Having been elbowed out of the No. 1 spot in the mortgage industry by Norwest Corp., Countrywide Credit Industries is bulking up to claw its way back on top.

Long known for running a lean shop, Countrywide has expanded its staff by more than a third in the past year. As of July, it had 5,333 employees, up from 3,901 a year earlier, according to monthly reports issued by the company.

Behind the burgeoning head count is an ambitious strategy to double market share by 2000, said Stanford L. Kurland, president of Countrywide Home Loans Inc.

Countrywide now has 5% of the highly fragmented mortgage originations market, Mr. Kurland said.

"As a leader in the industry, clearly we can gain share in every channel of business that we participate in," Mr. Kurland said.

To that end, Countrywide has added new products - including subprime loans, once the preserve of finance companies - and opened 19 new retail branches since last July.

Borrowers with blemished credit histories were once served almost exclusively by finance companies and specialized lenders. Now, many mortgage bankers are entering that arena to offset the shrinking profitability of the cutthroat A-grade market.

Mr. Kurland said that by adding subprime loans, Countrywide is boosting volume, strengthening its ties to mortgage brokers, and priming itself to compete in a new kind of mortgage market.

Whereas mortgages are now separated into two categories, prime and subprime, new technology will lead to a finely graded spectrum of risk and price categories, Mr. Kurland said. Countrywide wants to be ready for that, he said.

Countrywide began offering subprime loans in August 1995, and monthly volume has grown from $1 million to $71 million in July 1996. Of the 1,432 employees added in the past year, 120 were hired to make these loans.

As it jockeys for a bigger market share, Countrywide is targeting the two most profitable loan channels - retail originations and wholesale.

In the past year, Countrywide has opened 19 branches, in cities such as Baltimore, Dallas, and Phoenix. The consumer markets division added 185 employees in a year, reaching 1,182 in July.

Countrywide also added a wholesale branch to cater to brokers who sell loans to the lender, and now employs 669 in the wholesale area, an increase of 64% since July 1995.

There is some less cheery news buried in the staff growth numbers.

The biggest single jump in employee count occurred in Countrywide's loan administration division, which processes the principal, interest, tax, and mortgage payments on all the loans in Countrywide's servicing portfolio.

Over the past year, Countrywide's servicing portfolio has grown by 18%, as the lender sought to spread the costs of the highly mechanized servicing business over a huge base of loans. In July 1996, the portfolio stood at $147 billion. The number of loans increased 24% to 1.4 million.

At the same time, however, productivity in the servicing division dropped. In July 1996, 1,381 employees serviced Countrywide's portfolio, a jump of 33% from a year ago.

Mr. Kurland attributed the drop in productivity to higher delinquencies as the portfolio has aged, and a new mix of loan types. Countrywide has boosted its government loan business, but servicing these loans requires more work, Mr. Kurland said. It also brings in higher fees, he pointed out.

Does the drop in productivity suggest Countrywide is reaching the limits of economies of scale in its servicing business?

Mr. Kurland seemed to think not. He said Countrywide expects cost savings will be smaller as the portfolio grows, but servicing costs are right on target.

Des Moines-based Norwest Mortgage Inc., aided by its acquisition of Prudential Home Loans, has supplanted Countrywide as the top mortgage servicer. As of midyear, Norwest's portfolio was about $167 billion, against Countrywide's $146 billion.

Countrywide's overall strategy won praise from analyst Thomas O'Donnell of Smith Barney Inc.

He said the diversification into subprime loans and the expansion of its retail branch network would help the lender ride out lean times.

For example, when refinances are slow, Countrywide can bring in valuable purchase mortgage business through its retail network, Mr. O'Donnell said.

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