If vanishing refinancings and a strong market for adjustable mortgages weren't bad enough for mortgage bankers, add vanishing interest margins.

Mortgage banks, long accustomed to collecting a healthy flow of cash from loans waiting to be sold into the secondary market, may be facing tougher times, experts say.

That's because adjustable-rate mortgages - especially those with very low start rates - are taking up more and more room in the loan warehouses of many mortgage bankers.

Down from 1993

"They will not earn as much interest as they did in 1993," said Michael McMahon, a warehouse lender at First Interstate Bank, Los Angeles. "The revenue side is under extreme pressure across the board."

When mortgage bankers originate a loan, they fund it for 15 to 30 days until it is sold by drawing on a warehouse line provided by a bank or by other credit sources.

Last year, mortgage banks had an easy time: Most of the loans originated had fixed rates that were well above the interest they paid out for a warehouse line. The result was a significant contribution to the bottom line from net interest income.

Contracts Loans Attractive

However, this year adjustable mortgages are all the rage, and the best prices and starting rates are offered by portfolio lenders. This has caused many mortgage banks to seek to originate loans on a contract basis for thrifts or commercial banks.

These deals often call for a mortgage originator to hold loans until a certain bulk amount - perhaps $5 million - has been built up. Than the loans are delivered to the bank of thrift investor.

The appeal of these relationships is that the mortgage banker can get the best pricing on the market. The downside is that the originator may have to subsidize the loans on the balance sheet until they can be delivered.

"If I'm originating a loan at 4.25% and I'm paying 6% in interest to the banks, I'm not a happy guy," said a secondary marketing executive.

The problem is worse for smaller mortgage bankers, who typically pay higher interest rates on their lines of credit and who may have less access to repurchase agreements as an alternative source of funding.

Interest rates paid by mortgage banks range greatly - from as low as 5.5% for the largest companies to well over 6% for small or midsize concerns.

Some adjustable-rate mortgages now are being originated with start rates in the low 4% range.

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