As Fannie Mae's President and Chief Operating Officer Lawrence M. Small steps down from his perch atop the agency that many believe exercises the primary influence on the mortgage industry, that government-sponsored enterprise is simultaneously attaining record levels of portfolio growth and broadening the scope of its market presence more than ever before.

Last week, Small, 58, announced that he is leaving the largest buyer of U.S. home mortgages to join the Smithsonian Institution early next year. Franklin D. Raines, Fannie Mae's chairman and chief executive, credited Small for the company's tremendous earning growth.

The agency's $3.32 billion profit in 1998 was up 84% from 1995, Raines said.

"Larry has been a key participant in Fannie Mae's success in leading the nation to a record homeownership rate, while also setting records in its financial performance," Raines explained in a company statement.

Statistics released by the GSE last week confirmed Raines' remarks and proved what a central player the agency has become.

Fannie Mae's net mortgage portfolio grew by $14.2 billion in August to $494.9 billion, the company said last Monday. This reflects a 35% annual growth rate for August, up from a 18% rate in July.

Mortgage purchases hit $21.1 billion in August, compared with $14.0 billion in July, while portfolio liquidations were $5.7 billion in August, down from $6.6 billion in July.

In August, net commitments to purchase mortgages were $17.7 billion, compared with $12.7 billion in July.

Additionally, Fannie Mae's total mortgage-backed securities outstanding increased by $9.1 billion in August to $929.5 billion, a 12% annualized growth rate, unchanged from July.

"Nineteen ninety-nine is shaping up as another strong year for the housing industry and Fannie Mae," Raines said. "Mortgage originations should reach $1.3 trillion. The purchase market continues to soar, and despite higher interest rates, home sales this year will probably exceed last year's records. Fannie Mae's business growth is also very strong during the first eight months, more than a 15% annualized rate. And our mortgage portfolio, which delivers the majority of our net income, has grown at an extraordinary annual rate of 29% so far this year."

Additionally, Fannie Mae owns or guarantees about 23% of the country's mortgage debt, worth about $1.2 trillion. The GSE also reported second-quarter earnings per share of 91 cents, up from 80 cents in the same quarter last year and exactly in line with analysts' expectations.

Market's Tongue-Lashing

With all this growth, however, the broadening influence of the GSEs irks many market players, who believe that Fannie Mae's and Freddie Mac's forays into the mortgage insurance business and subprime securitizations are out of line with the companies' original charters.

The two agencies are the largest purchasers of residential mortgages in the U.S., and their operating policies have broad effects on how mortgages are underwritten and serviced.

"And now they are creeping down the residential credit spectrum for securitizations," said Michael Hoeh, head portfolio manager at Dreyfus Corp. "It can take market share away from other market players easily. It hurts the profitability of a Countrywide and Norwest. [Fannie Mae and Freddie Mac] are just sort of creeping into the higher-gross-margin type businesses."

In fact, an American Enterprise Institute conference last week on the two GSEs caused some intense bickering between representatives of Fannie Mae and AEI, a leading think tank.

The AEI conference featured a good deal of commentary by the speakers regarding the so-called "no-holds-barred" political and business styles of the two mortgage finance giants.

At the conference, consumer advocate Ralph Nader said that both agencies are "extremely skillful at playing the heartstrings to the fullest about America's love affair with homeownership."

U.S. Rep. Richard Baker (R-La.), chairman of the House Banking Subcommittee on Markets, Securities and Government-Sponsored Enterprises, all but openly acknowledged that any attempt to rein in Fannie Mae or Freddie Mac in the current environment is futile.

However, he said that he would introduce a bill at some point to beef up regulation of these agencies.

In response, spokesmen for Fannie Mae characterized the AEI conference as part of a campaign by the mortgage insurance industry and its allies to punish Fannie Mae for taking steps to lower costs to consumers, and said not one idea was offered at the conference on how to benefit consumers.

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