Home equity and subprime mortgage specialists are taking aim at a new Fannie Mae program that they see as an incursion onto their turf.

Fannie Mae began a program last week that lets borrowers with less-than-perfect credit get a loan at an interest rate just two points higher than on a standard mortgage -- and the rate goes down a point after 24 consecutive months of on-time payments.

The loans are designed to be cheaper than what a subprime lender would offer, even if the borrower does not qualify for a rate reduction after 24 months. Fannie Mae chairman Franklin D. Raines said the lower rate is possible because the government-sponsored enterprise's risk assessment technology lets it offer the loans without taking on too much risk.

But subprime lenders questioned that reasoning.

"Fannie Mae is expanding its mission into areas where it has virtually no experience, and taxpayers should be prepared for a bailout that could rival our savings and loan experience," said Jeffrey L. Zeltzer, executive director of the National Home Equity Mortgage Association.

The association predicts that the program will cost Fannie its biggest losses ever, he said. The outcome, he said, will be that consumers with credit problems will "be back where they were 25 years ago -- no access to mortgages or loans at all, other than loan sharks."

Fannie Mae shrugged off the criticism. "We keep coming up with ways to lower consumer costs, and certain others keep coming up with ways to object to it," said David Jeffers, a spokesman.

This prompt-payment reward concept is not new. Associates First Capital Corp. of Dallas started a program in early May that guaranteed a 0.5-percentage-point rate reduction after only 12 consecutive on-time payments. The total possible reduction would be 2.25 points in three years.

And Money Store, a unit of First Union Corp., has had a similar program since July 1998.

Mr. Zeltzer said Fannie Mae's "intrusion" into the market would "freeze competitors out," effectively eliminating the competition that keeps prices down.

Others in the industry said they are afraid that if the so-called A-minus program succeeds, Fannie will expand into B-grade lending, the specialty sector's primary target group.

Michael Vinciquerra, an analyst at Raymond James & Associates, said that both Fannie Mae and Freddie Mac need to find other markets for higher-yield loans. He said that only 6% to 8% of mortgages outstanding qualify as A-minus and, therefore, would not deliver huge gains in agency portfolios. But "they need all the incremental business they can get," he added.

"If a customer pays on time, Fannie Mae has basically got an A-loan customer on their hands, and they've still got a rate 100 basis points higher than it would have been originally," Mr. Vinciquerra said.

Mr. Vinciquerra rejected the argument that Fannie Mae does not have the experience to enter the market. "They've been in the business for a long time and have developed the expertise in systems and in credit evaluations and in balance sheet management so that they can go in and take these types of products and make them work," he said. "They've got the biggest data base in the U.S. regarding mortgage performance and can figure out who's going to pay and who's not better than anyone else out there."

Bear, Stearns & Co. analyst David Hochstim said criticism of the new product stems from a general industry fear of expansion by Fannie and Freddie.

"The reality is that Fannie and Freddie have a lower cost of funds and can survive with a lower yield," Mr. Hochstim said. "It's difficult for most mortgage investors to compete with them for most products."

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