The mortgage chieftains at a recent conference in Utah chortled knowingly when a slide show depicted some future business lines at Fannie Mae and Freddie Mac: pizza delivery, horoscopes, and pet day care.

The tongue-in-cheek presentation by Stanford L. Kurland, chief executive officer of Countrywide Home Loans, struck a nerve. More than ever, mortgage lenders and private mortgage insurers are fretting about diversification by the two secondary-market titans.

The latest concerns center on recent forays by Fannie and Freddie into mortgage insurance. That may not be astrology, but some executives maintain that the business lies outside the agencies' mandate to buy home loans.

"The question is, what's next?" said Patrick S. Flood, president of HomeBanc Mortgage Corp. in Atlanta. "This activity creates another sense of their stepping into other areas of the housing finance business."

Increasingly, executives at big mortgage businesses see the agencies competing with mortgage banks and insurers-rather than working with them cooperatively, as they have in the past. At its most extreme, this vision holds that Fannie and Freddie one day will originate loans, cutting out lenders to deal directly with the public.

Fannie and Freddie say they have no such plan. As for mortgage insurance, they say their moves are not only permitted but good for homebuyers.

Those, of course, are the key tests on Capitol Hill. And the controversy may well be headed to Congress. A group of big lenders and insurers is quietly setting up a trade group to fight pushes by the government- sponsored enterprises into mortgage insurance and other businesses. The group is now auditioning lobbying and public relations firms, Washington sources said.

The critics-generally executives from very large companies-say much more is at stake than mortgage insurance. The conflict points to "long-term structural issues in the business," said an executive at a large bank.

The stage for the latest drama was set early last year, when Fannie and Freddie rolled out 3% down payment programs intended to relieve what had been identified as the main obstacle to homeownership. Mortgage insurance is required when the down payment is less than 20%.

In October, lenders were galvanized by what many saw as a backdoor attempt to make it easier for Freddie Mac to self-insure such loans by amending its charter. The provision was defeated in Congress.

Last month Fannie Mae, which had raised mortgage insurance requirements in 1994, stoked the controversy by announcing it would reduce those requirements to the earlier levels-but only for borrowers approved by its Desktop Underwriter system. The system is used by lenders to determine whether loans will qualify for sale to Fannie Mae, and much of the protest has come from lenders large enough to have developed automated underwriting systems of their own.

Fannie would let borrowers buy even lower coverage than the 1994 level- in return for either an up-front fee, which could be added to the loan balance, or a higher interest rate. Fannie would then buy an additional layer of coverage.

Freddie Mac said it will unveil a new mortgage insurance plan shortly.

The initiatives were seen by private mortgage insurers as an incursion on their turf.

"The question that raises is, are they (Fannie Mae) in the insurance business?" said Darryl Thompson, president and chief executive of Triad Guaranty Insurance Corp., Winston-Salem, N.C. "We have capital put aside for the risks we're taking on. They don't."

Nor did they sit well with big mortgage companies that have invested in their own insurance programs. "We established a captive reinsurance platform to legitimately earn these returns," said an executive at one of the largest lenders, who did not want to be identified. "Suddenly, we're competing with a GSE."

Two private mortgage insurers-MGIC and United Guaranty-responded with alternatives to Fannie Mae's plan designed to lower the cost of mortgage insurance without requiring lenders to change their systems. Both plans allow borrowers to add part of the insurance premium onto the loan balance.

Some fear Fannie will refuse to buy such loans, making the financed- premium option impracticable at the reduced coverage levels. But Adolfo F. Marzol, executive vice president and chief credit officer at Fannie Mae, said it is in discussions with insurers to find common ground on the issue.

Fannie and Freddie maintain that they are operating within their chartered mission to expand homeownership. And repeating an argument they have used successfully in previous tiffs with lenders, they say the initiatives will reduce the cost of homeownership.

"Our charter directs us to find ways to lower costs for consumers, and that's what we ultimately have to strive for even when at times, it might be something that lenders, or (mortgage insurers) or other business partners might not want us to do," a spokeswoman for Freddie Mac said.

Fannie's mortgage insurance plan is "not a growth strategy or a take- more-risk strategy," Mr. Marzol said, adding that Fannie views mortgage insurance companies not as competitors but as "critical partners."

Mr. Flood of HomeBanc Mortgage acknowledged that "consumers that are very creditworthy are going to get a benefit that they are long overdue."

But a requirement that borrowers be accepted by Desktop Underwriter "by itself is going to be a limiting factor on who's going to be able to participate," said Saiyid T. Naqvi, president and chief executive officer of PNC Mortgage, Vernon Hills, Ill.

The fee charged by Fannie to use the system "would obviously have to be passed on to the customer," Mr. Naqvi said.

Fannie denies it is trying to force anyone to use its technology.

"There are certain very high risk products where we are not comfortable, but the vast majority of our business can be and is underwritten outside our technology," said Ann Logan, Fannie Mae's executive vice president for single-family mortgage business.

The Office of Federal Housing Enterprise Oversight, the financial safety and soundness regulator of Fannie and Freddie, is expected to issue a risk- based capital regulation by mid-March that may well shape the outcome of the battle.

"There's a huge interconnect here between the capital requirements and the ultimate fate of mortgage insurance coverage requirements," said Bruce W. Harting, an analyst at Lehman Brothers.

He expects Freddie Mac to wait "to announce how much risk per high-LTV loan they will take until they digest the pending capital requirements."

Fannie Mae, meanwhile, is playing down the furor, saying some tensions are a natural with so many players in the secondary market.

"Individual customers can agree or disagree," Ms. Logan said, referring to lenders who are Fannie's clients. "Am I concerned that there are going to be 20 of them that will storm the doors? Not really. I doubt that they would protest saving the consumer money. They're as interested in that as we are."

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