Frank Sinatra croons that Chicago was his kind of town. Mortgage lenders tend to feel the same way.

Thomas J. Rinella, senior vice president for community lending at St. Paul Federal Bank for Savings, cites the city's stable economy.

Unemployment is low compared with the East and West coasts, where the economy is more volatile. The Chicago-area job supply increased 2.3% in 1994 and 2.6% last year, according to Regional Financial Associates, West Chester, Pa. where.

The housing market in metropolitan Chicago has benefited from this stable economy. There has been a steady supply of first-time homebuyers.

Robert J. Loncar, vice president of residential lending at Columbia National Bank Mortgage Co., a subsidiary of Columbia National Bank, Chicago, said more than half all home lending in the metropolitan area last year was to first-time homebuyers.

Single-family housing permits in the metropolitan area this year were up 7% through August. Lenders attributed much of the increase to an expansion of the suburbs, fueled in part by corporations that have moved their headquarters from Chicago.

A few years ago, Sears Roebuck and Co. moved its headquarters from its trademark Sears Tower in downtown Chicago to Hoffman Estates near O'Hare Airport. Sears is the Chicago area's largest employer.

Mr. Loncar said he has noticed many people moving to the Chicago area from the East and West coasts because they are able to purchase top-notch homes at lower prices.

Excluding new homes, prices of homes rose 3% in 1995 to an average of $147,300. According to an estimate from Regional Financial Associates, home prices will rise 5% more this year.

Peter Taglia, president of the Illinois Mortgage Bankers Association, said that while these prices are higher than other areas in the Midwest, they are still far lower than most areas on the East and West coasts.

He said housing values on the coasts tend to fluctuate through the years, while there has rarely been a drop in values in Chicago.

"That's a reflection of what's happening in the economy here," said Mr. Taglia, who is also vice president and division head of the loan center of the Northern Trust Co.

And while more bedroom communities are emerging, lenders say Chicago's downtown neighborhoods are also undergoing a revitalization.

Lou Esposito, PNC Mortgage's vice president for sales in the Chicago and Wisconsin regions, said developers are buying properties from the city of Chicago in inner-city areas such as the Cabrini-Green projects, where many homes were vacated.

Mr. Loncar said people who work in the city are showing an increased willingness to live there as well. "Downtown is expanding like crazy," he said.

But the steady increase in home purchases in the metropolitan area has created a more challenging environment for lenders.

In general, the Chicago lending market is very fragmented. Very few lenders are dominant in both the purchase loan and refinance loan sectors. Market share is highly contested.

According to data from Experian, Chase Manhattan Mortgage was the leader in the purchase loan market for the first seven months of this year, with a market share of more than 3.6%. But it was only 17th in refinancing.

NBD Mortgage and Citibank FSB were the only two lenders with shares of more than 2% of the refinance market.

"Competition is very intense right now," Mr. Esposito said, "since the total number of mortgages to finance has shrunk due to a lack of refinancing."

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