Two key members of Congress have attacked a recent proposal by the chairman of Freddie Mac to eliminate size limits on the loans bought by the housing finance agencies.

They warned Freddie Mac chairman Leland Brendsel that the agency could lose its government-conferred privileges in the process.

In a letter sent Friday, Rep. Richard H. Baker, R-La., told Mr. Brendsel that he understood the desire of Freddie Mac - the Federal Home Loan Mortgage Corp. - "to grow and increase profits as a corporation with private capital."

"But you must accept to do so without your existing market privileges granted by Congress," Mr. Baker wrote.

And in a letter sent Monday, Rep. Rick Lazio, R-N.Y., sounded a similar theme.

Congress would have to "reassess whether and to what extent Freddie Mac and Fannie Mae should continue to enjoy the benefits of GSE status which afford them a substantial competitive advantage over their private-sector competitors," Mr. Lazio said.

Rep. Baker heads the House Banking Committee's subcommittee on capital markets, while Rep. Lazio heads the subcommittee on housing.

A well-placed congressional source said the latest controversy was likely to lead to a new law that clarifies the ambiguous loan-limit statute now on the books.

Mr. Baker also took the occasion to blast Freddie Mac for what he called its "poor record of compliance" with federal goals to finance low-income and moderate-income housing, and described Mr. Brendsel's proposal as a "retreat from your public mission."

Mr. Baker asked Mr. Brendsel to respond at hearings scheduled for mid- April.

A spokeswoman for Freddie Mac said, "The issue is not a priority for us right now, but we would be happy to discuss it with Congress at the appropriate time." Fannie Mae - the Federal National Mortgage Association - is carefully avoiding any involvement in the debate, sources close to the company said.

While the dispute may seem technical, it is embedded in a long-running debate about whom Freddie Mac and Fannie Mae should serve, whether they should pay the government for some of their privileges, and if their growing market power is unfairly eroding the role of purely private companies.

These issues bubbled up several times last year as a revenue-hungry Republican Congress searched for new sources of money, such as a "user fee" to reimburse the government for its implicit guarantee of agency securities.

The most heated response to Mr. Brendsel's view has again come from the thrift lobby.

In an angry letter to Rep. Jim Leach, the Iowa Republican who heads the House Banking Committee, said Mr. Brendsel's proposal "seems to clearly indicate an insatiable appetite and ambition to swallow the entire market.

As government-sponsored enterprises, Freddie Mac and rival Fannie Mae are required to hold only about half as much capital as banks and thrifts. Also, because they are treated almost like government agencies on the debt market, they can fund more cheaply than anyone else.

Experts say that largely as a result of these benefits, Fannie and Freddie dominate the fixed-rate market for conforming loans - buying or securitizing up to 80% of these loans. And they predict that if allowed access to the jumbo market, the agencies will inevitably garner a commanding share there as well.

"It would be devastating" for banks and thrifts if the agencies start buying jumbo loans, said Charlotte Chamberlain, an analyst with Wedbush Morgan Securities, Los Angeles.

As with conforming loans, rates on jumbo loans would likely fall by between a quarter and three-quarters of a percentage point, depressing profits for banks and thrifts, Ms. Chamberlain said, and hastening their exit from the mortgage business.

Some of Freddie Mac's largest customers also oppose ending the loan limits.

For example, Norwest Mortgage Co., Des Moines now the largest originator and servicer in the nation, believes that the agencies should give up their government privileges, such as exemption from state and local taxes, if they want to go after the lucrative jumbo market.

"If they want to compete across the whole spectrum of homeowners, then why shouldn't they be privatized and play by the same rules as other mortgage market players?" asked Mark Korell, group president of lender and investor services at Norwest Mortgage.

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