WASHINGTON -- Are rising interest rates bad for Fannie Mae and Freddie Mac ?

Investors seem to think so. They pushed down the already weak stock price of both Federal National Mortgage Association and Federal Home Loan Mortgage Corp. in response to the Fed's tightening of credit last week.

But analysts and agency executives think otherwise. They said they do not expect the rate increase to affect earnings at the two agencies next year.

Investors "have a knee-jerk reaction that Fannie and Freddie are rate sensitive," said Thomas O'Donnell, a Smith Barney analyst. "It's only a matter of time before the market comes to its senses."

Mr. O'Donnell said he expects the rate increase to benefit the secondary market agencies. So far this year, both have seen their loan purchases plunge as consumers gravitated away from fixed-rate loans to those with variable rates.

"The problem the agencies have had this year is volume," Mr. O'Donnell said.

With rates rising, originations have dropped from $1.1 trillion last year to a projected $750 billion this year. Meanwhile, adjustable rate mortgages, which now make up almost half of the market, have been largely retained by portfolio lenders.

"As spreads narrow, ARMs become less popular," Mr. O'Donnell said. That means the agencies will have a crack at more of the new loans being made.

Rates on ARMs are linked to other short-term interest rates, and economists expect that the spread between short and long rates will shrink next year.

"Also, if long rates top out and maybe come down, who knows, that too is good for them," Mr. O'Donnell added.

But if rates on the 30-year fixed loan cross 10%, everyone in the housing market will suffer, Mr. O'Donnell said, and the agencies will be forced to grind out profits in a much tougher environment.

At least one housing economist is predicting that rates will hit 10% next year. David Lereah of the Mortgage Bankers Association said he expects moderate increases next year, topping out at 10%

"At that point, there will be a pretty good slowing of housing activity," said Mr. Lereah. "Next year will be the hardest year we've had in a long time."

He said he expected the agencies to feel the pinch as mortgage bankers send them less business and rising rates swell funding costs and cut profits.

Mr. Lereah expects originations to total $600 billion next year.

By contrast, Fannie Mac economist Mark Obrinsky has a more optimistic forecast. Mr. Obrinsky said he expected rates to peak at 9.5% next year, and that originations would reach $630 billion.

Both agencies have bolstered earnings this year by buying their own mortgage-backed securities for their portfolios.

At Fannie, 37% of portfolio purchases through October consisted of its own securities, and the agency expects to deploy the same strategy next year, according to Ellen Goldberg, vice president for investor relations.

Ms. Goldberg added that Fannie Mae also expects that more depository institutions will offer adjustable-rate loans on the secondary market next year.

She said Fannie Mae expects Tuesday's rate hike to have no impact on its earnings.

A Freddie Mac spokesman said his agency also believed that its earnings would not be adversely affected by the rate hike.

Kurland Resigns At Bear Stearns

Dale Kurland, the long-time head of Bear, Stearns & Co.'s mortgage banking division, has resigned.

Ms. Kurland, a managing director, is expected to leave the firm shortly. She declined to comment on the reasons for her departure and stated that she had no immediate plans, but expects to continue to work in the field.

Ms. Kurland, an eight-year veteran of Bear, Stearns, is best known for her work in mergers and acquisitions. She recently represented NationsBanc Mortgage in its acquisition of three small California mortgage banks.

The largest Bear, Stearns deal was working on behalf of PNC: Bank in its purchase of Sears Mortgage for $327 million in 1993.

Much of Ms. Kurland's mortgage-banking work in recent years has been on behalf of the Resolution Trust Corp.. Among the RTC sales were that of Troy & Nichols and Sunbelt Mortgage.

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