Fannie Mae outlined its growth strategy for the subprime mortgage market Tuesday, hours after Freddie Mac announced plans to tighten its own subprime underwriting standards.

Daniel H. Mudd, Fannie's chief executive, said the government-sponsored mortgage giant has a small but growing position in the sector and that he expects its subprime business to increase.

Mr. Mudd said the company expects to shift its mix of subprime assets away from purchased securities toward its own production. It's more economical, he said during a conference call with analysts to discuss Fannie's business update. I think it actually involves more transformational change in the marketplace.

If its exposure to subprime loans increased, Fannie officials said, the company would continue to be more concerned with multiple layers of risk as opposed to specific loan characteristics, such as products underwritten with little or no documentation of a borrower's financial position.

Enrico Dallavecchia, its chief risk officer, said Fannie is trying to work with our lender partners to review the standards they use to originate these loans.

Mr. Mudd said Fannie does not intend to back away from purchases of subprime bonds, despite rising losses on recent loans. Citing broad moves in the market to rein in underwriting standards, improving prices for riskier assets, and its expectation that further regulatory guidance will be forthcoming, Fannie said it sees opportunities across the segment.

We recognize that our participation in this large and fast-growing segment will become increasingly important to our mission, Mr. Dallavecchia said. We believe we are positioned to become more active in this market as our view of risk-return dynamics becomes more favorable.

Fannie filed a 12b-25 business update with the Securities and Exchange Commission Tuesday in lieu of an annual report. Fannie is still recovering from an accounting scandal that forced it to overhaul its internal controls and undertake a major restatement of financial results. The company filed its report for 2004 last December.

In the filing Tuesday, Fannie said its share of domestic issuance of single-family mortgage securities held steady in 2006 at about 23.7%, though it experienced an upward trend during the course of the year, finishing at a 24.7% share in the third and fourth quarters.

Fannie mortgage bonds outstanding stood at $2 trillion at the end of the year, up about 5%.

Fannie's exposure to subprime loans remains relatively small, with only 2.2% of the mortgage assets it owns or guarantees falling into the category. Most of that portfolio comprises privately issued bonds purchased by Fannie that it emphasized were generally made up of higher-quality tranches and protected by credit enhancements.

Mr. Mudd said his company's heft and conservative risk profile are helping it avoid some of the subprime problems that have affected other companies. I want to emphasize that Fannie Mae is in a good position not only to weather the period ourselves, but even to help the market weather the prevailing turmoil in the subprime business, he said.

The officials declined to say how much they expect the company's participation in the subprime market to grow. They said the process would be tied to assessments of how specific products are performing.

You can either go on to the next tollgate or you've got some remediation to do before you get to the next step, said Mr. Mudd, illustrating reviews to be conducted by his credit risk department. It's an incremental process rather than there's some sort of a secret master plan that says we have a number about where we're eventually going to be in this market.n

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