One of the fastest segments of the mortgage business is "affinity" lending - a cheap and efficient way to market loans by soliciting members of non-profits, trade groups, or other organizations with large memberships.

In recent years several major banks have set up affinity lending operations hoping to mimic the success of one of the fastest growing mortgage providers, PHH Mortgage Services in Mt. Laurel, N.J.

By setting up alliances with groups such as USAA, the AFL-CIO, and employees of the James River Corp., PHH is snaring captive audiences for its marketing efforts.

It's a strategy that's paying off. In fiscal 1995, affinity relationships accounted for $1.4 billion or PHH Mortgage's $3.4 billion in loan originations.

During the year, affinity loans in the PHH portfolio generated $126 million, roughly 5% of the $2.52 billion in revenue for the company's Hunt Valley, Md. parent, PHH Corp., which also offers services like executive relocation and vehicle fleet management to corporate customers.

PHH affinity programs, dominated by mortgages but also including insurance and auto leasing, are expected to produce 40% of the corporation's revenue within five years, company officials said.

Leading PHH's affinity lending effort is Terence W. Edwards, president of PHH Mortgage Services. Mr. Edwards, previously PHH Corp.'s vice president of investor relations, replaced H. Robert Nagel in February.

Mr. Edwards said affinity marketing will be an increasingly important driver of PHH's revenue growth. "It's a very efficient way of getting customers," he said.

By teaming up with groups such as USAA, the company can piggy-back ads for its services in regular mailings to members. Also, organizations will refer their members to PHH if they ask about where to get a mortgage.

The strategy gives PHH a constant flow of prospective customers - without renting expensive mailing lists or buying independent advertising.

It also keeps costs low. The company can use 800-number phone lines rather than retail offices to pull in new customers. To cut costs further, PHH counsels borrowers about choosing the right home at the right price.

"The American Dream isn't to move in and move out. We want people to buy a home they can stay in," Mr. Edwards said. "We don't want people to buy more house than they can afford or one that won't hold its value."

Mr. Edwards credits that counseling effort for keeping PHH delinquencies - 1.2% - well below the industry 4.5% average.

Though industry guidelines allow borrowers to take out mortgages up to 33% of their gross income, PHH will try to steer them down to a more manageable level. "Those are big numbers," he said. "If someone tries to go that high, we ask, 'How are you going to eat? Do you like peanut butter and jelly?"'

Mr. Edwards said there is little difference in delinquency rates between the company's affinity customers and its general mortgage customers.

PHH began building its affinity business in 1984 after acquiring New Jersey-based US Mortgage Corp. Originally purchased to help PHH expand its executive relocation operation, US Mortgage offered an ideal operation to expand into affinity marketing, Mr. Edwards said.

"We need one facility, one focal point where customers could call and get service. We didn't have to reinvent ourselves or make any big changes," he said.

Affinity lending is providing a fresh source of business, helping PHH replace revenue lost after the end of the 1933-1994 refinancing boom.

Alex Hart, an analyst who follows PHH Corp. for Baltimore brokerage firm Ferris, Baker Watts said affinity lending is now driving the new originations.

"It's a growing chunk of business and it's been where the new business is coming from," he said.

The new business has been substantial. In 1995, PHH Mortgage's total originations grew 23%, pushing the company from the country's 20th largest mortgage lender to 13th, according to Inside Mortgage Finance, an industry newsletter.

By diving into affinity marketing in the mid-1980s, PHH got a head start into the game, but other financial service providers have used a similar strategy to build their business.

"PHH will tell you they were the creators of affinity marketing, but really they are copying off of MBNA," Mr. Hart said.

MBNA Corp., the Delaware-based credit card issuer, has become the second-largest card company with $25 billion in receivables by soliciting new customers from a wide range of affinity groups, including the American Dental Association and National Football League fans.

Maybe the PHH strategy isn't unique, but it's certainly working. Even some lenders are affiliating with outside mortgage companies such as PHH.

Credit unions, many of which are too small to offer mortgage lending themselves, are increasingly turning to PHH and other affinity lenders.

"For small credit unions, this gives them a broader product mix," said Jerry Karbon, a spokesman for the Credit Union National Association.

The trade group has a joint venture with PHH in which the company originates housing loans for credit unions and CUNA offers its members mortgage sales and marketing training.

"Even for larger credit unions this allows them to offer mortgages at more competitive rates," he said.

Affinity lending is quickly catching the eye of big banks. Several - including Bank of America, First Interstate, and Wells Fargo - have launched operations.

Despite the heavy competition, PHH remains one of the top two affinity leaders. Though no official numbers are available, the company is considered second only to Prudential Home Mortgage Co. in the size of its affinity lending portfolio.

Prudential Home Mortgage was acquired in January by Norwest Corp. for a reported $700 million. Neither Norwest nor Prudential would comment for this article.

Now that the value of affinity marketing has been proven, Mr. Edwards said he hopes PHH's formidable market presence and efficient operation will convince potential competitors to instead become his clients.

"A lot of people want to get into the mortgage business because they believe that's where the money is," he said. "That's not really the case. It's a service that can be provided."

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