A record 1998 for the U.S. mortgage industry-$1.45 trillion of originations-meant a banner year in volume and profits for Freddie Mac and its rival, Fannie Mae.

At the recent Midwinter 99 housing finance conference in Park City, Utah, American Banker talked to Leland Brendsel, chairman of Freddie Mac, about what lies ahead.

Investors demand ever bigger and better results from Freddie Mac. What will you do this year to top last year?

BRENDSEL: We think 1999 will be a good-in fact, an excellent-year. Activity will be down from 1998. It's unlikely we'll see $1.4 trillion in 1999. But even if it's just $1 trillion, that's still a big year.

We expect a large volume of fixed-rate loans to be sold into the secondary market. With the economy growing, inflation low, and home prices rising, it bodes well for credit performance.

On a single day last October, Freddie Mac bought $4 billion of mortgages in the secondary market. Do you see that happening again this year?

BRENDSEL: You can never predict that kind of thing. What we're finding is, financial markets can get imbalanced; there can be volatility. Those kinds of days create opportunities. We provided stability to the market. Could the same situation occur again? Absolutely.

What drives Freddie's earnings?

BRENDSEL: They are driven by discipline in how we manage interest rate and credit risk and how we manage our share capitalization. We should produce growth this year in the area of the mid-teens or somewhat above. Our results are there regardless of long-term rates, and whether the economy is weak or strong.

Our loan portfolio contributes 50% of growth in income. For 1999, the portfolio will provide an increasing share of net interest income. Our retained portfolio has been an important source of earnings growth. We had net growth of about $40 billion last year and should have 15% or 16% growth this year.

We see our earnings results aided by the continued drop in credit costs. The economy is good, home prices are up, California is better. And many years of sound credit policies and improvements in scoring are paying off.

You raised $1 billion last year by selling equity. Will you need to do it again?

BRENDSEL: I doubt we'll tap the equity market again. We saw big opportunities in 1998, and they outpaced the internal generation of capital through retained earnings, so we raised equity. But growth is not likely to be as rapid this year, and we see 1999 as a year when internal capital will be sufficient.

There's always a possibility that market conditions could be so great, and growth could far exceed our expectation.

Our major focus will continue to be on our reference notes, basically offerings of very large issues of very liquid notes. They have reduced our credit costs. We will still bring out a monthly issue of reference notes. Turmoil in foreign markets sends investors into high credit quality, and we've been benefiting.

What about the other part of your mission - providing funds for homeowners?

BRENDSEL: We don't see our two objectives as distinct and separate. If we push down costs and improve availability, it will also benefit our shareholders.

We will continue our focus on expanding into more parts of the market, the A-minus and alt-A areas. And we will explore how we can go into some B- quality credits.

We will also continue to work on installing automated underwriting. It's attractive for lenders and consumers and results in better originations. We're also working on loan-level, risk-based pricing, but that will take some time.

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