UPDATE 1-FHA has "huge" role in housing recovery--bank execs

(Adds Option One president comments in last three paragraphs)

By Al Yoon

BOSTON, Oct 15 (Reuters) - The Federal Housing Administration will likely boost its share of the mortgage market to as high as 12 percent in coming months as it picks up borrowers locked out of subprime and other private lending programs, two leading industry executives said on Monday.

"I think FHA will play a huge role in the recovery of the market," David Lowman, chief executive of JPMorgan Chase & Co.'s (JPM.N) global mortgage group, said at the Mortgage Bankers Association annual meeting in Boston. Compared with a market share of about 2 percent in recent years, "I envision they will be in the double-digits, at 10 percent to 12 percent."

President George W. Bush in late August announced a program that would widen the reach of the FHA program that guarantees loans purchased by mortgage investors. The initiative, known as FHASelect, makes it easier for borrowers facing default to refinance into the FHA program.

National City Corp NCC.N, based in Cleveland and the ninth largest U.S. bank, has already boosted its production of FHA loans to 11 percent to 12 percent from as low as 2 percent six months ago, said Paul Bibb, chief executive officer of National City Mortgage.

But Lowman and Bibb said FHA, whose lenders' loans become collateral for Ginnie Mae mortgage-backed securities, must still overcome some hurdles that led the agency to lose market share in the first place. The loans are more cumbersome and expensive for lenders to originate because they require more back-office work, Bibb said.

Wall Street investment banks expanded their share of the subprime market during the housing boom by offering lenders a lower-cost way to securitize loans. Those programs are largely frozen today as soaring delinquencies led an investors revolt against many kinds of mortgage-related debt.

"FHA over a period of 10 to 12 years simply let that business get away from them," Bibb said. "There's a lot wrong with FHA" that increased costs and risks to lenders compared with conventional loans sold through Fannie Mae and Freddie Mac mortgage bond programs, he said.

But Brian Montgomery, the FHA's housing commissioner, told mortgage bankers during a later panel that his agency has remained an "island of stability." Concerns among mortgage investors that the FHA Select loans are vulnerable to default and may taint mortgage bond programs will soon be addressed by Ginnie Mae, the government-owned company that pools FHA loans into mortgage-backed securities.

"FHA has been a model of stability throughout the recent subprime boom and credit crunch but only recently have people come to recognize that fact," Montgomery said.

Lowman, meanwhile, noted that FHA still hasn't paid some outstanding claims from losses tied to Hurricane Katrina, suggesting that some may question the integrity of the guarantee. But that issue will get "worked out" through legislation or other avenues because "they know if they don't pay claims there's no program," he said.

Steve Nadon, president and chief operating officer of H&R Block Inc.'s Option One Mortgage conceded that the FHA program will be an integral part of the subprime market where his company once played a dominant role.

"Over the next 24 months, or even 36 months, the subprime market is FHA," said Nadon, who sat on the panel with the FHA's Montgomery. "There's no subprime" financing available anywhere else, he said.

The subprime market will eventually come back, he said, though not in the form that fueled lending to riskier borrowers that was done during the housing boom. Reminding bankers at the conference that patience is a virtue, he told them to anticipate recovery for subprime in 2009.