WASHINGTON -- Fannie Mae and Freddie Mac are drawing criticism from a new adversary: the American Bankers Association.

Thrifts have long complained that the secondary mortgage market agencies squeeze profit margins by driving down the interest rates on home loans. Now the banking industry is joining in, expressing fears that Fannie and Freddie are positioning themselves to do the same thing with home equity and construction-related loans.

At issue is legislation that critics say would permit the agencies - formally known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. - to enter profitable lines of business without the prior approval of their regulator, the Department of Housing and Urban Development.

Engrossed by the comprehensive banking reform package, the banking industry paid little attention to the bill when it was being debated and passed in the House.

Though the measure was not adopted by the Senate, Congress is expected to take it up again in the next session.

The ABA outlined its concerns last week in a two-page letter to Robert R. Glauber, the Treasury Department's under secretary for finance.

Under the legislation, the ABA wrote, the agencies "could expand and become a primary source of funds for home equity loans, construction loans, and loans to hotels, nursing homes, and manufacturers of building materials. This goes well beyond Congress' stated intent in creating these entities to establish a secondary market in residential mortgages."

Such expansion would "usurp markets which have traditionally been the domain of the commercial banks, working against the Administration's efforts to strengthen the banking system," the ABA said.

White House Disapproves

The Bush administration opposes the legislation, arguing that it dilutes HUD's regulatory authority, but Fannie Mae and Freddie Mac support it.

"The House bill raised a lot of eyebrows, because it was so favorable to Fannie Mae and Freddie Mac," said Allan G. Bortel, an investment banker with Sutro & Co., San Francisco.

The Senate has yet to consider companion legislation to protect taxpayers from potential losses by the so-called government-sponsored enterprises.

Fannie Mae, at the urging of the National Association of Home Builders, is studying the possibility of participating in construction loans, according to spokesman David Jeffers. He said the agency is determined to stretch its traditional role in order to provide affordable housing to low- and moderate-in-come people.

"ABA members should be encouraged that there are a variety of partners, including Fannie Mae, looking at housing needs," he said.

He said the agency had no current plans to offer a secondary market in home equity loans.

A Freddie Mac spokesman could not be reached for comment.

Fannie Mae and Freddie Mac have had frequent skirmishes with the thrift industry in recent years. But observers said this appears to be the first time that the ABA has raised red flags about competition from the secondary market agencies.

One explanation: With their traditional commercial lending business slipping away, banks have become increasingly reliant on home-mortgage-related lending and investments.

Fannie and Freddie buy mortgages from banks, thrifts, and mortgage bankers. In the process, they reduce marketwide interest rates by 25 to 50 basis points, thanks to implicit government guarantees on both their debt and their mortgage securities.

Double-Edged Sword

Lower rates help homebuyers. But they also mean lower yields for private institutions holding mortgages. Some observers say the pressure on profits forced many thrifts to diversify into riskier fields.

Until now, the competitive impact of Fannie and Freddie has not been much of a factor in the debate. "Thrifts have been grumbling on the sidelines, but haven't made much headway," said Kenneth mcLean, an industry consultant. "But clearly, Congress needs to consider the adverse impact these two organizations have on the profits of banks and thrifts."

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