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REFILE-UPDATE 1-Mortgage mkt needs up to $250 bln of capital-FBR

Wed Aug 22, 2007 9:26am EDT

(Corrects to add "UPDATE 1" to the headline)

(Adds details of mortgage market)

NEW YORK, Aug 22 (Reuters) - FBR Research said on Wednesday that $150 billion to $250 billion of permanent capital is needed to normalize pricing in the depressed market for mortgage-backed securities.

However, in a note to clients, the research arm of securities firm Friedman, Billings, Ramsey & Co Inc said the process would take up to a year and will be painful for mortgage investors and originators. FBR Research said the new capital is needed to compensate for the massive "deleveraging" underway among companies that hold mortgages.

More than $20 billion worth of mortgage bonds not backed by mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N have been offered for sale in the past few days.

Mortgage investors increasingly question the underlying value of mortgage-backed securities given that orginators' lax lending standards which led to a jump in defaults. Also, many economists expect weak home prices to drop further.

"Investors believe the collateral has been impaired since they expect home prices to decline materially over the next year," the note said.

The deleveraging process has involved mortgage originators and investors alike selling large amounts of their mortgage-backed securities to reduce their net borrowings and enhance the quality of their portfolios. That has helped depress asset prices in that market, particularly among those securities not backed by Fannie Mae FNM.N and Freddie Mac FRE.N.

((Dan Burns, editing by Tom Hals; Wall Street Newsdesk 646 223-6110)) Keywords: MARKETS MORTGAGES/RESEARCH

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