WASHINGTON -- Freddie Mac gained some small ground over Fannie Mae in the first half of this year in their long-running fight for market share.

The most dramatic shift took place in the secondary market for adjustable rate mortgages. Freddie trounced Fannie, and grew its share of that shrinking pie by a fifth.

Lenders and Fannie Mae said Fannie is trying to recoup those losses.

The ARM market "has been tough for us," acknowledged Donna Callejon, senior vice president for single-family marketing at the Federal National Mortgage Association.

"What our customers have been telling us is that we are not as competitive as Freddie Mac on ARMS, both on pricing and underwriting," she said.

No Strategic Decision

The Federal Home Loan Mortgage Corp., known as Freddie Mac, said there had been no strategic decision to go after the ARM market.

"Our market share is up across the board," said Jim Cotton, director of business management.

The two secondary market giants bought $219.6 billion of mortgages in the first half of this year, up slightly from $214.1 billion in the period last year. Freddie's share of that market grew about 2.5 percentage points, to almost 44%.

The market for adjustable-rate-mortgages went down slightly to $16.8 billion in the first six months, from $17.2 billion. But Freddie's share of that market grew to almost 58%.

|The Lion's Share'

"There is a fairly small pie of ARM loans being originated. The lion's share of that is being originated or bought for portfolio by banks and savings and loans," said Ms. Callejon.

Fannie is trying to gain some lost ground in adjustables by designing more flexible underwriting standards. The present standards were written when interest rates were higher, and they do not fully allow Fannie to shop for the lower-rate loans now being written.

Presently, Fannie buys adjustable loans or securities only if the borrower can make payments at a 7% interest rate, even though the interest rate on most ARMS is lower, Ms. Callejon said.

Freddie, on the other hand, buys loans if borrowers can make payment at the prevailing lower rates, Mr. Cotton said.

Market |Extremely Fluid'

S. Muir Atherton, in charge of secondary marketing at American Residential Mortgage Corp., said the market for adjustable mortgages was "extremely fluid" right now as Fannie and Freddie jockey for business.

American Residential, based in La Jolla, Calif., sold $50 million of ARMs to Fannie Mae in the first six months of the year. But in May, it decided to start selling ARMs to Freddie as well, and sold $12 million to that agency in June alone.

Freddie Mac was "a little more aggressive in how it qualified ARM-buyers. Fannie has recognized this, and is taking steps to try and capture that back," said Mr. Atherton.

For lenders with a history of making good loans. Fannie is relaxing that 7% rule," Mr. Atherton said.

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