Joseph J. Murin took the reins of the Government National Mortgage Association, better known as Ginnie Mae, at a critical point in the industry crisis.

For years the federal agency was an also-ran, dwarfed in volume and importance by Fannie Mae and Freddie Mac. But the subprime market's collapse has resulted in a government lending resurgence that has boosted Ginnie's profile. Issuance of mortgage-backed securities with Ginnie's stamp has nearly tripled in the year that ended in September, and the bonds now account for 30% of new offerings.

The renewed prominence has been accompanied by a return of old problems.

Ginnie guarantees the timely payment of principal and interest on $427.6 billion of outstanding securities. Since the underlying loans are already insured by other agencies, predominantly the Federal Housing Administration, investors do not have to worry about losing principal. But Ginnie has to make sure that when a borrower falls behind on payments, the servicer (typically the same company that issued the security) advances payments to bondholders until the loan is resolved.

The liquidity crisis has increased the risk that servicers will fail to do so, making the job of monitoring them a lot tougher for Ginnie, which has only 68 employees. Nearly a dozen of its large servicers have defaulted in the past two years. Meanwhile, the volume surge at the FHA — like Ginnie, it is taking on more business than it has in years — has fueled concern that more dodgy loans will be approved. Mortgage experts say lax underwriting would lead to more FHA borrower delinquencies, and hence the greater need for Ginnie servicers to make advances.

Mr. Murin said in an interview last month that he has been single-minded in his focus since becoming Ginnie's president July 1.

"Our biggest area of risk is issuer risk," he said. "We've put a number of checks and balances in place. We look at every venue for risk. This is part of the re-engineering of the risk environment here."

Servicer Defaults

This year four servicers have defaulted on $1 billion of Ginnie loan pools, including Fidelity Home Mortgage Corp., a Baltimore lender that stopped making advances. Ginnie seized its $26.7 million portfolio and began servicing the loans itself.

The agency pulled servicing rights from the three others, which defaulted on covenants: Lehman Brothers, which filed for bankruptcy protection in September; the investment bank's Littleton, Colo., servicing unit, Aurora Loan Services Inc.; and the mortgage unit of R&G Financial Corp., a San Juan, Puerto Rico, banking company that has been plagued by accounting problems. The rights were transferred to Ginnie's master subservicer, Countrywide Financial Corp., now part of Bank of America Corp.

One of the largest recent Ginnie servicer defaults was American Home Mortgage Investment Corp., the Melville, N.Y., real estate investment trust that filed for bankruptcy protection in August of last year. Even though the bankruptcy trustee continued to make advances to Ginnie investors, the agency worked through the U.S. Bankruptcy Court for Delaware in Wilmington to transfer $450 million of servicing rights from American Home to the $14.2 billion-asset MidFirst Bank in Oklahoma City.

IndyMac Bank, which failed this year, was a small issuer of Ginnie securities and is continuing to service loans now that the Federal Deposit Insurance Corp. is operating the thrift, Ginnie said.

The primary reason for servicer defaults is a lack of cash to pay investors, Mr. Murin said.

"We look at cash flow because with everybody struggling, balance sheet" and profit and loss statements "are not good indicators," he said. "Cash flow is a better indicator, and it gives us some insight, a sort of early warning."

One problem in the current market is that many of the Wall Street firms that provided warehouse lines and advance funding for servicers are no longer around, Mr. Murin said.

Servicers "are having trouble with advances," he said. "They're all suffering from the backlog, the bubble." At Ginnie, "we're constantly developing analytics to monitor issuers."

Deloitte & Touche LLP is the main contractor for Ginnie's analytical work on its mortgage-backed securities. Lockheed Martin Information Technology, the subcontractor, performs data collection and processing, software development, and risk analysis. It also provides loan servicing on the agency's defaulted manufactured housing portfolio, including billing, delinquency management, asset disposition, and financial accounting.

For more than 20 years Ginnie has contracted back-office functions. Bank of New York Mellon Corp. handles all pool processing, the creation and transfer of securities, and investor accounting, reporting, and reconciliation.

"Using third-party outsourcing venues gives us the flexibility we need, so if the volume scales back, we don't have fixed costs to absorb," Mr. Murin said. "You don't downsize the federal government, which is why you don't want to upsize."

The variable-cost structure helps make Ginnie one of the most profitable operations in the federal government today, he said. It spends about $50 million to $60 million a year, and it said it expected its revenue for the last fiscal year, which ended Sept. 30, to rise 29% from a year earlier, to $900 million.

"If we're going to be an organization of 60-plus people with appropriations on what we can and cannot spend, then we have to have the finest processes in place and technology available," Mr. Murin said.

Jack Guttentag, a retired professor of finance at the University of Pennsylvania's Wharton School, agreed that the guarantee fee Ginnie collects — 6 basis points of the loan amount a year — "has been pure profit for the government." Ginnie's servicers are paid 44 basis points, compared with an average annual fee of about 25 basis points for Fannie and Freddie servicers. Prof. Guttentag said the relatively high fee makes Ginnie pools profitable for servicers "over their entire life," particularly for small-balance loans that prepay early.

"The servicer managing the Ginnie Mae pool is the first line of defense against defaults and delinquencies," he said. "Because the servicing fee is high, they're on the hook for advancing the payments when there are delinquencies."

Raising the Bar

Business has not always been so good for Ginnie. In 1989 it lost money because of rising issuer defaults that Congress blamed on lax enforcement of issuer requirements and inadequate monitoring of servicer performance.

Mr. Murin has taken steps to make sure that does not happen again. In August he established a risk committee and reconstituted the issuer review board. He selected a longtime Ginnie staff member, Stephen Ledbetter, to fill the newly created position of chief risk officer. Mr. Ledbetter remains an acting vice president of Ginnie's office of mortgage-backed securities.

Last month Ginnie said it was raising its minimum net-worth requirement for single-family issuers to $1 million and was giving issuers two years to meet that threshold. Currently most issuers need to have only $250,000.

The new minimum and the deadline are less stringent than those Fannie has set for its seller-servicers ($1.65 million of net worth by Dec. 31, and $2.5 million a year later). But this month Ginnie also began subjecting all new issuers to a one-year probationary period. "We're not letting anybody off the hook," Mr. Murin said. "We're being very particular about who gets into our program."

The change might shut the door to more small lenders, but Mr. Murin said Ginnie wants lenders to get their experience by selling to aggregators. "We don't want Ginnie to be a training facility. We want to make sure folks have some skin in the game and aren't jumping in headfirst," he said.

That stance is likely to disappoint the mortgage companies that have flooded Ginnie with applications to become issuers. The agency used to get one applicant a year; now it has 60 in various stages of the approval process. Those applications have increased the agency's workload and now can take up to six months for approval.

For small companies, working directly with Ginnie is often more appealing than selling loans to middlemen for several reasons.

Some mortgage bankers have said the top Ginnie issuers, such as Bank of America Corp., Wells Fargo & Co., and Citigroup Inc., have added "credit overlays" — such as minimum FICO scores — to the FHA's requirements to protect themselves from rising delinquencies. Helene Decillis, the chief operating officer at Ideal Mortgage Bankers Ltd., a Melville, N.Y., lender that uses the brand name LendAmerica, said lenders get better pricing on the loans sold directly to Ginnie in the secondary market, rather than through big-bank aggregators.

Timing also is a factor; a lender can get a pool of loans certified directly through Ginnie in just two days, compared with a week or more through an aggregator, Ms. Decillis said.

"If you want to have control over your destiny, then you want to sell directly to Ginnie," she said. Because of rising delinquencies, big-bank aggregators will "arbitrarily adjust the loan price based on credit score or other factors" and often will deny a seller any value for servicing rights, particularly for loans bigger than the old FHA limit of $362,000. (The Economic Stimulus Act of 2008 raised the limit to at least $417,000.)

"They're not giving us the full security price, and if you sell a loan over the former FHA limit, they give you no value for the servicing, so they're getting the MSR for free," Ms. Decillis said.

Julie Krause, a senior vice president at the Walla Walla, Wash., lender NetMore America Inc., said not so long ago she could sell any FHA-insured loan to any investor.

"They're now putting their own overlays on to that," she said. "Some investors have invoked a minimum FICO score, or they want an appraisal on every file."

During the heyday that started in 2004 for risky products like zero-down loans, Ginnie's role in the mortgage market waned, and its market share, along with that of the FHA (both of which are part of the Department of Housing and Urban Development), plummeted to less than 4%.

But since last year, when nontraditional loan production dried up, the industry has come full circle.

In the first eight months of this year issuance of Ginnie-guaranteed securities nearly tripled from a year earlier, to $162 billion. In August it guaranteed $27.5 billion of new fixed-rate mortgage-backed issues, while Fannie backed $28.5 billion and Freddie backed $18.7 billion, according to the Tampa analytics firm eMBS Inc.

Mortgage analysts said there are two reasons for the increase in Ginnie-guaranteed securities: Borrowers with adjustable-rate mortgages are refinancing into FHA loans, and homebuyers are gravitating to those loans, because they require a down payment of just 3%. By comparison, loans sold to or guaranteed by Fannie and Freddie with down payments of less than 20% must have mortgage insurance, and many private insurers have pulled back from writing insurance on any loans with less than 10% down.

The FHA also has been playing a central role in government efforts to prevent foreclosures. The Hope for Homeowners program was launched last month to help underwater borrowers refinance into FHA loans.

Fears about FHA

The roaring comeback has some market watchers and participants worried about whether the FHA can vet all the loans coming its way.

Brian Koss, the executive vice president of national production at Mortgage Network Inc., a lender in Danvers, Mass., said his biggest concern is whether the FHA has the infrastructure to deal with a significant increase in applications. "FHA hasn't had a new computer system in 20 years, and that's a concern for all of us," he said.

Even FHA Commissioner Brian Montgomery has repeatedly said the agency's computer systems are antiquated. (Federal funding from the recently enacted housing law is expected to change that.)

Mr. Koss echoed the concerns of other lenders about a lack of training and shortage of employees qualified to screen applicants and underwrite FHA loans. "There are an awful lot of mortgage people that don't have a clue about FHA," he said.

Daniel Jacobs, the chief executive of 1st Metropolitan Mortgage Co., said FHA loans will perform better than subprime loans have for one major reason: The agency requires borrowers to document their income and occupy the home, so it excludes speculators, who played a significant role in subprime defaults.

The requirements "will keep FHA and Ginnie from suffering the same fate as subprime, but it doesn't mean we won't see the performance of FHA deteriorate modestly," he said. FHA loans now make up 52% of his Charlotte firm's business, compared with 3% just two years ago.

The FHA's staffing level is "not something we can criticize them about, because their volume went up so quickly, it was unforeseen," Mr. Jacobs said. "But if they are unable to staff quickly and train quality people, we will have problems with the program due to a lack of institutional knowledge."

Lemar Wooley, a HUD spokesman, said the FHA is "very busy, but we are certainly keeping up both in terms of staffing and training. We are constantly training our staff, keeping them up to speed on anything new that we do."

In an interview in August, Mr. Murin said: "If you take a look at FHA's performance, it hasn't deteriorated. … I think the misnomer is that it will deteriorate. They have very strict underwriting criteria."

According to the Mortgage Bankers Association, the FHA's second-quarter delinquency rate rose five basis points from a year earlier, to 12.63%, and the rate for subprime loans rose 385 basis points, to 18.67%.

"Bit of a Strain"

Mr. Murin began his career as a loan officer at Pittsburgh National Bank (now PNC Bank) in the 1970s. Before taking the reins at Ginnie, he was a managing partner at a Pittsburgh appraisal company, Mortgage Settlement Network LLC. Before that he had been the CEO of Basis 100 Inc., a developer of automated property valuation services. He also ran a family-owned home builder.

He succeeded Robert Couch, the MBA's former chairman, as Ginnie's president. Mr. Couch is now HUD's general counsel.

In August, Mr. Murin acknowledged that the job was proving to be tough.

"It certainly puts a little bit of a strain on us, doing the volume that we're doing," he said. "We see more lenders in the marketplace converting to FHA lending programs, and when you step back from it, you have to say there's a different risk perspective."

Emily Flitter contributed to this story. Originally published in American Banker.