The Federal Home Loan banks' challenge to Fannie Mae and Freddie Mac moved forward last week with the Federal Home Loan Bank of Atlanta joining the banks' alternative secondary market program.

The Atlanta bank joined the Chicago and Dallas Home Loan banks in a Mortgage Partnership Finance Program under which it will offer to assume the funding and take on the prepayment and interest rate risk of home loans.

The program, created by the Chicago Home Loan bank, is "a very well- tested, turnkey operation," said Carol A. Jackson, acting president of the Atlanta bank.

"In a low-rate environment, this is the other side of a full set of programs for a Federal Home Loan bank," she said.

Nearly half her bank's members-which are in Georgia, Alabama, Maryland, the District of Columbia, Virginia, North and South Carolina, and Florida- have less than $100 million of assets.

Alex J. Pollock, president and CEO of the Chicago bank, said the New York and Pittsburgh banks are close to joining the program too. Since its inception in 1997, the banks have bought more than $1 billion in loans made by member institutions.

This alternative secondary market has grown amid lender concerns about the expanding influence of Fannie Mae and Freddie Mac.

The Home Loan banks are also fighting the government-sponsored enterprises with some political muscle of their own. The New York bank, for example, recently appointed former New Jersey Gov. James J. Florio as chairman.

Mr. Florio, now a partner with the Manhattan law firm of Fischbein Badillo Wagner Harding, will be the bank's advocate with politicians, the financial community, and the general public.

The Mortgage Partnership Finance Program divides the credit risk and interest rate risk of fixed-rate mortgage loans between the lender and corresponding Home Loan bank. Member commercial banks and thrifts handle origination and servicing; a Home Loan bank is responsible for funding and risks associated with interest rates, liquidity, and prepayments.

But the program has run into some resistance. A May 1997 suit challenged the authority of the Federal Housing Finance Board, which regulates the 12 Home Loan banks, to approve it.

The parties in the suit were the Western League of Savings Institutions, the Texas Savings and Community Bankers Association, World Savings of Oakland, Calif., and Charter One Bank of Cleveland.

Lou Nevins, president of the Western League, said a substantial number of its members "question the logic that the way to combat the near- duopolistic control that Fannie and Freddie exerts on the mortgage market is to create still another GSE to compete with them."

The case, filed in Federal district court in Texas, was dismissed, but an appeal has been filed, said Peter Gutzmer, senior vice president and general counsel for the Chicago Home Loan bank.

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