BANGALORE - The Obama administration's latest effort to boost the beleaguered housing market is likely to help mortgage insurers as lower defaults will boost their liquidity.

The new program aims to provide as much as $35 billion to state housing finance agencies, which provide low-cost mortgages to potential homebuyers with low to moderate incomes.

As part of the program, government-controlled housing finance giants Fannie Mae and Freddie Mac, together with the U.S. Treasury, will buy as much as $20 billion of bonds issued by the housing finance agencies.

The efforts of the U.S. government to reduce defaults and let homeowners keep their homes will help entities like MGIC Investment Corp, Radian Group Inc and PMI Group Inc to lower the claims that they pay out on defaults.

If the government is going to be pumping more money into the housing market, this is presumably intended to firm up housing prices and reduce the number of defaults, said Lawrence White, a professor at New York University's Stern School of Business.

This will lead to mortgage insurers making fewer payouts on mortgage insurance and that will improve their bottom line, White said.

So, for sure the mortgage insurers should benefit from these programs, White said.

Mortgage insurers provide coverage to home buyers who cannot offer a 20 percent down payment.

Mortgage insurers are hoping for a capital injection from the U.S. Treasury in face of record home loan defaults that has threatened the stability of these companies.

Anything that is positive for the housing market in the U.S., that can stem foreclosures, that can bring more liquidity to the housing market helps us, Radian's Chief Executive S.A. Ibrahim told Reuters.

WILL CAPITAL RAISE BE EASY?

Apart from rising defaults, mortgage insurers have also suffered due to expected losses in mortgage-backed debt, making it difficult for them to raise capital, much required for them to continue writing new business.

Bonds issued by mortgage insurers were investment grade before the housing slump and it was easy for them to raise capital as creditors were confident of repayment.

In the past two years that reputation has been tarnished because there has been a lot of uncertainty on whether they would be able to meet their obligations, White said.

If it now becomes more likely that they can meet their obligations, I think that may help them and make it easier for them to raise money, White added.

Much of the benefit from the program for mortgage insurers will depend on the extent of funding going toward loan modifications.

Loan modification could conceivably reduce losses for the mortgage insurers on their legacy book, which continues to be plagued by rising delinquencies, said Arlene Isaacs-Lowe, senior vice president on Moody's Specialty Insurance team.

Despite the recent increase in equity value of mortgage insurers, Isaacs-Lowe believes that until there is certainty around the shape of the mortgage finance market, uncertainty about the future of mortgage insurers will continue.

The capital markets will consider this aspect for mortgage insurers, and this will constrain their ability to access the market until there is further clarity, she said.

(Reporting by Sweta Singh in Bangalore; Editing by Pradeep Kurup)

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