are pushing into markets they formerly left to small, specialized lenders. These niches include reverse mortgages for senior citizens, loans to people with subprime credit ratings, and home equity loans. With secondary- market support from the housing agencies, these markets are expected to grow rapidly. For lenders, the new products bolster earnings and keep employees busy at a time when the traditional purchase market is growing only slowly. While volumes may be relatively small in the new areas, they usually carry higher profit margins than the mainstream business. For Fannie and Freddie, the niches serve a similar purpose. They are small but fruitful market segments in which to plow back some of the roughly $3 billion in capital they generated last year. "The mortgage banking industry has tremendous capacity" from the refinance boom, said Mark Korell, group president of lender and investor services at Norwest Mortgage Inc., the nation's largest mortgage retailer. Last year, the industry responded with layoffs and shutdowns, but now executives are looking for new opportunities. "We're all kind of saying, 'Gee, how can we continue to grow this business rather than have all these shutdowns?'" Mr. Korell said. "If you can keep some loan officers busy and some branches open doing some more nichey products," that's all to the good, he said. Niche products made up less than 1%, or $220 million, of the roughly $22 billion of loans Norwest has made through the first nine months. But in a shrinking market, the strategy makes sense, Mr. Korell said. It helps that many of the niche products have profit margins two to three times as high as the plain-vanilla mortgages traditionally purchased by Fannie Mae and Freddie Mac, according to Mike Perry, chief executive of Independent National Mortgage Corp., a unit of CWM Mortgage Holdings Inc. CWM is an independent company that was formerly a part of Countrywide Credit Industries and is still managed by top Countrywide executives. "Margins are incredibly thin" in the so-called conforming markets served by Fannie Mae and Freddie Mac, said Mr. Perry. That's because such loans are standardized, easy to do, and like commodities. Mortgage bankers are turning therefore to "the areas that are less commodity-like - the niches or nonconforming pieces" that still have sizable profit margins, he said. Among the new products mortgage bankers are eyeing are reverse mortgages, which allow seniors to cash in on their home equity. Last week, Fannie Mae announced it would buy such loans - a move that is expected to expand and standardize a fragmented market. "Reverse mortgages have so far been a very small niche," said Kevin Bartlett, managing director of secondary markets at Countrywide Funding Corp. "But with Fannie Mae's backing we are seriously considering offering the product." Mr. Korell of Norwest said his company, too, is looking at the new product. Until now, reverse mortgages have been offered only by a handful of private lenders and through the Department of Housing and Urban Development. About 15,000 reverse mortgages have been made in the last 10 years, according to TransAmerica Corp., a private originator. The nation's fifth-largest thrift, American Savings Bank, Irvine, Calif., said it plans to offer reverse mortgages next year and sell them to Fannie Mae. "We have the perfect client base to sell this product," said Mario Antoci, chairman, referring to retired holders of certificates of deposit who used to make up to 9% on their savings, but now earn considerably less and can make up the difference through a reverse mortgage. In its first year, Fannie Mae expects to purchase $1 billion of reverse mortgages. Another example of the new niche products is subprime loans made to borrowers with credit blemishes. Once the preserve of finance companies, this market is now being targeted by large lenders. Norwest Mortgage got into the business last year through its acquisition of Directors Mortgage Loan Corp., Riverside, Calif. Industry giant Countrywide Credit Industries also recently entered that market. Here, too, mortgage bankers are getting new support from the agencies. In September, Fannie Mae closed its first B and C deal, securitizing $150 million of loans originated by Advanta Mortgage. The loans were insured by the Municipal Bond Insurers Association, an arrangement that upgraded the loan package's credit rating to triple-A. And a spokesman said future deals would likely carry credit enhancement. Meanwhile, rival Freddie Mac announced last month that it is teaming up with Standard & Poor's to help lenders evaluate B and C mortgages through the Freddie Mac automated underwriting system. Market sources say Freddie Mac has shown interest in its own B and C deals, but the agency denies that. Though the agencies may only be tiptoeing into the subprime market, their involvement could ultimately be broader, one source said. Like mortgage lenders, Fannie Mae and Freddie Mac's forays into such mortgage niches are driven by the need to find new sources of earnings. "The companies generate a lot of capital," said PaineWebber analyst Gary Gordon. "They're going to put the great majority of that capital back in the mortgage business. Therefore, they want to look for every available avenue." The niches may be small, Mr. Gordon said, but "smaller is better than nothing. It's not like there's this other huge opportunity, like another $100 billion in mortgages a year they could buy somewhere. So you do what you can."

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