WASHINGTON - The Federal Home Loan Bank System is on the verge of revolutionizing the mortgage market, and Bruce Morrison is waiting for someone to notice.

The passionate and stubborn regulator has pushed the 12 Federal Home Loan banks to offer lenders an alternative to selling mortgages to Fannie Mae and Freddie Mac. But the Home Loan banks, and even some of the lenders, have pushed back. "If this were the Food and Drug Administration and a drug company, I would be getting awards," Mr. Morrison said in an interview this week. "It's just this is a funny business, with no really active consumer interest that makes my job easy. So I stand pretty lonely and alone doing a job."

But not for much longer. Next month, Mr. Morrison will leave the Federal Housing Finance Board, which he has chaired since June 1995. The announcement that he would leave stunned supporters as well as adversaries, but Mr. Morrison said the time had come for him to go.

"You can stay too long. You can become the issue. I'm not the issue. I'm just the messenger.

Besides, the Finance Board's work is nearly complete. On Thursday the agency polished off two key rules. One lets small banks pledge a wider range of collateral for advances from Home Loan banks. (See story on this page.) The second, much more controversial rule defines which assets best aid the Home Loan banks in accomplishing their public mission of promoting housing finance.

"We are writing a rule that says nothing more than, 'This is better than that,' " he said. "The thing that makes a government-sponsored entity different from a private company is that it has a specific public mission. … We have to call balls and strikes and give signals about what is and isn't mission. That's our job."

The rule, Mr. Morrison insisted, does not bar Home Loan banks from investing in mortgage-backed securities. The agency's original plan to "grandfather" mortgage-backed securities was abandoned in the final rule after critics said it was an attempt to curb purchases.

"Grandfathering became a stalking horse for limits," Mr. Morrison said. "It was a peace offering, and the people we peace-offered it to turned around and beat us over the head with it, so we are taking it off."

It may be one of the few times the combative Mr. Morrison has relented. But that is because other goals dwarf his distaste for mortgage-backed securities. His mission is convincing the Home Loan banks that they can compete with - and beat - Fannie and Freddie.

"There are no regulatory impediments to an aggressive and competitive Federal Home Loan Bank System," Mr. Morrison said "But there are impediments."

No. 1 on the list: a tradition of waiting to try anything new until consensus emerges among the 12 banks. But that's a luxury the system can no longer afford, Mr. Morrison said. He expressed confidence that members - the 7,400 banks and thrifts that own the Home Loan banks - will demand the changes he has been advocating.

At the heart of his plan is Mortgage Partnership Finance, a program that lets originators keep the credit risk while handing market risk to a Home Loan bank. On Thursday the agency made this program permanent and lifted a $9 billion cap on its growth.

Just since January the program has nearly quadrupled in size, to $7 billion. Commitments exceed $30 billion, and Mr. Morrison expects the program to reach $100 billion in two years. That's still peanuts in the $4.5 trillion mortgage market, but it is enough to get Fannie's and Freddie's attention.

Mr. Morrison claims the two government-sponsored enterprises have tried to thwart the program to protect their profits from buying and securitizing mortgages.

The powerful secondary market makers provoke no fear in Mr. Morrison. The former Democratic congressman from Connecticut, who went to Yale law school with President Clinton, will tell anyone willing to listen that companies with advantages bestowed by the government - that's Fannie, Freddie, and the 12 Home Loan Banks to name a few - must provide a public benefit. Otherwise, he says, they are nothing more than profit-seekers with a competitive advantage, using their implicit government backing to borrow money at below-market rates and invest it in higher-yielding securities.

While many here praise Fannie and Freddie for superior performance in the stock market, Mr. Morrison condemns their wild growth.

"No GSE should have a bigger balance sheet than it takes to accomplish its public mission," he said. Fannie and Freddie "are ballooning their balance sheet way out of proportion to what is needed to do their mission because it is profitable."

On Thursday, Mr. Morrison responded to critical letters he has received from senators, including Senate Banking Committee Chairman Phil Gramm. The Texas Republican's June 23 letter accused Mr. Morrison of going back on his word last fall when the regulator - trying to fend off a moratorium on his powers - agreed not to limit Home Loan bank assets until new capital rules were in place.

Mr. Morrison is undaunted. "I think Sen. Gramm himself has only passing acquaintance with the issue," he said. "If I listen to Sen. Gramm, it's like surrender to Fannie and Freddie."

Why? Because the Mortgage Partnership Finance program provides mortgage originators an attractive option to selling loans to Fannie and Freddie, which assume both the market and the credit risk.

Their expertise is limited to managing market risk, Mr. Morrison said. "They have no natural advantages in the management of credit risk. When you tie two commodities together and there's very few players … the product that is not a have-to product may not be competitively priced.

"It's called a tie-in in antitrust language, and tie-ins are always a problem because it means that market power in one market is slopping over," Mr. Morrison said.

"So what we are doing is breaking these two apart and re-creating a competitive market in credit risk."

Ten of the 12 banks have agreed to join the program, which was created in 1997 by the Federal Home Loan Bank of Chicago. The remaining two - the Home Loan banks in Seattle and Cincinnati - are pursuing variations.

Mr. Morrison says he is convinced this decentralization of credit risk is the way to go.

"This can enhance the business of these institutions such that they can be more profitable, more effective, and more beneficial to the public," he said. "Those things are not in conflict."

He predicted the program will create liquidity for lower-quality first mortgages that do not fit the mold required by Fannie and Freddie.

"There is no liquidity in this market, because of the arbitrary underwriting rules," he said. "But you don't have to write conforming rules when the originator is taking the risk.

"Every borrower through every outlet will have much more chance of getting an accurate risk-based price, with the full liquidity of the capital markets backing the transaction, because the credit risk is now being managed in a competitive fashion."

Eventually, after capital rules are standardized to eliminate artificial barriers, Fannie and Freddie will follow the Home Loan banks' lead.

"This recourse structure will win the day. The whole market will move in that direction. It is more competitive; therefore the pricing should be better. It's less risky, meaning it is a decentralization of credit risk."

Few people are as sure as Mr. Morrison that they are right. He only wishes he could convince the Home Loan banks that buying mortgage-backed securities is a less productive use of capital than participating in Mortgage Partnership Finance.

"It's really now up to the banks and to their members. It is real opportunity to make the banks dramatically more efficient, and therefore more profitable in return-on-equity terms. And it is right there in front of their face. It requires that they stop thinking like they have since 1932 and start thinking about the current economic reality of the market."

And to critics who insist the Finance Board should revamp the Home Loan banks' capital structure before it defines their mission, Mr. Morrison said that sequence makes no sense.

"You have to tell the people who are going to buy the stock what you're going to do with the capital," he explained.

Mr. Morrison said the capital rules will be done by Nov. 12, as required by the Gramm-Leach-Bliley Act. In fact, to Sen. Gramm's suggestion that the Finance Board is tardy in its implementation of the financial reform law, Mr. Morrison said: "The senator is just wrong. He should be sending us a thank-you note."

On the off chance he decides to oblige, Sen. Gramm should send the note to Washington's K Street corridor, where the most influential lobbyists set up shop. Mr. Morrison will head the D.C. office of GPC O'Neill & Associates, working for Tom O'Neill, son of the former House Speaker Thomas P. "Tip" O'Neill Jr.

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