get an FHA loan, Barclays says

Roughly 20% of borrowers holding subprime mortgages originated in 2005 would be able to qualify for a Federal Housing Administration mortgage under current standards, Barclays Capital analysts said during an April 6 conference call. The analysts made this assumption based on four factors: loan-to-value ratio, debt-to-income ratio, mortgage delinquencies within the past year and loan size.

A number of market participants worry that subprime borrowers might have very few options to refinance outside of an FHA mortgage - a situation that could cause a surge in FHA loan production, causing Ginnie Mae spreads to widen.

"The worry is that Ginnie Mae spreads may widen more because of the flood of new loans, but we are not that worried about it," said Glenn Boyd, co-head of fixed income strategy at Barclays. Boyd estimated the overall effect on FHA issuance would hover in the 13% range. As a result, GNMA issuance could rise by 15%. According to current criteria, 63.7% of 2005 subprime borrowers would qualify based on the size of their loans; 67.7% would meet the combined LTV criteria; roughly half, or 53.6% would meet DTI criteria and 63.6% would qualify based on their mortgage's 12-month delinquency history.

But while relatively few subprime borrowers may qualify based on current FHA standards, lawmakers are eyeing changes to the program that would allow an increased number of these borrowers to refinance into FHA mortgages. FHA loan volume has declined 46% since 2001 to only 2.6 million loans, according to the Mortgage Banker's Association, a trend directly correlated with the rise in subprime mortgage issuance.

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

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