A new alliance of mortgage insurers and consumer lenders formed to monitor Fannie Mae and Freddie Mac criticized the mortgage market giants' foray into subprime territory last week.

By using their 33-to-1 debt-to-equity leverage, Fannie Mae and Freddie Mac in the short-term can underprice the competition in subprime and home-equity lending, said Gerald Friedman, chairman of the new group, FM Watch.

This underpricing is in the short-term interest of the consumer, he said, but in the long term the price will rise.

He cited a January 1999 report by Barbara Miles from the Congressional Research Service, an arm of Congress. He said that, according to the CRS report, "initially prices go down, but once prices are reduced, as in any duopoly or monopoly, shareholder profit prevails, and the consumer loses."

Freidman criticized Freddie Mac and Fannie Mae for intruding in the arena of private mortgage insurance, arguing that some of these attempts could increase tax-payers risk. He also said previously subprime lending had been the domain of consumer-finance lenders. "They have been doing a great job for the consumer," he said.

For its part, a Fannie Mae spokesman said the alliance's proposals would be costly to the consumer. "That's why we call them the Coalition for Higher Mortgage Costs'," quipped David Jeffers, a Fannie Mae vice president.

A Freddie Mac statement called FM Watch "a thinly veiled lobbying group for the mortgage-insurance industry" that will lead to mortgage insurance costs "that punish America's homeowners."

FM Watch is an alliance of trade associations: Appraisal Institute, Association of Financial Guaranty Insurers, Consumer Bankers Association, Consumer Mortgage Coalition, Financial Services Roundtable, Home Equity Lender Leadership Organization, Mortgage Insurance Companies of America and National Home Equity Mortgage Association.

The group also favors raising the required levels of affordable financing that Fannie Mae and Freddie Mac must do. -ES

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