Wariness about the state of the home-equity loan securitization market is leading federal agencies and some commercial banks to consider buying whole home-equity loans rather than securitized deals.

The HEL securitization market was knocked for a loop last year when several top issuers went bankrupt or left the market altogether and today the sector remains damaged goods in the eyes of some market players.

With this current malaise, such major market players as Freddie Mac and Fannie Mae are moving toward buying home-equity loans outright, rather than waiting to buy HEL securities, market officials said.

Such a move "has the potential to cut down on the HEL securitization market if the agencies develop into mainly whole loan buyers and other groups of investors become portfolio buyers of loans," said one asset-backed securities official.

The agencies are already major buyers of HEL securities, and both Freddie Mac and Fannie Mae have begun guaranteeing HEL deal defaults for other issuers, so the natural evolution would be to purchase the HELs altogether. "If they're already buying the credit risk and buying the securities, why not circumvent the process and buy the bond itself," asked one head of ABS trading. "They can keep the credit arbitrage to themselves."

Agency officials declined to comment on whether their strategies have changed, while acknowledging that whole-loan purchases are now a common strategy. Such purchases may appeal to the agencies' congressional critics, who have long disparaged their forays into such paper as below-investment grade mortgage securities, as well as other initiatives that have seemed to deviate from the agencies' charter guidelines. Purchasing loans and cutting out Wall Street seems more in line with the agencies' goal of providing loans to homeowners.

"We've been a buyer of home-equity loans for a while," said Douglas Robinson, spokesman for Freddie Mac. "They support our mission and mortgage assets. They can be good uses of capital for our investors."

The agencies aren't the only ones that seem disillusioned with the current market. While HELs are still the largest asset class in the asset-backed securities world, issuance volume will likely be down this year and the paper has been in the doldrums in secondary trading. Home-equity securitization volume was $36.1 billion in the first half of the year a 15% drop from the $42.4 billion securitized in the first half of 1998.

While the ABS market struggles, a number of commercial banks also seem to have become fonder of HEL whole loans in recent months, including Washington Mutual Inc., First Union Corp. and First Franklin Corp. "If properly written and serviced [buying HELs] can be profitable for financial institutions," said Michael Youngblood, managing director of real estate capital markets at Banc of America Securities. "Any lender with expertise that has the systems and the capital can expand to HEL lending."

Many of the commercial banks that have become more active on the whole-loan side of the market have securitization units that had a brutal time in the market last year.

For example, First Union owns The Money Store, which hasn't issued an HEL deal in almost two years. One source said loans that would have been deal fodder for the Money Store in previous years are now winding up stored in First Union's own portfolio.

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