The telephones at Fidelity Bond & Mortgage Co. are ringing off the hook, and William O'Donnell, vice president of the mortgage lender, says "You would think we were giving something away."

What Fidelity is doing is processing applications for $5 million worth of 14 7/8 percent mortgages while the conventional rate is between 16 1/2 and 16 3/4 percent.

Fidelity is one of 15 mortgage lending institutions in Philadelphia participating in a city program using $20 million in funds from the Philadelphia Municipal Employee Pension Fund to finance low-interest residential mortgages within the city's limits.

Earlier this month, Philadelphia became the first city in the country to use public employe pension funds for residential mortgages. Other cities that have offered similar low-interest mortgage programs have funded them by issuing bonds.

The Philadelphia plan is aimed at stabilizing the city's tax base by discouraging its residents from fleeing to the suburbs or the Sun Belt. The program also is designed to help reverse the use of pension fund money for investments which relocate plants and equipment out of the area or out of the country. It involves $20 million of the pension fund's $700 million investment portfolio.

Richard Mason, a vice president at Mortgage Guarantee Insurance Co., which is insuring the mortgages, said that virtually all of the available mortgages were applied for in the three weeks since the program began. Now potential buyers are waiting out the 60 to 100 days it takes for mortgage applications to be processed.

Thomas Leonard, Philadelphia city controller and originator of the program, expects to receive the data by mid-August on how evenly the mortgages are spread among the city's income levels. Then he will decide whether the program should be considered for renewal and expansion in 1982.

"The beauty of the program from an investor's standpoint is that the mortgages are a sound investment, equivalent to securities that are double-A-rated by Standard and Poor's," said a spokesman for the controller's office.

Last year the employe pension fund yielded an average 9.2 percent in interest, the bulk of that coming from long-term securities. For the $20 million it has invested in residential mortgages, the pension fund will yield 14.65 percent interest.

The low-interest mortgages are available to Philadelphians for owner-occupied homes within the city limits. Current and retired city employes were given a weekhs head start on applying for the mortgages before the program was opened to all city residents.

There is no miniumum amount that can be borrowed under the program but there is a ceiling. The maximum loan is for $98,500 to purchase houses that cost no more than $135,000. Applicants for the maximum loan are required to make a 25 percent down payment. To insure that they city's working-class residents get a share, one-third of the mortgage money is to go to people who want to make a 10 percent down payment on houses that cost no more than $40,000.

The pension program is a shot in the arm for the 15 mortgage lending institutions who have each bid for a share of the 20 million. The current high-interest-rate market has taken it toll on the mortgages they offer. For one thing, savings and loans and thrift institutions are shy of the types of deposits that can be lent out as mortgages.