Some large homebuilders have gotten into the business of mortgage banking in recent years because they perceived it as a way of squeezing more profit from their customers.
But with the mortgage business in a slump and large inventories of new homes moving slowly, the companies are now feeling double the pain.
James F. Wilson, a securities analyst with Montgomery Securities, San Francisco, says three big builders are likely to report disappointing earnings because of the one-two punch powered by rising interest rates - Pulte Corp., Bloomfield Hills, Mich.; Centex Corp., Dallas; and Ryland Group, Columbia, Md. Each company has a substantial financial services business, he said.
An industrywide problem is an increase in the number of homes built before buyers were lined up. The rise in interest rates has slowed sales and led to an oversupply that has brought competitive price pressures.
The builders, meanwhile, have been making efforts to focus more on their primary businesses and less on financial services. Pulte, for example, sold a Houston thrift, First Heights Bank, in October 1994 for a profit of $25 million. It had bought the thrift's predecessor in 1988 at a time when many builders acquired thrifts as funding sources.
Similarly, Centex sold Texas Trust Savings Bank at yearend, making a profit of a little over $3 million. A spokeswoman said the sale was unrelated to the weakness in its mortgage banking operations, but the thrift was no longer regarded as a core business.
And Ryland said in October it was considering the sale of a business that issues and administers mortgage-backed securities. It said the operation fell outside its core building and mortgage finance businesses.
But the builders appear determined to continue in mortgage banking, if not other financial services. At Ryland, for example, a spokesman said the company had decided to continue in loan originations and focus on its housing customers. He said he believed other companies had gone astray during the refi boom by providing mortgages to all comers.
He also said the continuing income stream from servicing was an attractive offset to its sales-based revenues.
The Centex spokeswoman also said the company had no plans to exit the lending business.