Fannie Mae's chief financial officer sought to reassure investors that its double-digit portfolio growth would not sputter now that mortgage rates are rising.

Timothy Howard's main point in a conference call Friday with analysts was that the Federal National Mortgage Association does not expect 1996 to be a replay of 1994. That year, an increase of nearly 300 basis points in short-term rates reduced fixed-rate lending to a trickle and bolstered adjustable-rate originations.

This time around, Fannie Mae expects that fixed-rate originations will remain healthy and that the ARM share of the market will peak at 30%, compared with 60% in the previous rate cycle, Mr. Howard said.

Fannie reasons that although 30-year mortgages are becoming more expensive, consumers will stick with them because rates remain lower than a year ago. In 1994, by contrast, 30-year rates had been at historic lows just 12 months before.

In addition, ARM lenders are at a relative disadvantage to the market this year, Mr. Howard said. Their cost of funds is higher than current short-term rates, but in 1994 their cost was below then-current rates.

"Yes, interest rates are up 100 basis points and could go still higher," Mr. Howard said, "but we think our portfolio will do well whether rates stay where they are or move higher because today's market isn't like it was in 1994."

As Fannie Mae's loan portfolio has grown - it reached $261 billion at the end of the first quarter - analysts have become concerned that its earnings growth would become more vulnerable to interest rate cycles.

When rates rise and fixed-rate originations fall, the interest spread on Fannie Mae's new mortgage investments typically falls. That's because loan product is scarce and it's a seller's market.

Reflecting that concern, analyst Steven Eisman of Oppenheimer & Co., New York, downgraded Fannie's stock two weeks ago.

Mr. Eisman argued that falling loan volumes in the second quarter - as foreshadowed by a drop in the Mortgage Bankers Association loan application index - would cut into spreads on new mortgage investments and thus on earnings growth.

After the conference call, Mr. Eisman said he hadn't changed his mind. He said he isn't expecting a rerun of 1994 but does expect spreads and growth to shrink.

In his remarks, Mr. Howard made a point of saying that Fannie Mae had not reduced its earnings projections since rates began rising.

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