A bruising battle is shaping up between banks and finance companies in the market for home equity loans and subprime mortgages.

Spectacular first-quarter earnings at the finance companies have inspired a number of banks to step up their own activities in the field, observers say.

Finance companies specializing in home equity loans and subprime mortgages generally posted first-quarter earnings increases of well over 20%, thanks in part to strong originations. Money Store, the most visible player, reported a 96% jump in earnings.

Such numbers hold clear appeal to the banking industry as it searches for new sources of revenue. Chase Manhattan Corp., Boatmen's Bancshares, and other major banking companies all are considering making home equity loans and mortgages to people with blemished credit histories.

"Everyone is looking to expand into home equity," said Ed Hughes, home equity sales manager for BancOne Milwaukee.

"Banks and traditional finance lenders are going to be duking it out for market share in the near future," added James Nadler, executive vice president for residential mortgage-backed securities with Fitch Investors Service Inc., New York.

The home equity market is huge - $100 billion in originations a year - but it won't be easy for banks to increase their business. Analysts say finance companies firmly dominate most of the market, but banks have been active in lending to people with top-notch credit histories.

Established finance companies have been focusing their marketing efforts tightly and gearing up new technology, often with fantastic results.

The Money Store, based in Union City, N.J., said its first-quarter profits jumped to $14.2 million, from $7.2 million a year earlier. Robust origination growth and strong gains in securitization were the main reasons, said Marc Turtletaub, president and chief executive.

The company is using its television advertising especially effectively, said Darrell Hendrix, assistant vice president for mortgage-backed securities at rating agency Duff & Phelps, New York.

"They've been concentrating on getting the maximum response, using more targeted ads," he said.

Aames Financial Corp., Los Angeles, managed to increase its first- quarter net income by 231%, to $7.9 million. Gary K. Judis, chairman and chief executive, cited the success of programs to buy loans and the expansion of a retail loan office network.

Technology has helped some finance companies focus efforts. Daniel T. Phillips, president and chief executive of RAC Financial, Dallas, attributes an earnings increase of almost 1,000%, to $6.4 million, to new information systems and computerized loan origination technology.

United Companies Financial Corp., Baton Rouge, La., also has tightened its focus to successfully increase earnings, Mr. Hendrix said. The company increased net income 40% to $17.8 million for the first quarter of 1996, in part because of the sale of its title insurance and life insurance companies.

Cityscape Mortgage Corp., Elmsford, N.Y., Amresco Inc., Dallas, and Equicredit, a subsidiary of Barnett Bank, are three home equity lenders to watch in 1996, one analyst said.

Cityscape first-quarter net income increased 830%, to $9.3 million, the company reported. Domestic loan originations almost doubled, jumping to $166.7 million from $60.8 million. Additionally, Cityscape's foray into the United Kingdom mortgage market brought in $27.4 million in loans. The company reported no loan chargeoffs for the quarter, according to chief executive Robert Grosser.

Amresco reported a 50% increase in net income for the quarter, to $4.8 million, driven by integration and consolidation of its origination facilities.

Despite the increase in competition, analysts are not expecting the well to run dry anytime soon.

"The home equity lending market is pretty large, and no one of these companies has a significant majority share," said Mr. Hendrix. "There's no ceiling in the near term for these finance companies."

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