A buildup in home equity and subprime lending by big banks and thrifts is beginning to show up in their earnings statements.

Wells Fargo & Co. on Tuesday reported a 6% jump in home equity and subprime balances during the third quarter, to about $16 billion, and noted that it can now underwrite home equity loans on-line nationally.

First Union Corp. last week reported a mortgage securitization gain of $117 million on loans generated by its Money Store, its subprime lending unit in Sacramento, Calif. First Union said Money Store, which it acquired at midyear 1998, helped it boost first-half income from consumer products by 1.4% from a year earlier, to $523 million.

And Golden State Bancorp reported Tuesday that its home equity originations increased to $104.7 million in the third quarter, up 8% from the second quarter and 70% from the first. Golden State, the parent of California Federal Bank, said in the release that it plans to launch a new home equity product and line of credit.

The rise in home equity and subprime lending reflects the acquisitions of such specialists as Money Store as well as increased demand for home equity loans now that rising interest rates have made refinancing less attractive to consumers.

"Home equity has traditionally followed a countercyclical business cycle to the mortgage industry, so as refinancing goes up in the first-mortgage industry, you typically see run-offs in the home equity portfolio, which makes it a tougher game," said Colin Walsh, senior vice president of Wells Fargo Home Equity. "As interest rates creep up, it becomes a very good environment for home equity lending, and at this point, our attrition is much more under control."

For the independent specialists that had the strength to survive last year's crisis in the capital markets, the entry of banks means tougher competition.

"It raises the bar," said Hugh Miller, president and chief executive of Delta Financial Corp., a Woodbury, N.Y., subprime lender. "Those with deep pockets are able to capitalize off of opportunities as a result of the capital markets not being open to the independent home equity lenders today. The change that we've seen, in terms of bank-owned and large, diversified companies being able to capture a much larger percentage of the market share, is probably a permanent one."

Mr. Miller pointed out that the top players in the sector a year ago -- IMC Mortgage, Contifinancial and United Companies Financial Corp. -- have been replaced by the likes of Bank of America's Equicredit unit and Countrywide Home Loans, a unit of Countrywide Credit Industries, the biggest independent mortgage bank.

To compete, specialists "have to be better capitalized and have a better business plan that turns them cash-flow positive a lot sooner," Mr. Miller said.

Fannie Mae's entrance into the subprime sector this month, with a program that lets borrowers with less-than-perfect credit get a loan at an interest rate just 2 points higher than on a standard program, could give banks further encouragement to grab market share from specialists.

Bill Schenck, chairman and chief executive of Fleet Mortgage Group in Columbia, S.C., said the Fleet Boston Corp. unit has had to refer about 5% of its applicants to subprime specialists. Fannie Mae's involvement would enable it to capture a significant portion of that volume, he said.

"All the loans that we would do through it are sold to Fannie Mae, so we're not taking incremental risk by putting these things in our portfolio or holding them as assets," Mr. Schenck said. "From a risk point of view, it's the same to us as a conventional mortgage, but it allows us to go deeper into the credit world.

"You're going to see real pressure put on specialty lenders' margins to the extent that banks associated with Fannie Mae are able to provide products at more competitive rates," Mr. Schenck added. "In the coming months and years we will see a substantial increase in the amount of home equity lending that we'll do through Fleet Mortgage. It will get us more deeply into the challenged credit arena."

Deutsche Banc Alex. Brown analyst George Bicher said banks, which have been burned in the past by home equity loans, are better prepared to serve the subprime and home equity markets today.

"Banks have gotten a little more intelligent about how to market and originate those products and who to market them to. They have also become sensitive to the fact that customers can be swayed by pricing and advertising."

A recent study by David Olson Research concluded that this is an opportune time for banks to invest in the sector, with stock prices of the monoline subprime lenders barely above all-time lows, and predicted banks will become still more dominant.

"I really wonder how you could be a viable specialty lender today by just doing subprime credit or home equity loans. To survive, you're going to have to be involved with other businesses as well," said Christine Clifford, a partner at the Columbia, Md., research firm. "No matter how excellent you are, if your cost to fund is substantially higher than your competitors', how do you survive?"

Ms. Clifford said First Union, Bank of America Corp., and other banks have enough capital to hold loans in portfolio. "Banks are not dependent on the secondary market," Ms. Clifford said. "They can go in and out of doing securities as it makes financial sense."

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