For government-sponsored enterprises to prosper with the increased government pressure to expand affordable housing lending, the agencies need to look under a few rocks and behind some trees to scare up business where it wasn't before.

Knowing this, Fannie Mae is pinning a few of its affordable housing hopes to create both another avenue to reach the HUD-set 30/30 goals and a reliable source of business once the refi boom ends.

The Fannie Homestyle initiative is a retail bank- and thrift-targeted program that allows the agency to purchase home improvement loans from qualified lenders from up to $101,575 for second mortgages and up to $203,150 for first mortgages combined with renovation second mortgages.

Started last spring, it differs from Fannie's usual mortgages in that the value of the loan is partially based on an appraisal of the property value expected on the completion of renovations, rather than the current property value. It also differs because most of these loans aren't typically securitized.

Herb Moses, assistant director of product initiatives, said that Fannie Mae has gotten off to a slow start with the new program. He also said that its exposure was limited because it is targeted specifically for retail banks and thrifts, which traditionally more home improvement loans.

Speaking during a Consumer Bankers Association conference Oct. 18, Moses said he expects the program to grow a lot soon, partly because of more aggressive marketing and partly because it offers lenders larger-than-usual loan amounts, the security of credit insurance and fast loan turnarounds that come from not having to wait for renovations to become complete.

While the program has many upsides for lenders, it has a downside as well. Fannie--and bankers, too--are having difficulty getting customers to buy into the program because of the deluge of business in the primary market brought on by low interest rates. It hopes to counter that with a familiar Fannie tool--a program aimed at educating the consumer.

The agency, however, might find more luck in finding a market for securitizing home improvement loans. Although most loans are securitizable, many are being bought for cash. For smaller lenders looking to securitize these loans, Fannie said it would be able to do it on a swap-and-hold basis.

But the market for home improvement securitizations doesn't exist, and its creation would be difficult because it would require a base of about $1 billion to get off the ground--a tough figure to reach when the average loan size is just $30,000.

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