Fannie Mae's plan to give away death-and-disability insurance to homeowners may have hit a new snag.

The giveaway, which was promoted as a boon to the government-sponsored enterprise's customers, has now attracted the attention of the Treasury Department.

It had already attracted high-level political fire. Rep. Jim Leach, chairman of the House Banking Committee, attacked it as a way for Fannie to cash in on its lucrative government links in a whole new investment sphere.

Dismissing the program as an "arbitrage operation," the Iowa Republican asked the Department of Housing and Urban Development, which regulates Fannie, to review the program to see if it fits into Fannie's charter.

It is an arcane tax issue, however, that could be the deal-killer.

The Treasury Department is looking at whether Fannie would be violating the tax code's intent by financing a tax-exempt investment-insurance for its customers-with what is, in effect, tax-deductible debt, House Banking Committee aides said.

Tax law restricts companies in buying insurance for their employees and shareholders with tax-deductible debt, but does not exclude such insurance for customers, according to Willard Taylor, a partner at Sullivan & Cromwell, New York.

Fannie Mae flatly denied the program has hit a snag in the Treasury Department.

"Once again, we would finance this product with retained earnings, not debt," said David Jeffers, vice president for corporate relations, reiterating a point the agency made when Rep. Leach criticized the program.

"It is completely false that the Treasury Department is looking at this in the way your unnamed sources have described," Mr. Jeffers added. He insisted the banking committee aides had "totally misrepresented the situation," yielding a "twisted and distorted" account of Treasury's involvement.

The banking committee staff members said the program wouldn't pay off if Fannie were truly using its equity to finance the program. They add that in internal documents Fannie pegs the cost of the premiums at its debt costs.

Early word is that the Treasury Department views Fannie's reasoning as an "aggressive reading of the tax code," according to a banking committee aide.

A Treasury spokesman acknowledged that Mr. Leach has asked the department for comment.

He said the department is studying the Fannie Mae plan "in light of a number of policy considerations."

Meanwhile, the other mortgage agency, Freddie Mac, is studying the product to see if it "serves our interests, those of our customers and borrowers," Freddie spokeswoman Sharon McHale said.

Lenders have told Freddie Mac they don't like the Fannie initiative, she said.

One complaint is that by offering the product, Fannie Mae is cutting into the lenders' cross-selling opportunities.

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