issuance becoming more a product of larger originators that hold servicing operations.

"This could put upward pressure on the WACs of Freddie and Fannie production," said Berliner in the report.

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