An alternative secondary market for residential mortgages gained momentum last week.

Bank United of Houston, Texas' largest thrift, completed a sale of $83 million of mortgages together with the Federal Home Loan banks of Chicago and Dallas.

The sale was made under the Home Loan Bank System's Mortgage Partnership Finance program, which is bringing more competition to the secondary market.

Fannie Mae and Freddie Mac dominate the market, but the new program offers wider profit margins for lenders large and small, said Alex J. Pollock, president and chief executive of the Chicago Home Loan Bank.

Participating lenders must be members of a Federal Home Loan bank. Of the Home Loan System's 6,500 members, two-thirds are commercial banks and one-third are thrifts, Mr. Pollock said.

The Chicago Home Loan Bank started the program in June 1997. Until last week it had been focused on Illinois and Wisconsin, which are both in the Chicago bank's district. The Dallas bank's members are in Arkansas, Louisiana, Mississippi, New Mexico, and Texas.

The program is now in a "more rapid growth phase," Mr. Pollock said, noting that the Federal Home Loan banks of Pittsburgh and New York are ready to jump in.

The program works by separating credit risk and interest rate risk. Rate risk is handled by the Home Loan bank, because it has the "same long-term access to the capital markets that Fannie Mae and Freddie Mac do," Mr. Pollock said. Credit risk is handled by the member banks and thrifts.

"Each partner is bringing to the structure its natural competitive advantage," Mr. Pollock said.

Lenders doing business with Fannie and Freddie pay guarantee fees. But under the new program, the Home Loan banks pay lenders for their role in managing credit risk, Mr. Pollock said.

Also, Fannie's and Freddie's guarantee fees are priced nationally, so a lender in Maine may be subsidizing a lender in California.

The Mortgage Partnership Finance program will ultimately show whether the Federal Home Loan Bank System can safely assume the risk of individual portfolios.

Fannie and Freddie said the Home Loan banks' program, with approval for doing $9 billion in loans over several years, does not amount to significant competition when stacked up against their own volume.

The program is "a speck in the ocean of mortgage deliveries," said a spokesman for Fannie Mae. " This is a relatively minor new initiative."

Freddie Mac questions "the wisdom of the FHLBs entering into a new line of business, given the well-publicized problems of their capital structure," a spokeswoman said. The Home Loan banks "have not had much expertise in credit risk management," she said.

Bank United's profit margin in last week's sale was about 45 basis points above the pricing available through Fannie or Freddie, said Barry C. Burkholder, its president and chief executive.

Nevertheless, Mr. Burkholder said he would evaluate each sale of loans deal by deal.

"It's really that risk-sharing component that replaces the guarantee fee that the agencies normally charge," Mr. Burkholder said. Lenders pay Fannie or Freddie a fee and then never hear about the loan again, he said. But "if too many loans go bad with the Home Loan Bank of Chicago deal, you will hear about it - because you have some additional recourse."

Mr. Pollock of the Chicago Home Loan Bank said the program offers member institutions "a more attractive, more profitable way to create fixed-rate mortgages" for their customers.

"A real banker is someone who makes credit decisions and lives with them," Mr. Pollock said. In a secondary market transaction with Fannie Mae or Freddie Mac, the credit decision is made through the agencies' underwriting guidelines, he said. And when the loan is sold, it belongs to the agencies, along with the credit and interest rate risk.

In effect, "the financial institution has really only acted as a kind of broker, as opposed to a real banker," Mr. Pollock said.

Some secondary market executives say the Home Loan banks' program could change the market. But others have refrained from participating, saying they were concerned about pricing execution, reporting requirements, and servicing issues.

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