The battle over Fannie Mae and Freddie Mac's role in the mortgage industry moved to a far more public stage last week.

FM Watch, a coalition of trade groups, introduced itself to the world in a press conference Thursday, vowing to lobby against expansion by the two secondary marketing giants into other businesses.

Fannie and Freddie struck back, hard.

Both companies issued statements dismissing FM Watch as merely a lobbying group for the mortgage insurance industry, bent on protecting insurers' profits at consumers' expense.

That evening, Fannie chairman Franklin D. Raines blasted FM Watch in a speech before the New York Financial Writers Association. Once again referring to the group as "the Coalition for Higher Mortgage Costs," he said it "is less concerned with consumers paying less than mortgage insurance companies making more."

Last week's verbal sparring pointed to tensions in the industry that have been bubbling for some time but came to the fore this year.

Critics charge that Fannie and Freddie are trying to exploit their privileges as government-sponsored enterprises in areas outside their chief business of buying home mortgages from banks and other lenders. Because of their perceived U.S. government guarantee, they enjoy very low borrowing costs.

Some fear the GSEs will eventually try to sell mortgages-and other financial services-directly to consumers.

Fannie and Freddie counter that everything they do relates to their mission, which they define more broadly as lowering the costs of homeownership. They deny any intention to originate mortgages.

Last October, mortgage insurers and some lenders were galvanized by what they saw as a surreptitious attempt by Freddie to amend its charter to let it self-insure some loans. The provision failed in Congress.

This year, Fannie and Freddie further infuriated their opponents by coming out with mortgage insurance schemes that would reduce coverage requirements in return for up-front fees or higher interest rates.

The GSEs said these programs would lower costs for homebuyers; naysayers said the fees amounted to insurance premiums and that Fannie and Freddie were trying to gain a slice of the mortgage insurance pie.

One of FM Watch's first official actions last week was to send a letter to Housing and Urban Development Secretary Andrew M. Cuomo, urging him to increase affordable housing requirements for the two GSEs.

"It is our understanding that Fannie Mae and Freddie Mac have been talking to administration officials, to Congress, and to private entities, saying they did not want to change any affordable housing goals," said William Mike House, executive director of FM Watch.

"We believe because Fannie Mae and Freddie Mac get substantial government subsidy, they should be leading the fight to raise affordable housing goals."

A Fannie spokesman said it is discussing with HUD the possibility of raising its targets, but it wants to make sure its goals are realistic. If it had to meet unrealistically high goals for low-income homebuyers, Fannie said, it would have to ration loans among middle-income borrowers to meet percentage requirements.

Both Fannie and Freddie pointed to the letter as evidence that FM Watch was acting in the insurers' interest. Since most affordable housing loans have low down payments, the GSEs reasoned, those borrowers would have to buy mortgage insurance for the GSEs to be able to buy the loans.

Separately, FM Watch endorsed a open letter to House Banking Committee Chairman Jim Leach. The letter, penned by the National Taxpayers Union, a conservative lobbying group, expressed support for proposed risk-based capital standards for the two GSEs.

Freddie's statement called FM Watch "a thinly veiled lobbying group for the mortgage insurance industry." The new group, however, includes several noninsurance trade groups as members.

"In future you'll hear other names, other trade associations who will join us," said Gerald L. Friedman, chairman of the coalition.

Many expressed surprise that no individual companies came forward as FM Watch members last week. Chase Manhattan, insurance giant American International Group, and General Electric Co. (which owns both a lender and a mortgage insurer) were said to be major forces behind the group.

Both Chase and GE, however, are members of the Consumer Mortgage Coalition, which is involved in FM Watch, and AIG's United Guaranty Corp. unit is a member of the Mortgage Insurance Companies of America, which backs the new group. A spokeswoman for FM Watch said it was "never in the plan" for companies by themselves to join the coalition.

Even if they did so, would the group stand a chance against Fannie and Freddie, whose lobbying clout on Capitol Hill is the stuff of legend?

Mr. Raines said in his speech that FM Watch will not pose a threat "unless they can find a reason that what they're doing will benefit the consumer.

"Let's just be crassly political here," he said. "Homeowners vote more than nonhomeowners. They're going to have to define, why should the consumer care? Until they can show that they can do a mortgage cheaper than we can, I think most people aren't going to want to get us out of business."

FM Watch argues that the consumer will be best served by a free market, and that if Fannie and Freddie use their low borrowing costs to dominate consumer lending, they will establish a duopoly. The group's original name was the Competitive Consumer Lending Coalition.

"They (Fannie and Freddie) can underprice any financial good and service," Mr. Friedman said. "That's in the short-term interest of the consumer, but in the very short term. Initially prices go down, but once competition is reduced, as in any monopoly or duopoly, prices go up, shareholder profits prevail, and the consumer loses."

Mr. Friedman said the GSEs are trying to require lenders to use their automated underwriting systems, to make those systems "the dominant gateways to the consumer."

Ralph Nader, the most prominent consumer advocate, this year expressed support for a coalition to take on Fannie and Freddie.

Bruce Marks, executive director of the Neighborhood Assistance Corporation of America, said his Boston-based housing advocacy group hopes to join FM Watch. But he acknowledged that FM Watch may be too uncomfortable with his group's confrontational tactics.

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