Citing increased demand from lenders, the government on Wednesday expanded a controversial mortgage program offered by the Federal Home Loan Bank of Chicago.

The Federal Housing Finance Board voted to let all 12 regional Home Loan banks participate in the pilot program, dubbed Mortgage Partnership Finance. The program is designed to give lenders an alternative to selling mortgages in the secondary market.

The finance board also raised the cap on loans made through the program, from $750 million to $9 billion. Including commitments, the Chicago bank had already reached the $750 million limit.

"This is a response to market demand, not only in the Chicago bank's district, where MPF is already flourishing, but also in many other areas of the country," said finance board Chairman Bruce A. Morrison.

Under the pilot program, which was begun in June 1996, the Chicago Home Loan bank funds, and manages the interest rate risk of, residential mortgages originated and serviced by participating lenders. That saves its member institutions from having to pay a guarantee fee to a secondary market agency, the Chicago bank said.

The program's critics, however, said they fear that some Home Loan banks may not be prepared to handle the program's additional credit risk. Indeed, the finance board's decision to expand the Chicago pilot came just five days after the General Accounting Office issued a report criticizing the agency's "involvement in promoting system programs and projects ... (that) could complicate (its) primary duty as safety and soundness regulator" of the Home Loan banks.

The GAO criticisms will be addressed today in a hearing by the House Banking Committee's capital markets subcommittee.

But one group skeptical of expanding the pilot program, America's Community Bankers, was mostly pleased at the finance board's decision.

"We would've preferred to see an intermediate step rather than moving to more of a full-bore approach with a $9 billion cap," said Robert R. Davis, the group's director of government relations.

"But we're happy that the finance board has approved an expansion where the business decisions to participate would remain with the individual banks," he said.

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