Fannie Mae's electronic link to mortgage brokers could shift market share toward smaller lenders, according to a study by Morgan Stanley Dean Witter.

In increasing numbers wholesale lenders and mortgage brokers are signing up to use Fannie Mae's point of sale complement to its automated underwriting system, Morgan Stanley found.

The system's point of sale capability gives direct access to brokers sponsored by lenders.

More use of automated underwriting could also increase loan volume. It is resulting in "a broader range of loans approved and accepted by the secondary market," said A.W. Pickel, chairman of the technology committee for the National Association of Mortgage Brokers and president of Leader Mortgage Co., Lenexa, Kan. "I think it's actually increasing the homeownership rate."

Small banks and mortgage companies that can deal directly with brokers using Fannie Mae's technology will be able to compete with big players such as Countrywide Home Loans Inc., Norwest Mortgage, and Chase Home Finance without the costs of creating their own software platforms, Morgan Stanley said.

Thrifts and others that make top-quality loans using alternative credit standards may find their business shrinking, the study said, because Fannie's system will enable the company to buy more niche loans, including low-documentation and high-loan-to-value loans.

Golden West Financial Corp., Washington Mutual Inc., GreenPoint Financial Corp., and other big thrifts may encounter more competition for the nonagency loans that they focus on, the report said.

Fannie Mae is making an "ubiquity play," said Kenneth A. Posner, vice president at Morgan Stanley and author of the report. "Just about everybody is going to have to use automated underwriting, or they'll be falling behind."

While Fannie and its rival Freddie Mac are close in market share among banks and originators, Fannie Mae is equipping the broker channel with the point of sale technology in an "aggressive push," Mr. Posner said. And this strategy may make a difference, because more than 50% of originations are said to come through brokers.

Automated underwriting accounts for close to 50% of Fannie's bulk purchases, up from 25% a year ago, according to the Morgan Stanley report.

Fannie's desktop origination system now generates about $6 billion a year in production volume, equivalent to almost 1% of originations by brokers, but volume is expected to grow by at least 400% in 1999, Morgan Stanley said.

"We are very serious about including brokers in our technology strategy," said Michael Koch, director of marketing for customer technology services at Fannie Mae. Fannie has a partnering strategy with its lenders whereby brokers can only get the necessary software through a lender- sponsor, he said.

Fannie has 32 lenders registered to sponsor brokers, with 16 others in the pipeline, double the number of a year ago, Mr. Koch noted. Fannie is registering brokers almost 75 brokers a week, he said. Lenders typically maintain relationships with hundreds of brokers.

"The lender audience is our primary audience," said Patricia McClung, director of product development for automated underwriting at Freddie Mac.

Some 25% of the loans Freddie evaluates using its automated underwriting system come from a broker or other point of sale originators. But that number is expected to grow as Freddie works on ways to "better serve getting access to brokers," Ms. McClung said.

Loan Prospector, Freddie Mac's automated underwriting technology, has had a volume increase of more than a 100% over the last year, she said. In 1997, the system evaluated 528,000 loans and for 1998 the company estimates it will evaluate 1.6 million loans.

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