Some more help in Freddie and Fannie's mortgage kit

Freddie and Fannie are teaming up to help the nation's banking and savings industry until interest rates drop. Freddie is "Freddie Mac," nickname for the Federal Home Loan Mortgage Corporation; his teammate, otherwise known as the Federal National Mortgage Association, commonly does by "Fannie Mae."

These two corporations, along with their sister Ginnie Mae -- the Government National Mortgage Association -- perform differing functions in the housing market; but they all provide lenders with a secondary market where packages of mortgage that have been grouped together can be sold. The proceeds from these sales can then be used to make more mortgages.

Now, while mortgage lenders -- particularly those in the savings-and-loan (S&L) industry -- struggle with depressed earnings brought on by ledger books full of old, low-interest mortgages, as well as low liquidity or a lack of available cash, these quasi-governmental corporations are coming up with a variety of programs to help them out.

The most recent comes from Freddie Mac, the corporation that purchases conventional mortgages, or those not guaranteed by a federal agency such as the Farmers Home Administration or Veterans Administration.

Beginning this week, lenders will be able to pull together packages of old mortgages and sell them to Freddie Mac. In return, they will receive a participation certificate, or PC, bearing an interest rate slightly less than the average rate of the mortgages.

For instance, explained Freddie Mac spokesman Don Hill, if the package carries an average interest rate of 9 percent, the corporation would give the lender a PC bearing an 8.75 percent rate. While this appears to put the lender slightly on the short end of the stick, the Freddie Mac PC can be used much more effectively as collateral, Mr. Hill explained. This collateral can be used for loans to get the institution over its short-term cash crisis, or provide a new source of mortgage money, which would be lent out at current, higher rates.

When a test of this program was announced in mid-August, Hill said, some 2, 000 of the 5,000 institutions that Freddie Mac deals with called in the first two days asking about it. "So there is certainly an interest in ways to help lenders through these times," he said.

Programs like this, however, "do nothing to address the earnings crisis" in the mortgage industry, said Jonathan Gray, a banking analyst with Sanford C. Bernstein & Co., a New York brokerage firm. "But it does help protect them [ mortgage lenders] from liquidity problems." Until interest rates drop far enough to bring home buyers back into the mortgage market, he said, the lenders still have the problem of not being able to offset old, cheap mortgages with those earning higher interest.

"It's liquidity problems that kill more S&Ls than earnings problems," pointed out Jerome A. Baron, a vice-president and banking analyst with Merrill Lynch, Pierce, Fenner & Smith Inc.

This plan, said Philip R. Brinkerhoff, Freddie Mac's president, is the first phase of a guarantor program that will eventually allow lenders to put together packages of their own ortgages and sell them to private investors on their own, acting as their own secondary-mortage marketers. Freddie Mac's role, he said, would be to evaluate these packages for their financial and investment soundness , and, if the passed, issue a guarantee of the securities and put the corporation's good name behind them.

In addition to giving lenders additional mortgage capital, it would also help them in the transition to new, shorter-term mortgage practices. "As the banks take advantage of this," Mr. Brinkerhoff said, "they will be able to restructure themselves to avoid getting in this position again."

At Fannie Mae, which buys both conventional and government-backed residential mortgages, "all kinds of new programs" have been introduced in the last year or so, said spokeswoman Beth Van Houten. One of these, which came out last summer, is a "participation program" that allows banks or S&Ls to put together a pool of mortgages and give Fannie Mae an interest in it, ranging from 50 to 95 percent. Once the deal is made, she said, "they get their check in two days."

The minimum size on these packages is $250,000; but some have been in the "miltimillion-dollar" class, she added. "And because lenders are retaining an interest in them, we do not require that they be Fannie Mae-approved. And a federal or state chartered bank or S&L can do it," she noted.

Another program, begun in August, "reognizes that adjustable-rate mortgages are here to stay," Ms. Van Houten said. These mortgages, where the interest rates can move up or down, based on market conditions and sometimes schedules spelled out in the contracts, have become almost the only way mortgages can be written at a time when lenders are quoting rates in the 18- to 20-percent range.

The program will buy up to eight types of adjustable mortgages from lenders. Such mortgages give lenders more ways to attract home buyers who might otherwise go somewhere else or give up the idea of buying a home altogether. "All of these plans are very helpful to us," said Gregory Rowan, a member of the lending department at the Charlestown Savings Bank in Boston. "But until interest rates come down, they can only do so much."

It has been easy to see what high rates can do lately, he said. With an 18. 75 percent mortage rate, the bank had three applications last week and five the week before. But a month ago, when the rate was 17 percent, Mr. Rowan said, "we had 54 applications, which shows you the ridiculous situation we're in. If you had quoted a 17 percent rate a year ago, people would have laughed in your face."