In newspapers and magazines, Fannie Mae aims to define its image among lawmakers and other influential folks around town. "We have one job at Fannie Mae. One mission. One purpose. To do whatever we can to lower the cost of homeownership," says a recent ad in the National Journal.

National television spots funded by Fannie Mae's nonprofit Fannie Mae Foundation use the theme "Showing America a New Way Home" to target a wider audience, namely consumers who company officials say need information on how to buy a home.

Warm and friendly as the ads may be, a new coalition of executives in the mortgage-lending and insurance industries sees them as bright-red flags that Fannie Mae, the nation's third-largest financial institution, is out to grab their business. The coalition believes the ads have the hidden purpose of establishing Fannie Mae as a brand-name mortgage company in the public's mind--a charge D.C.-based Fannie Mae denies--and are one of many ways Fannie Mae has crept beyond its congressionally mandated purpose of buying home loans from banks and other lenders in order to make mortgage money plentiful.

The coalition, which includes such firms as Chase Manhattan Corp. and GE Capital Corp., has launched a lobbying campaign to convince Congress that Fannie Mae needs to be reined in. At the same time, Fannie is being criticized by regulators at the Department of Housing and Urban Development who say the company is focusing too much on making profits for shareholders when it needs to beef up its cushion against financial losses and do more to encourage blacks and other minorities to become homeowners.

Fannie Mae's chairman of six months, Franklin D. Raines, strongly disagrees with the company's critics.

"We believe we have over the last 20 years shown that you can pursue a public mission and have good returns to your shareholders," Raines told a recent gathering of financial journalists and economists. "There are many theorists who say it is not possible, who would say that you have to be shorting one or the other. Indeed, I think we have found a very healthy balance."

Regardless of one's point of view, it's clear these challenges from government and private industry present Raines with Fannie Mae's biggest political challenge in decades, lawmakers and housing analysts say. Until now, they say, the multibillion-dollar giant has easily deflected grumbling that, because of its special government ties, it's too powerful politically and competes unfairly with the private sector.

"Fannie Mae has found itself fighting a multi-front war, and even with the biggest lobbying guns and its best marksmen, it's increasingly hard to assume it will win every battle," said Karen Shaw Petrou, a financial services consultant who co-publishes a newsletter about Fannie Mae and its main rival, Freddie Mac.

"The mood has changed," said Rep. Richard H. Baker (R-La.), chairman of the House Banking subcommittee that oversees government-sponsored enterprises and a longtime critic of Fannie Mae. "Members of Congress are now hearing publicly for the first time from other participants in the housing market about concerns over encroachment into free markets by government-sponsored enterprises such as Fannie Mae."

Congress chartered Fannie Mae in 1938 to promote homeownership by buying mortgage loans. Fannie and its smaller cousin and rival government-sponsored enterprise, Freddie Mac, buy home loans from banks and other mortgage lenders in what's called the primary mortgage market. This recycling of mortgage money gives lenders a constant supply of new cash to make loans. Fannie and Freddie's purchase of the loans creates the secondary mortgage market. Fannie and Freddie either bundle the loans they buy into mortgage-backed securities and resell them for a fee, or hold on to the mortgages until they mature.

Although both Fannie and Freddie are independent, for-profit companies with publicly traded shares, their congressional charters do provide them with advantages over other financial institutions: They don't have to register the securities they sell with the Securities and Exchange Commission, an exemption that saves them an estimated $500 million a year, according to some economists. Each has a $2.25 billion line of credit with the U.S. Treasury (which neither has used). They are not required to pay state or local income taxes.

Moreover, Fannie and Freddie's $1.8 trillion outstanding debt is listed in an appendix to the federal budget, bolstering Wall Street's view that their borrowings are implicitly backed by the U.S. Treasury, despite printed warnings on their bonds that they are not. Fannie and Freddie, because of their perceived government backing, can borrow at interest rates below what even the best-rated companies command and only slightly above what the U.S. Treasury itself pays to borrow on behalf of taxpayers.

Those advantages are part of what makes their competitors howl, especially now that they fear Fannie and Freddie have the capability to cut into their business as middlemen in providing mortgage loans. Both companies deny they want to go straight to the consumer to make loans--indeed, their charters prohibit it--but Wall Street analysts say Fannie and Freddie now have technology that would enable them to do it.

Analyst Ken Posner at Morgan Stanley Dean Witter & Co. said industry opposition to Fannie and Freddie is fueled by those who fear the inevitable changes that computers and the Internet bring. He points to the vast collection of mortgage-repayment information that Fannie and Freddie now have on millions of Americans. By analyzing that data, the companies can much more precisely pinpoint borrowers who might default on their mortgages, greatly improving the efficiency of evaluating the creditworthiness of home buyers.

Fannie and Freddie increasingly are using that information to streamline the mortgage application process in ways that many lenders could never hope to match. "The real issues are these competitive issues," Posner said. "The political controversy masks the reshaping of the competitive landscape by technology."

It may be that home buyers would actually save money if Fannie and Freddie could offer direct loans. Already, their efficient operations and charter-related benefits have been documented as saving borrowers up to one half of 1 percentage point on mortgage rates, which adds up to tens of thousands of dollars over the life of a loan.

Indeed, both Fannie and Freddie have argued that certain tools they are introducing into the market--such as the improved system of evaluating creditworthiness--will make home lending cheaper. But many of their competitors want no part of that.

Fannie and Freddie's charters "mandate they make money available," said Robert O'Toole, a senior executive at the Mortgage Bankers Association of America. "Nothing in it [says] they have to make mortgages as cheap as possible."

O'Toole added: "It might be cheaper for government-sponsored enterprises to do lots of stuff--if they made cars or washing machines--but that doesn't mean they should do it."

O'Toole said the overriding concern in the industry is that Fannie and Freddie are pushing into their business with special advantages because they need "to meet earnings promises to their shareholders," which "requires them to identify other business opportunities in the mortgage-lending food chain."

The new industry coalition, FM Watch, has taken a public stance against Fannie and Freddie, holding news conferences, running advertisements and maintaining a Web site, For years, lenders and mortgage insurers have groused about Fannie's heavy-handed lobbying and business tactics, but always anonymously, out of fear that Fannie might leave them out of their deals. (The Mortgage Bankers Association is not part of the coalition, but O'Toole said "we have some areas of common interest.")

Part of what pushed Fannie's detractors into the open were moves by Fannie and Freddie to require that lenders use their systems for evaluating borrowers. Lenders, which have spent millions of dollars developing their own systems, were angry. To mollify them, first Freddie and then Fannie recently struck deals with large lenders such as Countrywide Credit Industries Inc. and Fleet Financial Group in which one or the other enterprise is guaranteed all of that lender's business in exchange for allowing the lender to use its own evaluation system.

Another impetus for the coalition's formation came last October, when Freddie--assisted by then-Sen. Alfonse D'Amato (R-N.Y.), who chaired the Senate Banking Committee--quietly slipped wording into legislation that would have allowed the company to insure home loans itself and thus eliminate the need for private mortgage insurance on many loans. The wording was deleted after lobbyists for the private mortgage insurance industry and House Banking Committee Chairman Jim Leach (R-Iowa) found out about it.

Despite the mortgage insurance industry's victory, the message for many in the housing industry was clear: Fannie and Freddie were aggressively trying to expand their businesses, and an organized counterattack was needed.

"What you already know," reads one FM Watch ad, is that "Fannie Mae and Freddie Mac have played an important role in providing access to quality housing for millions of Americans. What you might not know . . . [is that they] are moving beyond their unique charters, to benefit their investors at the risk of taxpayers and the expense of home buyers."

Fannie counters with its own ads. "We don't believe mortgage costs should go up. Do you?" says one. Meanwhile, the Fannie Mae Foundation, which disburses gifts around the country, helps garner political support for the company at the grass-roots level. Fannie's strategy is intended, insiders say, to discourage people, including members of Congress, from challenging the company.

Fannie and Freddie executives officially deny they feel any heat from the coalition's campaign, although Fannie in several instances has outbid the coalition for top-drawer lobbyists, coalition officials said. But analysts say the two companies are more on guard.

"For the first time in many years, political issues will dominate both Freddie Mac and Fannie Mae," CIBC Oppenheimer & Co. analyst Steven Eisman said in a report in April in which he explained why he had downgraded the stock of both companies from a "buy" to a "hold" rating. "These issues could plague the stock prices of both companies for all of 1999."

Fannie Mae spokesman John Buckley said the company is aware of the challenges it faces. "We know that we are in a very interesting year in terms of the regulatory environment and the anxieties that are undergirding many of the elements of the housing industry," he said. "We are able to adapt to changing environments."

Fannie's stock price has dropped 13.8 percent and Freddie's has dropped 17.4 percent since the beginning of the year. The Standard & Poor's 500-stock index, meanwhile, has risen 5.8 percent over the same period.

On the regulatory front, Fannie's sparring with HUD has increased. In 1992, Congress strengthened HUD's oversight of Fannie and Freddie. Having just lived through the multibillion-dollar savings and loan bailout, Congress wanted to be sure the companies had sufficient safeguards against loss so that their theoretical call on taxpayers would never be tested.

HUD's independent Office of Federal Housing Enterprise Oversight earlier this year unveiled proposed rules that would force Fannie to increase its financial cushion against losses, even though Fannie argued strenuously that regulators weren't measuring its risks properly. Regulators found Freddie's capital to be adequate under the proposed rules.

Meanwhile, HUD Secretary Andrew M. Cuomo is pushing Fannie and Freddie to invest in more home loans to those with low and moderate incomes. Last month, HUD announced that, starting in 2001, it wants the two companies to ensure that 50 percent of the loans they buy qualify as such--up from the current 42 percent requirement.

Fannie initially fought the target, but then Raines publicly pledged his support, though cautioning that it would be a "stretch" to meet.

Government officials say Fannie could meet the targets by simply reducing earnings somewhat, which they say would still leave a generous return to shareholders. They say that in recent years Fannie Mae has been delivering shareholders returns of 24 percent to 25 percent. That compares with returns averaging 5 to 10 percentage points less for the financial services industry as a whole.

"There are two clear and indisputable facts," said William Apgar, HUD assistant secretary for housing. "One, the number of Americans in need of affordable housing stands at an all-time record high of 5.3 million families. Two, Fannie and Freddie are making record profits."

Raines said regulatory changes could hamper the company's mission, not its earnings goals. Lowering earnings "might benefit a few current customers," he said, by enabling the company to buy more low-income loans, but in the long run would hurt the company's ability to attract new capital. That would "therefore reduce our ability to provide benefits to many more consumers," Raines said.

HUD also plans to restrict the amount of non-mortgage investing Fannie and Freddie engage in. In that activity, known as arbitrage, the companies use proceeds from their low-cost borrowing to invest in high-yield securities, pocketing the difference. Both companies say they need those investments to balance their portfolios.

House Banking Chairman Leach sees it differently, saying that the "natural tendencies of government-sponsored enterprises" are "to use their privileged borrowing status" to maximize profits rather than in "mission-appropriate ways."

"HUD has the responsibility to ensure that government-sponsored enterprises stick to their mission of serving the public, not simply stockholders," Leach said.

In a letter last spring to The Washington Post, Raines expressed "concerns regarding the increasing regulatory bent of HUD."

"The secondary mortgage market is working . . . to the benefit of millions of American families," Raines wrote. "Heavy-handed regulation by HUD is unlikely to improve the functioning of that system. HUD must be careful that its regulations don't turn a successful competitive marketplace into another government-directed morass of credit allocation."

Apgar isn't moved. "We're not over regulating or micromanaging. We're just doing what the law requires," he said. "Congress has given us certain regulatory responsibilities, and we take our responsibilities seriously. We're doing the best we can to protect the public interest, mindful of the GSEs' [government-sponsored enterprises'] private business interests. The GSEs are concerned with their shareholders. We're concerned with their obligations to the public."

Baker, chairman of the House subcommittee, is one member of Congress who believes balancing those interests warrants more discussion. "Whether sufficient resources have been plowed into mission compliance or shareholder profits should be reduced to obtain their goals--that truly is a policy question for Congress about all GSEs," he said.

In Profile

Fannie Mae

Business: A for-profit, publicly traded, government-sponsored enterprise that is the leading buyer of single-family home mortgages. Fannie also owns more than 4 percent of Inc., which operates

Based: Washington

Established: 1938, by President Franklin Roosevelt

Chief executive: Franklin D. Raines

Employees: 3,800 (of those, 2,800 are in the Washington area)

1998 revenue: $31.5 billion

1998 earnings: $3.42 billion

1999 assets (first quarter): $501.1 billion

Web site:

Yesterday's closing stock price: $63.81 1/4, down 68 3/4 cents on the New York Stock Exchange

SOURCES: Bloomberg News, Hoover's, Fannie Mae

CAPTION: FANNIE'S FINANCIALS (This graphic was not available)