Not Everyone Is Swearing Off Subprime Market.

WASHINGTON -- While much of the mortgage industry has been backing away from the troubled subprime credit sector, Fannie Mae executives said in a recent conference call with investors and analysts that they anticipate opportunities to grow that aspect of their business.

To be sure, Fannie Mae CEO Daniel Mudd said that subprime remains a small part of Fannie Mae's overall credit risk exposure. Fannie Mae estimates that just 2.2% of its total single-family book of business consists of subprime credit quality loans. Currently, Fannie Mae reports having over $50 billion of private-label, subprime MBS.

And subprime ARMs with short-term resets - the loans considered most susceptible to payment shock - account for 1.5% of the company's total portfolio.

Much of Fannie Mae's involvement in the subprime market involves buying "highly rated tranches" of private-label mortgage securities backed by subprime loans. In addition, Fannie Mae typically adds credit enhancements to limit loss exposure.

Still, Fannie Mae acknowledged in a recent SEC filing that its participation in the subprime sector increased during 2006, and company executives said they may continue to grow the subprime segment of the business.

But at the same time, Mr. Mudd warned that any expansion of Fannie Mae's role in subprime mortgage finance will depend on market conditions.

"I think we are reasonably prepared to play a somewhat larger part in the market, but it's really going to depend on what happens in the market," he said. "The pricing has been too tight for my taste to the higher credit quality. As you continue to see the news unfold in subprime, that may change and that may create opportunities where we think the risks and the opportunities match up better."