The disruption in the housing and credit markets has resulted in an increase in FHA mortgage lending.  Significant increases, however, have occurred mostly this year helped by the various government initiatives to stimulate housing and prevent foreclosures. 

According to the Mortgage Bankers Association, the government-insured share of mortgage applications has tripled in the past year.  In July, 29.1% of all mortgage applications were for government-insured loans, which is primarily FHA.  This is up from 8.4% in July 2007. The MBA also noted that HUD data show that the level of conventional-to-FHA refinance applications increased by 317% on a YOY basis in July.  Most of this is likely to have been subprime ARMs. Applications for government-insured loans are also on the rise - up nearly 134% from a year ago, while conventional applications are down 50%, said the MBA.   

Ginnie Issuance

Ginnie Mae issuance represents 20% of total Agency MBS issuance so far in 2008.  This compares to 8% to 12% in the previous five years.  Issuance since April has passed $20 billion per month, and Lehman Brothers says that it expects the sector to continue to expand at a rate of $20 billion per month.  On a net basis, analysts estimate supply to run at $35 billion over the next year (down from $60 billion earlier this year), with at least half coming in Ginnies.

In July, Ginnie Mae issuance was higher than Freddie's at $24.9 billion versus $20.3 billion, and so far in August, Ginnie is at $26 billion compared to $16.6 billion for Freddie.  JPMorgan also notes that Ginnie issuance is poised to match that of Fannies. One contributing factor is expectations that the recent increase in G-fees that become effective in the fall will push many Alt-A borrowers into the FHA/Ginnie space. Analysts predict that up to 20% of GSE volume could be affected - potentially pushing Ginnie's share to 40% or more. They don't believe, however, that Ginnie's share will get that high for various reasons including: FHA requires full documentation; many originators are not accustomed to FHA's underwriting procedures; appraisal procedures are different; and seller-funded down payment assistance has been banned under the recently passed housing bill.   

Supply Helps Liquidity

The higher supply, however, is seen as a positive for the sector as it should result in improved liquidity, which should attract additional investors' attention, believes Lehman.  In particular, analysts say that Ginnies could become an attractive substitute for Treasuries - "attracting a different investor base to the agency MBS market" such as official institutions, pension funds, households and mutual funds. Lehman believes this expanded interest in Ginnies would benefit the entire agency MBS market.

Lehman analysts expect this to be a process, but over the next 3- to 6-months, they expect sponsorship to increase for Ginnies as a result of the increasing supply.  

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