experts are warning that internal upheavals derail more sales of mortgage companies than market conditions do. Protracted negotiations produce employee defections and fuel talk by rivals that the company isn't paying attention to business, according to Richard J. Melnick, a partner with the Rockville, Md., law firm of Shulman, Rogers, Gandal, Pordy & Ecker. "Your business will suffer; you must plan for that," Mr. Melnick said. Analysts are warning lenders to beware as the industry approaches a new year and many more mortgage deals. "Overcapacity, predatory pricing, and further compressions of margins" are driving companies to seek merger partners, Mr. Melnick said. Mr. Melnick and other industry analysts offered their views to mortgage bankers from large and small companies at a well-attended panel discussion during a recent conference of the Mortgage Bankers Association of America. Purchases of smaller companies and servicing rights, while not garnering many headlines, will proliferate, Mr. Melnick said. Larger deals - including Chase Manhattan Bank's purchase last year of American Residential Mortgage Corp., and the pending sale of the home mortgage business of Prudential Insurance Co. of America - serve as highly visible mileposts in the pricing derby, analysts said. But the industry will see fewer high-end deals that place a premium of 150 basis points or more on servicing, the analysts said. Servicing rights, which have carried premiums, are now headed back to earth, said Hilary Renz, senior vice president of Cohane Rafferty Securities, a Harrison, N.Y., firm that helps structure buyouts. "We believe servicing values are high right now," Mr. Renz said. "There is a better chance of values falling in the coming year than rising." The best way to retain core value is by getting rid of unnecessary parts of the operation while keeping those that are important, the analysts said. For instance, company owners were urged to dispense with company cars that are not used for business and with spouses who are on the payroll but don't do any work. "You see it all the time," said one longtime analyst who asked that his name not be used. Mortgage bankers were also urged to look at their balance sheets and to close marginal offices, avoid long-term fixed commitments, and forget about purchasing new systems. "You won't get your money back," Mr. Melnick said. Employee defections, foot-dragging, and surrounding the deal with a wall of secrecy are potential problems, he said. Employees who are given little information can feel out of the loop and may decide to defect or cut down on the work they do. Keeping employees up-to-date with a communication plan is crucial during negotiations, speakers said. Indeed, along with production and servicing capabilities, mortgage owners want to pass along their employees, with their storehouse of knowledge, to the buyers. "They know your market," Mr. Renz said. "And your buyer doesn't have that ability."
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