Freddie JumpsInto Subprime Pool; Fannie Dips a Toe in

Freddie Mac is diving into subprime lending, ending months of speculation over how deeply the agency would go into the burgeoning market.

Freddie Mac and its rival, Fannie Mae, outlined their approaches to lending to tarnished borrowers at the Mortgage Bankers Association's annual meeting Tuesday in New York. Their participation could accelerate growth in a sector that has become a new frontier for many lenders and, ultimately, could bring rates down for borrowers.

Chairman Leland C. Brendsel said Freddie will begin buying lower-quality loans over the coming year and proceed further down the credit spectrum in 1999. "We will buy all the loans we can that meet our parameters and can be priced profitably."

Freddie Mac will deal with mainstream lenders as well as companies that have traditionally offered subprime products, he said.

Freddie Mac will first buy so-called A-minus-quality loans and then move on to the B and C credits of more challenged borrowers, Mr. Brendsel said. He declined to discuss how much buying Freddie Mac would do. All told, the subprime industry originates about $125 billion annually, with A-minus credits accounting for about 10% of volume, according to industry estimates.

Fannie Mae will remain on the fringes, said chairman James A. Johnson. The company will focus on counseling subprime, or B- and C-rated borrowers, with the aim of turning them into A-caliber credits and buying their loans, Mr. Johnson said.

"We can make A's out of B's and C's in many cases, but not all," Mr. Johnson said.

Although Fannie Mae and Freddie Mac have different strategies for the subprime market, both companies say they are motivated by a desire to make mortgages more affordable, especially to African-Americans, immigrants, and others who have been cut out of the mainstream market. The subprime market generally includes people with nontraditional credit records or dings in their credit records.

Freddie had launched a pilot program to buy home equity loans to get a sense of the subprime market but had not detailed long-range plans.

Fannie Mae had begun to focus on counseling of subprime credits, but some observers saw this as a prelude to deeper involvement-a step Mr. Johnson said his company will not take.

Mainstream lenders generally welcomed Fannie Mae and Freddie Mac involvement, saying it would mitigate risks to mortgage bankers. But because of the companies' different approaches, some lenders wondered whether the market might become segmented.

Under Fannie Mae's program, a subprime borrower could wait a year-a period for credit counseling-and perhaps receive an A loan. That same subprime borrower could opt to act immediately and receive a loan backed by Freddie Mac that carried a higher than A quality rating but a lower rate than traditional subprime loans.

Established subprime lenders are not enthusiastic about the agencies' using their buying clout to alter the market and undercut the wide profit spreads they have traditionally enjoyed.

Smart subprime lenders will recognize that the industry is changing, Mr. Brendsel said. "Those that try to create barriers from that happening are ultimately going to fail."

Mr. Brendsel said he wasn't referring to Fannie Mae, which is taking a more circumspect approach to subprime. But he did say, "We hope they always can expect a challenge from us."

Analysts say there will most likely be a shift in rate structures, with Freddie's buying clout reducing rates to a degree.

"This will bring on more competitive pressures," said Kevin Spinner, a vice president at Keefe, Bruyette & Woods Inc., New York.

But Freddie Mac is also a business whose aim is to produce profits while expanding homeownership, Mr. Spinner said. The degree of impact on lending rates "depends on what Freddie Mac is willing to pay for the loans and what they are willing to accept as a return," Mr. Spinner said.

Freddie Mac president David W. Glenn said the company feels strongly about outside guarantees and other safeguards, as it proceeds down the credit spectrum.

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