In theory, Freddie Mac and Fannie Mae should enjoy a smooth, rational duopoly that very nearly maximizes profits.

The two companies boast complete barriers to entry; no prospective competitor without government agency status can replicate Freddie's or Fannie's funding costs or the creditworthiness of their guaranties on mortgage-backed securities.

Both companies have sufficient resources that neither can possibly hope to dominate the other in terms of market share, and both are presumably smart enough to understand that an overly aggressive fee reduction by one ultimately requires a retaliatory response by the other.

In early 1993, we began to see signs - higher Remic fees -that both companies were managing price competition between them more effectively. Unfortunately, there are few signs of progress since then. According to Freddie Mac officials, there are no signs that Fannie Mae is willing to concede market share gains to Freddie Mac or to increase guaranty fees.

From Freddie Mac's perspective. Fannie Mae is simply unwilling to accommodate the reality that Freddie Mac has become a more formidable competitor over the last several years. As a result. price competition remains fierce between the two companies. and prospects for sustained increases m guaranty fees remain distant. at best.

Generally, Freddie Mac and Fannie Mae should face similar political risks. Both companies perform similar functions vis-a-vis the mortgage market, and thus far both have faced similar legislative and regulatory regimes.

The primary difference between their political exposures is that Fannie Mae's various affordable housing initiatives have been far more visible than Freddie Mac's. Fannie Mae clearly has sponsored more identifiable housing programs. with larger dollar signs attached, than Freddie Mac.

The perspective of Freddie Mac's management is that the company has gotten somewhat of a bum rap on this topic and that initiatives are under development to change it. The company's primary emphasis is on altering underwriting standards that may unintentionally result in discrimination against lower-income potential homeowners.

As one example of modification, the company has changed a previous underwriting criterion that homebuyers have two years of continuous employment with the same employer to a condition that the applicant have two years of uninterrupted income; apparently, a significant percentage of lower-income homeowners have continuous employment, but with a larger number of employers.

Obviously, Freddie Mac's more cautious stance regarding affordable housing programs lowers the business risk associated with these activities. Also, more modest objectives reduce the likelihood of failing to meet those objectives. Nevertheless, the key question is whether Freddie Mac's lower profile on the affordable housing front creates materially higher political risks for the company.

Fortunately for Freddie, Fannie Mae is likely to prevent any political retribution against Freddie Mac for the obvious reason that what is done to one can provide a precedent for the other. In this sense, Freddie Mac gets a free ride politically from Fannie Mae's extensive efforts. we think that this approach- whether deliberate or accidental -- will work for Freddie Mac, although our conviction on this point is less than 100%.

Despite these efforts, there are few signs that Freddie Mac is about to devote both the financial and public relations resources needed to produce any efforts quite as dramatic as Fannie Mae's "trillion dollar" initiative. While the company is apparently preparing a series of program announcements for this fall that management views as significant, our distinct impression is that these will pale in comparison with Fannie Mae's programs - both in public appearance and in financial substance.

This article is excerpted from a recent report by Mr. Hemel:

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