Move over Fannie and Freddie, Ginnie Mae eyeing first place

NEW YORK Aug 21 (Reuters) - The U.S. government is on pace to unseat Fannie Mae FNM.N and Freddie Mac FRE.N as the biggest guarantors of new mortgage bonds in August as the two housing finance giants reel from losses.

Ginnie Mae, the only issuer of mortgage backed securities explicitly backed by the U.S. government, has issued more of the fixed-rate bonds (MBS) so far this month than either Freddie Mac or Fannie Mae, marking a milestone in a dramatic rise in market share this year.

It would be the first time in at least 15 years Ginnie Mae has topped both Fannie Mae and Freddie Mac fixed-rate issuance in the $4.5 trillion market, according to eMBS, a Tampa, Florida-based mortgage bond data provider.

"As far as percentage of issuance, Ginnie Mae has been on decline for over a decade, so this really has been a turn of events" said Todd Abraham, co-head of government and mortgage bond management at Federated Investors, Inc. in Pittsburgh, Pennsylvania.

The surge in Ginnie Mae volume shows it is doing the job that is seen as the primary responsibility of Fannie Mae and Freddie Mac -- supporting the housing market as it works its way through the worst housing slump since the Great Depression. Fannie Mae and Freddie Mac are Congressionally-chartered private companies that guarantee MBS and purchase mortgages as investments.

The stunning rise for Ginnie Mae has come as subprime and other risky borrowers fall short of tighter lending standards and must turn to government programs.

Programs that back loans in Ginnie Mae securities, such as the Federal Housing Administration, are also growing after the U.S. Congress passed legislation expanding their reach.

Ginnie Mae in the month through Aug. 20 issued a record $27.2 billion in fixed-rate MBS, compared with $25.2 billion from Fannie Mae and $17.3 billion for Freddie Mac, eMBS data show. In adjustable-rate mortgages, Ginnie Mae is still behind Fannie Mae issuance.

"The full effect of federal government efforts to 'nationalize' part of the subprime market is yet to occur," said Walter Schmidt, head of mortgage bond strategy at FTN Financial in Chicago, wrote in a note to clients. Ginnie Mae market share topped 30 percent, up from less than 10 percent a year earlier, his data show.

The share loss for Fannie Mae and Freddie Mac is coinciding with a storm of controversy over the companies' ability to maintain adequate capital as they fight off losses and expand their roles. Without the GSEs to provide lenders an outlet for their loans, the housing market would stumble further and deepen a U.S. recession, analysts say.

The stock prices of Fannie Mae and Freddie Mac have dropped 85 percent since May amid speculation the government will have to exercise its right to recapitalize the companies with taxpayer money. Their corporate and mortgage bonds rallied on Thursday since the securities would be treated more like U.S. Treasury debt in the even of any government bailout. For story, see: [nN21474178].

Mortgage bonds are credited with lowering interest rates to consumers and fueling the housing boom by assuring lenders of a market for their loans, thus lowering their risks. As Fannie Mae and Freddie Mac programs grew more efficient, their MBS dominated.

Now, Ginnie Mae has increased market share as Fannie Mae and Freddie Mac have sharply boosted the cost to lenders for selling into the bond program. To grow revenue and shore up credit quality, they have raised costs to lenders and lifted guarantee fees multiple times, making GSE-financed loans more expensive than FHA backing.

"We are taking in very high-quality loans that provide high revenue," said a spokesman for McLean, Virginia-based Freddie Mac. "Ginnie is growing, but at what cost?"

A HUD official had criticized legislation as too aggressive, warning Congress that the agency should not be the lender of last resort designed to subsidize bad loans. Critics have also charged that the costs to the government as it pays claims to investors may soar.

Ginnie Mae's total mortgage bond market share could rise as far as 50 percent, based on JPMorgan Chase & Co calculations of borrowers who find Fannie Mae and Freddie Mac programs too expensive, after their latest round of fee increases. Those are "mainstay prime/Alt-A" borrowers, analysts led by Matthew Jozoff in New York said in a research note.

Impediments to an FHA loan that turned many borrowers to easy-money programs during the housing boom remain, and will likely keep that market share down, they said. Rules on documentation may deter Alt-A borrowers used to showing less proof of income, while many brokers are still not equipped for FHA programs.

But the Department of Housing and Urban Development, which administers the FHA, is "just inundated with (lenders) wanting to get approval," to make the loans, said Steve Jacobson, chief executive officer of Fairway Independent Mortgage Co., a Sun Prairie Wisconsin-based lender and broker.

With programs for less creditworthy borrowers gone, "FHA is the viable option," he said. "We're challenging agents almost to rethink the business."