It's only a matter of time before Freddie Mac and Fannie Mae dominate the subprime mortgage market.

At least, that was the opinion of lending executives at the Subprime 97 conference here last week.

Yields are too attractive, borrowers fit the government-sponsored entities' charter requirements, and industry players are too small and unorganized to put up much of a fight, they say.

"The voracious growth by Fannie and Freddie in recent years can't be sustained," unless they enter new markets, said Gary J. Kopff, president of Heritage Management. "They can't make jumbo loans, so they're looking to see what they can nibble away from subprime."

The move into subprime would be good for the mortgage agencies' shareholders, participating community banks, and borrowers, Mr. Kopff said.

The only way that the industry could defeat Fannie and Freddie is to "rise up and say that they're not needed," Mr. Kopff added.

Judging by participation here, Freddie is taking the more active role in subprime.

In fact, no fewer than five Freddie representatives attended the conference. They were active participants in the question-and-answer session, and were chatting up lenders about the market.

One small midwestern subprime lender said, "They've already done three deals," referring to Freddie's recent subprime securitizations with First Union Corp. "And, they told me they're going to do more."

Finance company executives are decidedly against the big agencies' entry into their markets, but seem confident that margins will be unaffected in the near term as Fannie and Freddie struggle to carve out a spot in the competitive market.

"No one needs them to come in right now," said an Irwin Capital executive. The advent of securitization means that no subprime lenders need to rely on government-sponsored enterprises. "If they're going to do this, they're going to have to play by the rules," he said.

The mortgage-scoring systems offered by Freddie and Fannie are not necessarily helpful when predicting subprime loans' performance, said Jennifer Schneider, an analyst with Duff & Phelps. The scoring systems were developed using prime borrowers who have gone through credit problems, not traditional subprime borrowers, she said. "As more data becomes available, these will be useful, but we're not there yet," she told attendees at a session here.

A Freddie representative disagreed, though, telling session attendees, "Freddie Mac's risk-rate evaluator was developed using subprime loans."

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