With every week bringing a fresh wave of bad news about the collapse of the subprime mortgage market, one player that could benefit greatly from the distress is Ginnie Mae, which could potentially reverse years of declining new issuance as borrowers flee out of subprime back into the world of government-insured mortgages.

Moody's Investors Service recently downgraded or put on negative ratings watch some 267 mortgage-backed securities originated last year and backed by subprime second-lien mortgage loans, marking the latest blow for a subprime market that has been floundering for months. Some major Wall Street players could get seriously burned as a result, with an internal hedge fund run by Bear Stearns reportedly facing massive losses due to mortgage securities-related bets.

Yet in the midst of the subprime meltdown, mortgages insured by federal government agencies are gaining renewed allure among borrowers. In particular, a whole

generation of borrowers who had turned away from Federal Housing Administration/Department of Veterans Affairs-insured mortgages for at-times cheaper but riskier subprime loans are now running for shelter and looking at a mortgage class that had been lingering in the shadows, analysts and bankers said.

"There has been a pickup in FHA and VA loans - it's more the realization that there is another product out there that has gotten lost and forgotten in the whole subprime craze," said Timothy Rawlinson, vice president of residential lending for Hatboro, Pa.-based Fox Chase Bank.

With such formerly top subprime lenders as SouthStar Funding and American Freedom Mortgage recently shuttering their lending operations, and still-viable lenders scrambling to impose stricter borrower requirements, FHA-insured mortgages are in some cases the only remaining option left for subprime borrowers. Moreover, the FHA has modernized its lending operations over the past few years, such as moving to

a greater degree of automated underwriting. That helps make it just as easy to get a

borrower into an FHA-insured loan as into a subprime loan, Rawlinson said.

On the whole, Ginnie Mae mortgage borrowers are a far more leveraged group than Fannie Mae or Freddie Mac borrowers. For example, FHA mortgage borrowers, who make up about 70% of Ginnie Mae pools, typically qualify only for mortgages with a 3% down payment (and thus usually are required to make a 1.5% insurance payment), said Glenn Boyd, Barclays Capital's head of mortgage research, in a recent market review.

While it remains unclear just how much new business the subprime collapse could bring to Ginnie Mae, some initial analyst estimates have predicted that the agency could have $100 billion to $200 billion in additional volume over the next two years, a lofty prediction that Ginnie Mae has been careful to downplay. For one thing, a recent decline in FHA mortgage refinancing could offset any gains made from the entrance of new borrowers into the FHA mortgage sector.

Any borrower flight out of subprime mortgages "hasn't affected our volumes yet," said Michael Frenz, Ginnie Mae's executive vice president and chief operating officer, while noting there has been an increase in FHA-related mortgage activity. "It will be a slow build."

Ginnie Mae has had a long, slow erosion of its formerly sizable share of the mortgage-backed securities market over the past few decades. Although Ginnie Mae MBS finance around 95% of FHA- and VA-guaranteed loans, Ginnie Mae's share of the overall MBS market has waned in the face of the burgeoning private-sector MBS market, along with a tidal wave of offerings from Fannie Mae and Freddie Mac. In the late 1980s, Ginnie Mae made up 42% of new MBS securities. Today, it makes up around 10% or less of the market, analysts said.

"There could be some room for a Ginnie Mae comeback, at least in terms of volume," said one MBS investor. He noted that even if deal volume increased over the next six months, the buy side must consider other possible negative pricing factors. For one, Ginnie Mae spreads have already widened on market expectations of increased volume, a trend that could worsen when new supply hits the market. Also, during the robust housing environment of the past few years, Ginnie Mae prepayments (in which borrowers often refinanced their mortgages to eliminate the minimum insurance premium) at times rose sharply compared with Fannie and Freddie MBS.

Still, signs are that a move into FHA mortgages could improve overall MBS performance. The Mortgage Bankers Association found that in first-quarter 2007, the seasonally adjusted delinquency rate spiked for prime and subprime loans while decreasing for FHA and VA loans. Compared with the first quarter of 2006, the seasonally adjusted delinquency rate increased 33 basis points for prime loans and an enormous 227 basis points for subprime loans, while decreasing eight basis points for FHA loans and 44 basis points for VA loans, the MBA found.

New Frontiers

Just as Ginnie Mae mortgage volume could be getting a possible boost, the agency is also going full-bore into a new front of the mortgage-backed securities market. This September, the agency is set to offer its debut securitization of home equity conversion mortgages (HECMs) - basically, FHA-insured reverse mortgages.

Ginnie Mae has offered HECMs to borrowers since 1989, but the upcoming HMBS will be the first time the agency has securitized the product. The deal should add additional liquidity to a secondary market in reverse mortgages that is rapidly expanding with new players, including Bank of America.

Further, there is a large pipeline of prospective Ginnie Mae HMBS, as the FHA has insured roughly 236,000 HECMs since the program began 18 years ago. In an indication of the growing popularity of reverse mortgages, about 32% of all HECMs insured stem from the federal government's 2006 fiscal year (and that was a 73% increase from fiscal year 2005), according to a survey issued last month by Edward Szymanoski, James Enriquez and Theresa DiVenti, officials at the Department of Housing and Urban Development. About 90,000 new HECMs should be insured in the current fiscal year.

The average HECM loan balance is estimated to be $103,000, while the aggregate outstanding loan balance is in the $18.1 billion range. With reverse mortgages showing no signs of waning in popularity (and the rise of retirees over the next decade should keep issue volume high), Ginnie Mae has a potential gold mine of future deals and could be a major player in a reverse mortgage securitization market.

The prospect of regular Ginnie Mae reverse mortgage securitizations certainly intrigues players in that sector. With a federal agency in the mix, the hope is that a bevy of new investors and issuers will pour into the sector. "When you get Ginnie Mae involved, it takes it to the next level," said Darryl Hicks, an associate director at the National Reverse Mortgage Lenders Association (NRMLA).

Previously, only private-sector reverse mortgage lenders, like market leader Financial Freedom Senior Funding Corp. (a division of IndyMac) and Seattle Mortgage Co. (recently purchased by Bank of America), had included reverse mortgages in securitizations. Financial Freedom, for instance, has long supplied reverse mortgages to Lehman Brothers-led deals.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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