Fannie Mae's automated underwriting systems are gaining market share and bringing in more fee income, according to a report by Morgan Stanley Dean Witter.

But fee income is just the "tip of the iceberg" that this technology can bring, wrote Kenneth A. Posner, a Morgan Stanley vice president who wrote the report.

Fannie Mae is also developing new products related to second mortgages and home equity lines of credit, and is expanding its Internet strategy.

William Kelvie, chief information officer and executive vice president for Fannie Mae, recently told investors in New York that the company expects as much as 30% of the origination market to be on-line by 2003. His remarks during the New York visit were the basis of Mr. Posner's report.

Technology is helping Fannie Mae build competitive advantage, Mr. Posner noted, and technological initiatives are playing a bigger role in analysts' assessment of Fannie and Freddie.

Lenders using Fannie's Desktop Underwriter processed nearly two million loans in 1998, and the company expects more than three million loans to be processed this year, Mr. Kelvie said.

Fannie bought nearly 50% of its loans through its automated underwriting system in the weeks toward the end of 1998, and the company expects that figure to be 100% by sometime next year.

The approval rate for loans traveling through the system is also growing, with expectations that it will reach 90% this year.

Fannie's share of the automated underwriting business rose to 59% last year, according to a recent survey, while Freddie's fell to 36%, Mr. Posner noted. PMI Group also has an automated underwriting system, but with just a single-digit market share.

Large lenders have recently voiced concerns with the growth in market share and income for Fannie and Freddie's systems. Lenders complain that their own underwriting systems are overshadowed by Fannie and Freddie's presence.

Fannie Mae derived nearly $55 million of its revenue last year from automated underwriting and other technology-related systems, Mr. Kelvie said. The company predicts more than $80 million of such revenue this year, but Mr. Posner forecasts a figure closer to $120 million.

Fannie's Internet strategy now includes an educational Web site for home buyers with links to lenders; a Web site that lists Fannie's real estate owned properties together with agents' listings; Finet Holdings' Web site, which uses Desktop Underwriter to approve customers on-line; and a Web site being developed that will link brokers and lenders using Fannie's underwriting technology.

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