One U.S. government agency is planning to guarantee billions in new mortgage debt, filling a gap left by private investors in what amounts to a large transfer of risk to taxpayers.

Since the collapse of the housing market last year, the government agency charged with supporting low-end housing has been extending mortgage loans to borrowers with poor credit records and not enough cash for a 20% down payment - the infamous "subprime" borrowers that are often blamed as the original cause of the collapse of financial markets.

In mid-June, the Federal Housing Administration asked Congress permission to back $400 billion in these mortgages in 2010 - its largest request ever. It's on track to back more than $315 billion this year, covering nearly 20% of all mortgages issued.

"If they hadn't stepped into the void, the housing market would have crashed even more than it did," said economist Mark Zandi, co-founder of Moody's Economy.com. "I don't think there was much of a choice."

The FHA's move to take on more risk brings echoes of Fannie Mae (FNM) and Freddie Mac (FRE) in the midst of the housing bubble - a case of serial mistakes that led directly to those companies entering government conservatorship last year.

Mortgage investors are anticipating a splash in issuance from Ginnie Mae - the agency that packages and resells mortgages the FHA insures. The expectation is that it could come close to selling almost as much in the near future as the $463.6 billion it has sold since 1995.

"FHA is the new subprime," said Art Frank, head of mortgage security research at Deutsche Bank.

The new subprime isn't exactly like its predecessor, however. Some have said FHA would be in the same situation as Fannie and Freddie if it hadn't been muscled out of the market by private subprime giants such as Countrywide Financial.

But FHA wasn't handing out risky mortgages as fast as other lenders in the private sector. In addition to charging an insurance premium, FHA insists on fully documenting income and a 3.5% down payment. By 2006, the FHA accounted for just 2% of the U.S. mortgage market, thus avoiding the worst of the collapse.

"Where we lost market share was the too-good-to-be-true guys," said Bill Apgar, senior adviser to the secretary of Housing and Urban Development, which oversees the FHA. In hindsight, losing that particular market share turned out to be FHA's salvation.

The securities FHA mortgages are turned into are different too. Investors are insulated from all risk, including default. After the loans are packaged and resold into the mortgage security market, the FHA backs them with the full-faith and credit of the U.S. government, just like Treasury debt.

However, there are doubts about whether FHA's 3% capital reserve will be sufficient. At the end of the first quarter, 12.6% of FHA loans were delinquent and 7.37% were in foreclosure, according to the Mortgage Bankers Association.

"The FHA, and by extension taxpayers, are taking on more credit risks and are going to suffer losses as a result," said Moody's Economy.com's Zandi. "They probably will need a capital infusion."

Prices on the securities have started to come down and yields have begun to rise, anticipating a massive increase in supply. Lower prices for existing bonds are likely on the way.

Ginnie Mae mortgage-backed securities still offer a "healthy" yield spread over U.S. Treasurys, said Eric Pellicciaro, who manages $100 billion Agency mortgage-backed securities at BlackRock Inc. Therefore he expects "continued demand from foreign institutions investing their dollars as well as domestic investors looking to boost their U.S. government holdings."

-By Andrew Edwards, Dow Jones Newswires; 212-416-5973; andrew.edwards@dowjones.com