The refinancing wave is putting Fannie Mae and Freddie Mac in an awkward position.

While rising loan volume puts pressure on the two agencies to buy more loans from lenders, refinancing has aroused caution on the part of investors who would buy Fannie and Freddie's securities.

"They're walking a fine line right now," said Patrick S. Flood, president of HomeBanc Mortgage Corp. in Atlanta. "They don't want to make it too easy (to refinance loans), because if that happens it will devalue the securities."

Investors, he noted, "expect these loans to stay outstanding for a certain period of time." With refinancing at a high level, investors are increasingly concerned that borrowers are learning to refinance every time rates drop, he said.

Mr. Flood said it appears that Fannie and Freddie, the two largest investors in mortgages, may be erring on the side of protecting value to investors.

"There is a tremendous opportunity for the agencies to simplify the process and to make it easier for lenders to raise their productivity to meet consumer demand," he said, "but we've not seen that take place at this point, and that's disappointing."

HomeBanc has seen "a tremendous lift in refinance activity" since 1997, when refinances accounted for 8% of its business, Mr. Flood said. During the first two months of 1998, refinances averaged 40% of total business, he said.

"We're in negotiations right now to ask" Fannie and Freddie "to be more liberal with making the process easier for consumers that are high grade in credit."

But despite a streamlined process that allows loans to be refinanced without an appraisal, the agencies are "limiting that process to customers that are not adding closing costs back to their loan balance to cover the cost of refinancing," Mr. Flood noted.

Officials at the agencies insisted they have responded to the refinancing wave by buying more loans. It is expected that Fannie Mae's production will have doubled from December to March, said Frank Demarais, vice president for product development.

"Fannie Mae has participated with our customers in making things operate efficiently but at the same time prudently," he said, adding that Fannie is continuing to work on reengineering and automation.

"With each new refinancing wave, investors have the opportunity to reasses their prepayment models and their understanding of prepayment risk," added Bob Ryan, vice president of marketing and pricing at Freddie Mac.

But Mr. Ryan said there "absolutely" are ways to simplify the process. "Things like the constant evolution of technology have probably made this refi wave a little bit easier. The capacity for the lending community to process more and more borrowers through the refinance has become easier and more simplified," he said.

Melvin A. Steele, senior vice president of secondary marketing at PNC Mortgage Corp. of America, said the agencies are doing as well as can be expected.

"The more quickly we can get the loan closed for the customer, the better off we all are," said Mr. Steele, who estimated that 60% of PNC's volume is for refinanced loans.

Fannie and Freddie have been "very supportive of the refinance volumes that we've seen," and have helped to reduce documentation and qualification requirements, Mr. Steele said.

Mr. Steele noted that other potential outlets for PNC's loans are more restrictive than the agencies.

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