In a stark example of the deteriorating conditions in the mortgage industry, Prism Financial on Wednesday said it expects to report a fourth-quarter loss of 30 to 35 cents per share - or $4.4 million to $5.1 million - instead of the 24-cent profit forecast by Wall Street analysts.

The announcement came a month after the Chicago lender's chairman and chief executive, Bruce Abrams, committed suicide. Prism's stock price fell as much as 20% and ended the day at $4.50, down 12.73%. It peaked last summer at $29.50.

The company said it expects to report a profit of 35 to 40 cents per share for 1999, versus 94 cents expected on Wall Street. That consensus, provided by First Call/Thomson Financial, was based on estimates by the three firms that cover Prism, the same ones that underwrote its initial public offering in May: ABN Amro, William Blair & Co., and U.S. Bancorp Piper Jaffray.

Prism attributed the shortfall to the rise in interest rates in the last year, which has destroyed the impetus for homeowners to refinance their mortgages, depressing overall lending volume. The company's main line of business is originating loans through branches.

Last year was a tough one for mortgage lenders, and the outlook for 2000 is just as gloomy. The home loan industry is expected to lose about 75,000 jobs this year; originations are expected to decline to $985 billion, from the 1998 peak of $1.4 trillion, according to the Mortgage Bankers Association of America.

National Mortgage News, a sister publication of American Banker, ranks Prism No. 20 among retail originators, with $964 million in the third quarter.

The company last year followed a controversial strategy of buying small retail origination shops as the value of such franchises fell. To limit its risk, Prism would structure its acquisitions with "earn-outs," meaning it would make a small cash payment and then over time let the new subsidiary keep some of its profits as additional payment.

It also tried to limit its fixed costs with a "net branch" strategy, in which the branch manager pays for all the branch's expenses, including rent, in exchange for a bigger commission on each loan. Half of its branches were set up this way. All Prism's loan officers are paid strictly on commission.

But "they still have fixed costs and non-loan-origination personnel," said Robert P. Napoli, an analyst at ABN Amro. "The rapidity of the drop in the mortgage industry and the rise in rates surprised them a bit, and they were caught with an infrastructure that was higher than they'd like it to be."

Unlike some of the industry's giants, Prism does not service loans. Servicing is seen as a hedge against falling volumes when rates rise because homeowners are less likely to pay their loans off early.

To diversify its income sources, Prism last year bought Apollo Housing Capital LLC, a Cleveland company that syndicates tax credits for low-income housing developments. But Mr. Abrams' suicide forced the delay of two Apollo syndication deals.

Prism commissioned an independent review from law firm Katten Muchin Zavis and accounting firm PricewaterhouseCoopers LLP. In a statement Wednesday, Prism said the audit had found "no evidence of any fraud or corporate improprieties at Prism."

"We had no reason to suspect any irregularities or wrongdoings," Richard Wellek, Prism's new chairman, said in a statement. But "we wanted an independent assessment to reassure our investors, employees, and partners."

Prism expects the two tax-credit sales to close this quarter. Mr. Napoli estimated that these transactions would have added 10 cents per share to fourth-quarter earnings. He said he thinks Prism will become profitable again in the first quarter, but only as a result of the Apollo deals, because winter is traditionally a slow time for mortgage sales.

Like most lenders, Prism has had to cut jobs in a contracting market. It said it slashed 14% of its workforce in the fourth quarter, in addition to a 24% reduction in its nonsales staff.

A Prism spokeswoman said the company was in a "quiet period" and that it could not make its executives available for interviews.

"I don't think it was a big surprise," Mr. Napoli said of Prism's earnings warning. "Nobody moved their estimates, but the way the mortgage market has come down, I don't think many people expected them to hit the quarter. We were just waiting to get clarification from the company on some of the trends within the business."

Asked whether Wall Street had been too optimistic about Prism's prospects, he replied, "Until you got into November, it wasn't clear the mortgage market was going to drop off as rapidly as it did."

The reasons for Mr. Abrams' suicide are unknown, but local news accounts in Chicago, where he was a prominent developer, suggested he may have regretted persuading friends to invest in Prism.

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