Two of Wall Street's most aggressive mortgage securities firms have quietly cut operations, signaling a reduction in the emphasis placed on these securities.

Scores of salespeople, traders, researchers, and support staff left Donaldson, Lufkin & Jenrette and UBS Securities in recent weeks, either through resignations or firings.

"Yes, we are scaling back," said Kevin Finnerty, managing director in charge of mortgage operations at the Union Bank of Switzerland unit.

A spokeswoman for Donaldson Lufkin said 25 employees were recently cut, mostly from the mortgage group.

Former traders and others close to the two companies said many more resigned in the final weeks of 1997, deciding to get out before the ax fell.

The mortgage underwriting and trading business just is not as lucrative as it once was, and investment firms, because of recent rate swings, have never been more vulnerable to big losses in their mortgage groups.

Donaldson Lufkin perennially ranks among the top underwriters and traders of various types of mortgage securities. But it cannot justify the unit's costs against the profit it produces, the spokeswoman said. "The margins are getting increasingly narrow, and we have to size appropriately."

The spokeswoman emphasized that Donaldson is not leaving the residential mortgage securities business, and other people close to the company agreed. "Are we getting out of the business? No," said one employee. "Will we be No. 1 going forward? I don't know."

UBS is a later entrant in the mortgage field and hired many big guns in 1996 and 1997 to build business and establish a top standing in the rankings. Mr. Finnerty, brought on to lead the charge in November 1996, had spent the preceding 11 years at mortgage powerhouse Bear, Stearns & Co.

Mr. Finnerty declined to say how deep the cuts go in UBS' mortgage unit. But traders at other firms said the company has been doing very little business. The company's parent, Union Bank of Switzerland, is in the midst of a merger with Swiss Bank Corp., and the mortgage group may have been seen as a weaker link going into the deal, one analyst said.

Donaldson, Bear Stearns, UBS, and other investment firms help package mortgage loans into securities and then buy and sell these products on behalf of clients in the secondary market. Industry observers said the cutbacks at the two firms will not affect the $1.7 trillion mortgage securities market enough to move mortgage rates.

Still, the actions have stunned some market observers. They ask whether one or both firms bet wrong on the market and failed to hedge against recent interest rate moves.

They also said the firms were among the most ambitious at staffing up when the mortgage securities market bounced back in 1996; both may now be realigning, they said.

One analyst pointed to the strong emergence of home equity securities as perhaps cutting into mortgage security volume.

The emergence of other asset classes has not been lost on Donaldson or UBS.

Donaldson is "expanding various fixed-income businesses," the spokeswoman said. And UBS has been raising its profile as a backer and trader of various types of asset-backed securities.

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