Express America, pieced together by investors from the assets of failed thrifts, became one of the hottest mortgage companies during last year's refinancing boom.

But the very volatility that raised the company to the heights proceeded to dash it down to the brink of disaster. To survive after a string of other opportunities slipped away, it has sharply reduced its loan business and jumped into mutual funds.

The company's four-year history serves as an exemplary tale of how destructive the cycles can be in a rate-sensitive business like mortgage banking.

Express America agreed last week to pay $28 million to acquire most of the assets of the Pilgrim Group, a Los Angeles mutual fund company, presumably with the proceeds from the sale of most of its mortgage servicing portfolio. The deal brings with it Pilgrim's name, its staff, and the right to manage six of its funds with combined assets of about $1.15 billion.

"Our board has expertise in mutual funds and we think we can do quite well," said James R. Reis, vice chairman of Scottsdale, Ariz-based Express America Holdings Corp. "You can now call us a diversified financial services company."

Then and Now at Express America Dec. 1993 Dec. 1994Headcount 700+ 100Servicing portfolio $6.8 billion $300 millionAnnual production $4 billion $500 millionStock price $9.00 $4.00Mutual funds under management 0 6

But mortgage bankers contemplating bidding on Kemper or Fidelity may want to take note that it has been a pretty lousy year for mutual funds as well.

With fairly severe gyrations in the equity and bond markets, performance numbers at many mutual funds have plummeted, driving down assets under management.

Further, the runup in interest rates is now making certificates of deposit and other fixed-income investments more attractive.

One of the mortgage banks that came out of the sale of assets by the Resolution Trust Corp., Express America was purchased by a group led by Robert Stallings in May 1991. And 10 months later, the company went public at $11 a share.

Just a year ago Express America was a thriving loan wholesaler with annual volume of $4 billion and a $6.8 billion servicing portfolio. Shares of the company were changing hands at about tk and its head count was well over 700, according to company officials.

Today, the company employs only about 70, has monthly volume of $40 million, and a servicing portfolio of a little over $300 million. And, as of last week, a small family of mutual funds.

What's more, the stock is trading at about $4 per share. "But, for the first time in a while, we're not losing money," said Mr. Reis.

What happened?

In November of last year, things were going reasonably well. Because it was a wholesaler that buys loans from brokers and correspondents, Express America benefited disproportionately from the refinancing boom of 1993, expanding rapidly and building its servicing portfolio from $3.8 billion to $6.8 billion in less than a year.

But loan runoff became a problem, causing a $15 million writedown, and the company recognized a need to build scale in the business.

However, its two main attempts to vault into the highest ranks of mortgage banking came to naught. A proposed merger with Plaza Home Mortgage fell apart and a planned $100 million debt issue was scuttled when the bond markets went south in February.

Chairman Bob Stallings remembers the day when the offering was to be made. "I woke up in Atlantic City, where I was for a brokers' convention, turned on the TV and saw that the Mexican presidential candidate had been shot. Turned the channel and Clinton was announcing a major speech that afternoon. The market rumor was that he was going to have bad news about Whitewater. On top of that it was the day North Korea declared war on South Korea. The bond market went crazy and has never recovered."

The rise in interest rates wasn't just bad news for Express America from the standpoint of raising capital. Higher rates also choked off refinancings and caused mortgage banks to begin cutting prices to bring consumers in the door. This trend was strongest in Express' main line of business: wholesale lending.

Lenders began to originate loans at prices so low that many times it ate away completely the value the servicing right created.

"There was no need for a middleman," says Michael Corasaniti, a stock analyst with Alex. Brown & Sons. "Borrowers went straight to the lender. That made wholesalers cut prices to the point where it took out all their profit."

But a nascent trend in mortgage banking seemed like a good bet to save Express America from a hostile market and make its shareholders very happy.

All during the winter and spring of 1993 and 1994, commercial banks were buying independent mortgage bankers -- often at very handsome prices.

Many of the old RTC properties, such as Sunbelt Mortgage and Crossland Mortgage, were purchased by commercial banks at prices that would please the most aggressive venture capitalist.

Express America seemed primed to join the trend. Sometime in the spring, it was approached by at least two regional banks with unsolicited takeover offers, sources say.

Negotiations commenced but a deal was never consummated. According to one source, the company turned down an offer of at least $14 a share.

As was the case with the debt offering, Express America was just a little bit late. By the summer, it was clear that wholesalers were having more problems than retailers with keeping up volume and turning a profit.

This meant the company was unable to get the kind of money it might have commanded just three months earlier.

When Plaza announced it was no longer for sale, its stock, which had gotten as high as $11, sank almost 40%, to $6.75.

With the market continuing to deteriorate, Express was forced to seek a sale of just its servicing.

At the end of August, Express sold its $6.5 billion servicing portfolio to NationsBank for $85 million. After debts were paid, the company was left with almost $30 million, but other than a mortgage brokerage operation, no line of business to speak of.

After several months of considering alternative investments, the company finally reached last week's agreement with Pilgrim.

"They just missed about every wave out there," said a mortgage banker.

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