UPDATE 1-Ginnie Mae makes new pool-type for FHA Secure loans

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By Al Yoon

NEW YORK, Oct 15 (Reuters) - Ginnie Mae, the only issuer of U.S.-guaranteed mortgage securities, late on Monday said it would create a new type of pool for the securitization of loans made under an expanded government program.

The loans guaranteed by the Federal Housing Administration's FHA Secure program -- introduced by President George W. Bush to make it easier for defaulted borrowers to get a new mortgage and avoid foreclosure -- will be part of a "new, multi-issuer pool-type" under the existing Ginnie Mae II bond program, according to a statement from Ginnie Mae.

Creation of separate pools for FHA Secure loans may be a bow to pressure from Wall Street dealers and investors who for weeks have been on edge over how Ginnie Mae will package the assets. Chances that the loans from defaulted borrowers would taint existing Ginnie Mae bond programs has already hurt Ginnie Mae securities relative to other MBS since they will be more prone to default and produce unwanted principal "prepayments," traders said.

The only eligible loans for the new pools will be those that are refinanced into an FHA-insured loan after having become delinquent due to a rate reset on an adjustable-rate mortgage, or fixed-rate conventional to FHA-insured refinance loans that carry subordinated second-liens, Ginnie Mae said.

Furor over the issue compelled the FHA to hold an "emergency" meeting with a group of bond traders and investors earlier this month to reassure them that the FHA program will not degrade loan quality, according to traders familiar with the meeting.

The price premium on Ginnie Mae securities over similar mortgage bonds had in September eroded to the lowest in four years on fears the plan to rescue homeowners from foreclosure would have an adverse effect on Ginnie Mae securities. The price of Ginnie Mae bonds has rebounded some since then on expectations the issuer would protect the integrity of its current Ginnie Mae I and Ginnie Mae II programs, traders said.

While Ginnie Mae bonds make up just 10 percent of the $4 trillion market for guaranteed mortgage securities (including MBS backed by private companies Fannie Mae and Freddie Mac), some mutual funds with big concentrations have a lot at stake, traders said. Ginnie Mae bonds make up the top five holdings in the $6 billion Franklin U.S. Government Securities Fund FKUSX.O, comprising 12.4 percent of assets, according to Morningstar.com.

Expected prepayments are a key factor in determining a bond's value since they can reduce high-coupon cash flows and create losses if the bonds are valued above the par, or 100, price at which the transaction occurs