Turmoil in the nation’s mortgage market is apparently driving up business for one local mortgage lender: Rhode Island Housing.

The public housing agency which specializes in low-cost loans to first-time buyers reports that its loan volume during the third quarter of this year climbed to just over $1 billion — the highest in seven years.

Prospective buyers who just a few years ago were flooded with offers from private mortgage lenders for zero-down and “cash back” mortgages are experiencing what amounts to a mortgage market drought — and that means more business for Rhode Island Housing.

“The other mortgage sources have dried up,” said Richard H. Godfrey Jr., the agency’s executive director. “So we see people coming back to our products.”

A Boston-based research firm, The Warren Group, ranked Rhode Island Housing as the state’s third-highest lender for house-purchase loans. During the first nine months of this year, the agency originated 388 of the 8,380 such loans made in the state.

Rhode Island Housing’s market share for house-purchase loans is just under 5 percent, or less than half of the 11-percent market share of the state’s number-one house-purchase lender, Bank of America.

Rhode Island Housing, formerly known as Rhode Island Housing and Mortgage Finance Corporation, or RIHMFC, has been providing low-cost mortgages to first-time buyers since 1973.

By 2000, the agency’s loan volume had topped $1 billion. Then, houses prices began to soar and global investors looking for higher returns poured their money into mortgage investments, and mortgage companies profited. Competition among lenders for first-time buyers grew — and by 2002, the state’s public housing agency watched its loan portfolio begin to shrink.

By the third quarter of 2005, the agency’s house-purchase loan portfolio had fallen about 60 percent, to $634 million.

House-purchase loans generate more than half of the agency’s total annual revenues, Godfrey said, so that meant less money to run the agency. “We put a lot of jobs on hold,” he said. “We reduced staff by about 10 percent starting in 2004.”

Now, the agency is filling empty chairs and preparing later this month to open a new Rhode Island Housing Help Center next door to its offices at 44 Washington St. in Providence. Rhode Island Housing has about 170 employees and a budget of roughly $27 million.

Besides borrowers looking for house loans, Godfrey said, the agency is finding a new market for its products among lenders other than banks, as well as mortgage investors. (The agency traditionally offered its loans almost exclusively through banks, Godfrey said.)

The agency is counting on the new appetite to help finance a new loan product designed to help owners who can’t afford their mortgages to refinance. The “home saver loans,” to be rolled out later this year, will enable eligible owners to refinance up to 100 percent of their houses’ value at more favorable terms than what is generally available through private-sector lenders, Godfrey said.

“I give credit to Rhode Island Housing [for] not standing on the sidelines and wishing this problem will go away,” said Nicolas P. Retsinas, director of Harvard University’s Joint Center for Housing Studies. “The market will correct, but there will be collateral damage literally to thousands of homeowners….This is one small step.”

The home saver loans will offer up to $374,000 for single-family houses and condos, and up to $400,000 for two-family houses. The agency will also offer secondary loans for up to 10 percent of a house’s value to cover closing costs.

To be eligible to apply, borrowers must live in the houses they own and meet the federal government’s definition of low to moderate income. Owners who have significant debt beyond their mortgage, Godfrey said, or whose current mortgage exceeds the value of their house, probably would not qualify.

Godfrey has said that the agency could be doing $5 million to $10 million a month in these refinance loans. That would mean the new program could be as large as its first-time-buyer program.

“Our business is growing,” Godfrey said, “but unlike a private company, our profits don’t get distributed, so we put all of our money back into the programs.”

A report recently issued by ratings agency Standard & Poor’s said that Rhode Island Housing at the end of last year had a “slightly lower” profitability ratio than its peers, but that its “profitability and financial performance is strong.” The agency was given an AA- rating.

Rhode Island Housing’s reward for the increase in its lending business, however, is somewhat bittersweet.

“We’re processing three times as many loans,” Godfrey told the housing agency’s board last month, but “the other side of the business, unfortunately, is also booming.”

Reports of home foreclosures in Providence in September spiked 53 percent, he said.

larditi@projo.com