Fannie Mae's new effort to underwrite A-minus loans is being greeted with mixed emotions by lenders who are already lending to borrowers with slightly impaired credit.

Last week Franklin D. Raines, Fannie Mae's chairman and chief executive officer, unveiled the Timely Payment Rewards mortgage, which is designed to help people with bruised credit obtain loans that qualify for purchase by Fannie Mae. He said the new mortgage would let borrowers pay 2 percentage points less than they would typically have to for a subprime loan. After making two years of on-time payments, borrowers would be guaranteed a 1-percentage-point rate decline but would also be free to refinance. The new product is available only through lenders that use Fannie Mae's automated underwriting system, Desktop Underwriter, for originating loans.

Fannie and Freddie's efforts to mainstream much of the subprime market are being marketed as ways to bring lower costs and efficiencies to borrowers and lenders alike. But some lenders are fearful of the companies' entrance into this market.

First Indiana Bank in Indianapolis has been active in A-minus and high-loan-to-value equity lending for the past eight years without products from Fannie Mae or Freddie Mac , said Timothy J. O'Neill, Jr., senior vice president at the thrift. A secondary market already exists for such loans, he said, and with a lot of A-minus business going toward debt consolidation and refinancings, he questioned whether this niche "fits the intent of the charter of the agencies."

"Our fear with the agencies, of course, is standardization, commoditization, which doesn't allow you to distinguish yourself as a community bank. We think this area would benefit from a lot of creativity," he said. Some of the innovations First Indiana has brought to its lending include documentation, alternative appraisals, self-insurance, and other cost-saving measures, he said.

Jamie S. Gorelick, vice chairwoman of Fannie Mae, said its new product is "clearly market-broadening for the prime lender."

"It literally delivers on our promise" to help people with damaged credit become A-rated borrowers, she said, in that it creates incentives for responsible behavior and reduces costs for borrowers who would not have had access to the prime market.

Peter T. Paul, president of Headlands Mortgage Co. in Larkspur, Calif., said it originates about $50 million of A-minus mortgages a month, or 5% of its total originations. Headlands has been making loans "at approximately the same yield that Fannie talked about" and selling them to Freddie Mac, he said. These loans typically require a 5% or 10% down payment along with mortgage insurance. The loans, like Fannie's new product, have no prepayment penalty, so if a borrower's credit improves, he or she can do a no-fee refinancing, he added.

If Fannie's loan "becomes very popular," Headlands will offer it, Mr. Paul said. Overall, Fannie and Freddie's involvement will bring greater efficiency to A-minus lending, he said.

James B Witherow, president of FT Mortgage Cos., a lender now offering Fannie's new product, said it lets mainstream lenders "serve the need of this particular niche that may have been pursuing higher-cost alternatives in the nonconforming marketplace."

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