Borrowing a page from the credit card industry, Fannie Mae and Freddie Mac are prodding mortgage lenders toward risk-based pricing as a way to build loan volume.

By using credit scores based on borrowers' histories and on collateral to set the price of a loan, lenders can safely extend credit to more customers, according to advocates of risk-based pricing. Leland Brendsel, chairman of Freddie Mac, said the technique is a key to continued growth in the mortgage industry.

"The greatest era for mortgage lending lies just beyond the century mark," Mr. Brendsel said. "Cost-based pricing will speed the transformation."

The mortgage industry has been slow to embrace tiered pricing because Fannie and Freddie have been satisfied to treat most borrowers alike, as long as they met fundamental credit criteria.

But now that population trends are forcing the industry to reach for more types of borrowers, the companies are turning to a more strenuous risk-screening process. The objective is to identify borrowers who wouldn't have qualified in the past and to set prices appropriate to the risk of lending to them.

Mr. Brendsel predicted that by 2000 Freddie Mac would rely exclusively on risk tiers when pricing loans it buys from lenders. Fannie Mae is also establishing tiers within its conventional loan program to more accurately distribute risk, company executives said.

The approach appears to be in keeping with Fannie Mae chairman JAMES JOHNSON'S desire to "stretch what we can do in the underwriting process" to make mortgages available to more borrowers.

Fannie Mae and Freddie Mac, chief buyers of the $800 billion of residential mortgages originated each year, could well determine pricing policy for the entire industry.

"Both agencies feel the last to arrive at risk-based pricing will lose," said Sterling Edmunds Jr., executive vice president at Crestar Mortgage Corp., Richmond, Va. "It's only a matter of time" before the approach is widely used in the mortgage industry.

Fannie Mae and Freddie Mac are considering dividing the group of loans currently considered A-quality into several tiers. The emphasis on risk- based pricing by the agencies could help standardize prices for so-called subprime, or B and C credits, which are now set according to individual lenders' fancy.

Mainstream mortgage bankers said they have gotten no overt directive from Fannie Mae or Freddie Mac, but they said both companies are urging them to move in the new direction.

"Risk-based pricing is definitely on the radar screen," said James Jandrisevits, senior vice president at Fleet Mortgage Group, Columbia, S.C.

This is demonstrated by pressure from the agencies to keep credit scores within certain ranges in order to get better guarantee fees, Mr. Jandrisevits said. Fannie and Freddie "are building elements of the pricing structure into contracts with lenders."

Risk-based pricing relies on a number of factors, including property and borrower information, to assign a score that can be used for pricing decisions.

While mortgage lenders say they generally will accept the approach, they also wonder about pitfalls. Indeed, the credit card industry has been buffeted by losses despite the use of risk-based pricing technology during a period of fast growth in the early 1990s.

"You have the responsibility to stay on top of the performance" of each loan, said Michael Auriemma, president of Auriemma Consulting Group, a credit card firm in Westbury, N.Y.

Problems may be more acute in the mortgage market because lenders tend to discover trouble when the borrower is already distressed, Mr. Auriemma said. Indeed, mortgageholders tend to miss months abruptly, while credit cardholders' payment patterns shift subtly well before serious problems develop.

Mortgage industry observers said it would take years for the tiering approach to become standard because loans to less creditworthy borrowers are more difficult to administer-and service.

Fannie and Freddie said their separate automated underwriting systems can help lenders take a tiered approach by developing precise scores for mortgage loans.

Lenders complain that they would have to run loans through each agency's automated system before knowing which would offer the best price. This approach can affect "best execution strategies and be inefficient for the lender that uses both systems," said James Wilson, senior vice president at First Union Mortgage Corp., Waterbury, Conn.

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