WASHINGTON - Freddie Mac has been courting smaller lenders with its streamlined loan-buying system.

And while smaller mortgage companies man, like the program, some larger ones worry that it's a troubling sign of things to come in the industry.

Freddie Mac spent $100,000 recently to build business with 285 small lenders at a three-day event in its McLean, Va., offices.

The program included a big pitch for Midanet, the software that Freddie supplies lenders to deliver their loans electronically, said Mark H. Fleming, vice president of seller-servicer operations at Freddie.

Heavy paperwork was one of the barriers that small lenders faced in doing business directly with Freddie Mac, Mr. Fleming said.

Misgivings Among Big Players

Some 6% of Freddie's business comes from 1,300 smaller lenders - those that sell up to $30 million in loans yearly to Freddie Mac, he said.

But does the assist to smaller lenders take business away from wholesalers?

Mr. Fleming said such a question was "politically charged." He added that Freddie wants to remove unreasonable barriers for anybody who wants to do business with the agency.

Some large lenders have misgivings about the aid and comfort Freddie is giving to their smaller competitors.

A typical point of view came from Mark Faris, executive vice president of Norwest Mortgage Inc.

Without this direct link, he said, smaller companies "would have been required to change their style of business.

"They would have become sellers to wholesalers. What we've done is perpetuate companies that are inadequately capitalized to do business."

Costs Down, Volume Up

Two smaller lenders described how they use Freddie's technology to cut costs and boost loan volume.

Pinnacle Mortgage Investment Corp. in Lancaster, Pa., started out selling its loans to wholesale mortgage bankers. Now they have a direct relationship with Freddie Mac and originate between $800 million and $1 billion in loans.

Delivering loans electronically is much quicker than sending paper documents, said Ian F. Cannon, assistant vice president for secondary marketing.

It has helped Pinnacle cut down on its primary cost, borrowing money from warehouse banks, he said.

Pinnacle can make a loan on a Monday, sell it to Freddie on a Tuesday, and return the money to the warehouse bank by Thursday, Mr. Cannon said.

"Before Midanet, we would have had to add two days" to that, he said.

Edwin Koons, vice president of Taneytown Bank and Trust Co. in Taneytown, Md., agrees. He also likes the lower labor costs it brings to the 12-person company.

"It may save us from adding the additional staff person. It allows us to do it faster," Mr. Koons said.

The mortgage company originates about $30 million in conforming loans annually, and another $10 million in nonconforming loans.

"I don't think it's any secret large lenders and smaller lenders have different agendas," said Mr. Faris of Norwest.

Looking ahead, Mr. Faris worries that the ambitious plan of Freddie's rival, Fannie Mae, to put out a single computer system that links lenders, appraisers, insurers, and others, will keep shaky small lenders in business.

"The thing we're concerned about is that as Fannie Mae develops systems that they not use government-sponsored where-withal, that they not perpetuate an inefficient system by providing technology to lenders that can't develop it themselves," he said.

If that happens, "we'll end with fragmentation" in the industry, he said.

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