The idea of having a real estate company originate loans seemed pretty outlandish to bankers 15 years ago. When Richard B. DeWolfe tried to sell the idea in 1979, banks turned a deaf ear.

"They didn't think we were competent enough," recalls Mr. DeWolfe, chairman and chief executive of Lexington, Mass.-based DeWolfe Cos.

These days, with most of the mortgage business coming from home purchases, DeWolfe's strategy of blending real estate brokerage with mortgage banking is paying dividends. While other New England mortgage bankers are folding, merging, or selling out, DeWolfe is holding its own with a direct pipeline to homebuyers. It plans to start servicing mortgages next year.

Though the track record of such unions is littered with failure, DeWolfe is proving that the pipeline is a critical asset -- especially in times like these. The spike in interest rates has killed the refinancing business in Massachusetts; it is off by 34% so far this year, according to Banker and Tradesman. Companies like Abby Financial, which staked their future on that market, have been burned. DeWolfe never fully shared in the spoils of that business, but today is in a far more stable position.

"We have the relationship with the customer," says Mr. DeWolfe. "And what he wants is easy access, service, and good rates." His plan is to make DeWolfe a one-stop shop for the homebuyer.

Confidence in that plan was reinforced last month when four former directors of Blockbuster Entertainment, including H. Wayne Huizenga, invested $500,000 in the company, with options to buy another $5 million worth of stock.

Still, the mortgage company has not escaped the bloodletting of the last six months. The increase in interest rates and precipitous decline in refinancing has sparked a rate war in Massachusetts.

The price cutting -- particularly on adjustable-rate mortgages -- has cut into DeWolfe's business. Lending dropped by 22% in the first nine months of the year; the company, which lent $250 million last year, does not expect to reach those numbers this year.

Mortgage origination income fell 15% to $2.5 million in the first nine months.

The pressure has affected the real estate company's bottom line, too. While DeWolfe's net revenue was up 26% to $18.5 million through Sept. 30, profits dropped 9% to $885,000. Mortgage banking was the main culprit.

"The battle this year was to just hold on to our piece of the market," says Paul Harrington, president of DeWolfe New England Mortgage Services.

DeWolfe faces a challenge on another front. The Clinton administration is rewriting the rules that regulate ties between real estate companies and mortgage lenders.

The relationship would not be banned by the rules proposed under the Real Estate Settlement Practices Act, but companies like DeWolfe will have to be careful to build firewalls so that real estate agents are not paid on the basis of referrals to the mortgage company, says Robert O'Toole, a senior vice president at the Mortgage Bankers Association of America.

In a tough market, DeWolfe has held on to its market share in Massachusetts, about 0.5% for purchase mortgages, according to Bankers and Tradesman. That ranks it as No. 50 among 349 lenders in a fragmented market, where not even the largest banks have more than a 5% market share. Counting refinancing, DeWolfe has 0.2% of the market.

Though it has a long way to go to challenge the top three lenders -- Baybank, Shawmut, and Fleet -- DeWolfe has come far from 1979, when it struggled to get a mortgage brokerage business off the ground. The company was one of the first to join the ill-fated Shelternet, an on-line mortgage origination service launched by First Boston Corp. The venture failed, but DeWolfe went on to become a correspondent lender to several national lenders.

It wasn't until last year that DeWolfe started funding its own loans with a $10 million credit line from CoreStates Bank of Philadelphia.

DeWolfe has grown slowly partly as a matter of philosophy. "We provide financing only to the homebuyers we service," says Mr. DeWolfe. "We don't want to be in competition with some of the lenders, because we sell our loans to them."

DeWolfe finances one out of every three homes purchased through the real estate agency. Mr. Harrington, who is also president of the Massachusetts Mortgage Bankers Association, says that's better than most other real estate companies have done with their mortgage operations. "Most do less than 20 to 25%," he says.

Meanwhile, small mortgage companies that entered the fray to serve the refinancing business are now going out of business or merging with others. "That's less competition," says Mr. DeWolfe.

"We're getting back to a more level playing field," adds Mr. Harrington. "And I think next year will be better."

Ms. Temes is a freelance writer based in Boston.

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