James A. Johnson, chairman and chief executive of Fannie Mae, provided some perspective on Fannie's foray into the subprime market and on efforts to find a better form of mortgage insurance, at a meeting of the New York Society of Security Analysts.

A-minus loans compose the largest part of the subprime market, he said. "We can capture this business for Fannie Mae and manage the risks successfully," he said.

Fannie Mae booked $4.2 billion of Alternative-A loans during the first nine months of 1998, he noted.

Franklin D. Raines, Fannie's chairman and CEO-designate, said, "We think consumers are paying too much in the A market and outside the A market."

Responding to lenders' concerns that Fannie and Freddie might expand their horizons beyond the secondary market, Mr. Raines said that Fannie Mae has "no aspiration to originate loans," and that the secondary market would remain its focus. "The secondary market has proven to be the ideal position on the mortgage-value chain for our business."

But Mr. Raines also said that Fannie Mae would further its "consumer focus." "Mass customization will be the trend of the future in mortgage finance," he said.

On the question of Fannie Mae and Freddie Mac's entering private mortgage insurance, Mr. Johnson said that Fannie was in an "intense dialogue" with mortgage insurance companies, to come up with an appropriate risk-management solution.

"We must keep our focus of the partnership squarely on the consumer," he said.

Mr. Johnson said that Fannie has had a "productive long-term partnership" with the mortgage insurance industry, and that it isfocused on developing "the next stage of our partnership."

But the Fannie executives expressed concern over the advent of pool insurance arrangements, in which the insurer agrees to insure a pool of loans, and the lender pays a lower guarantee fee to Fannie Mae or Freddie Mac.

A spokesman for Amerin Guaranty Corp. said, "We have never viewed pool insurance as something that is going to help the mortgage insurance and the mortgage lending industries."

It has been a "short-term solution" that has not been a "meaningful profit generator," he said. Captive reinsurance, in which a lender shares in the risk and revenue with the mortgage insurer, is a relatively new arrangement that is preferred, he said.

Glen Corso, assistant vice president for investor and public relations at PMI Mortgage Insurance Co., said discussions are focusing on "product development issues and how we can best meet the needs of homeowners."

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