WASHINGTON -- Fannie Mac and Freddie Mac engaged in a spirited battle for business in the second quarter even as their total volume shrank by a third.

The outcome was a draw, with each agency cornering about the same market share as it did in the first quarter. But the struggle is far from over, and both agencies continue to repair damage and fine-tune their strategies.

Fannie Mac, the Federal National Mortgage Association, said it bought 54.7% of all loans sold to the two agencies. That was up slightly from 54.2% in the first quarter.

Lenders said both agencies were willing to make better deals - both on terms and on price - in the face of a shrinking market, strong competition from portfolio lenders, and a shift to adjustable-rate mortgages.

They said Freddie Mac, the Federal Home Loan Mortgage Corp., was cutting guarantee fees as its securities lose ground against Fannie Mae's.

Freddie's security, which commanded up to a quarter-point more than Fannie's last year, now fetches only about one-sixteenth of a point more than Fannie's, according to Michael Conway, executive vice president of secondary market pricing at North American Mortgage Co., Santa Rosa, Calif. As the gap has narrowed,

"Freddie Mac is trying to respond, by lowering its fees," Mr. Conway said.

But "Fannie Mac doesn't want to abdicate its leadership. There's a real battle going on."

Fannie Mac appears to be reducing its guarantee fees for some lenders, as well as negotiating more flexible credit terms.

"Everyone I talk to is getting something" in special negotiated deals with Fannie, said an executive at a midsize lender.

For example, Fannie is more flexible now in buying loans for properties not occupied by owners. The agency is also more willing to look at special underwriting cases on a loan-by-loan basis, the executive said.

"We want to make sure we're competitive on deal terms," as well as on service, product development, and affordable-housing lending, said Donna Callejon, Fannie's senior vice president of mortgage-backed securities and marketing.

"We're doing what we always do, which is to look at how we're doing relative to the primary market, other investors, and Freddie Mac," she said.

She said Fannie Mac expects business volumes to continue to fall in the third quarter, though business in July did not drop off sharply from June levels.

Freddie Mac officials declined to comment.

Adjustable-rate mortgages, which made up 43% of all loans originated in June, remain a small part of business at the agencies.

Only 5% of loans bought by Fannie Mac in the second quarter had adjustable rates, up from 3.4% in the first quarter. At Freddie Mac, 11% of loans in the second quarter were ARMs, up from 9.89% in the first quarter.

Ms. Callejon said Fannie is pursuing "swaps" with portfolio lenders. In such deals, the lender exchanges loans in portfolio for agency-backed securities.

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