Friend or foe? Increasingly, that is the question mortgage bankers are asking about GE Capital Corp.

The issue heated up this week when the financial services giant announced an agreement to acquire the large Shearson Lehman Hutton Mortgage Corp., Irvine, Calif.

The deal, slated to close by early September, will make GE the nation's third-largest mortgage servicer, processing monthly payments on nearly $60 billion of mortgages. The General Electric Co. unit is currently ranked No. 7.

In the view of many mortgage bankers, the deal makes clear that GE has become a serious competitor. But mortgage bankers have historically viewed GE as a trusted ally, because the company is a leading supplier of default insurance.

|Having Your Dog Bite You'

"It's disconcerting," says Angelo Mozilo, vice chairman of the huge Countrywide Credit Industries. "It's like having your pet dog bite you."

He and others said GE already is an aggressive competitor in wholesale mortgage banking -- the business of buying loans and servicing rights from other lenders.

In the wake of the acquisition, GE plans to pick up the pace of those purchases -- and for good reason. Based on recent prepayment rates, GE will have to take in about $15 billion of rights a year just to hold its massive portfolio even.

"We're having an internal debate about whether they're an ally or a competitor," says Marc Smith, chief executive of Crestar Mortgage Corp. The Crestar Bank unit uses GE for mortgage insurance but competes "head to head with them in wholesaling," Mr. Smith said.

High Marks for Service

To be sure, few lenders are expected to pull their insurance business from GE, which handles more than 25% of all new mortgage insurance. Indeed, mortgage bankers still give GE high marks for service in insurance.

But lender anxiety is clearly on the rise, making the GE situation a classic case of the often-conflicting relationships in the modern mortgage market.

Consider thrifts' relations with Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.

Some thrifts complain bitterly that the government-sponsored titans have unfairly muscled in on the business of funding mortgages. But these same thrifts routinely sell sizeable portions of their own loans to the agencies.

The debate over GE is likely to play out in a similar manner, observers say.

"Lenders will huff and puff about it, and some won't use GE for mortgage insurance," said Charles Wendel, a vice president with Mercer Management Consulting, New York. "But most will take a more pragmatic view. If GE offers quality service, lenders will continue to use it, even if another part of GE is competing with them."

Newcomer to Servicing

GE entered the servicing business three years ago by acquiring a $12 billion servicing portfolio from Travelers Corp. That deal included a major servicing facility in St. Louis.

Since then, GE has more than tripled the portfolio by purchasing servicing rights from other lenders.

The acquisition of Shearson Lehman Hutton Mortgage, which carries a pricetag of $70 million, will give GE another $17.5 billion of servicing and a new facility in San Bernardino, Calif. Shearson is a unit of Lehman Brothers Holdings, which in turn is part of American Express Co.

GE was clearly hungry for a another big servicing unit. Before settling on Shearson, it made bids earlier this year for Sears Mortgage Corp. and GMAC Mortgage Corp., according to industry sources. The Sears, Roebuck & Co unit ultimately was sold to PNC Bank Corp., while the General Motors unit was pulled from the auction block last month.

All-Star Bidding Cast

In snaring Shearson, GE reportedly beat an all-star cast of bidders, including Chase Manhattan Corp. and Margaretten Financial Corp. (See related story on this page.)

Why is GE so bullish on servicing? The company likes both the income and the opportunity to cross-sell other financial services to homeowners, says Alan Hainey, president of GE Capital Mortgage Services.

That unit, GE's mortgage servicing and production arm, is based in Cherry Hill, N.J. The insurance unit, GE Capital Mortgage Insurance, is based in Raleigh, N.C.

Mr. Hainey played down lenders' complaints about competition from an old ally.

"There are times when you are providing services to others throughout the mortgage banking industry and there are times when, if you buy loans, you are competing with someone else."

However, he said, the company focuses on "underserved" segments of the wholesale market. For example, it recently started a special service aimed at getting business from very small banks. It also operates as a "wholesaler's wholesaler," buying new servicing rights from other big purchasers.

"We believe that the service we bring to the industry as a whole far outweighs the competitive nature of individual deals," he said.

Though he declined to reveal any growth targets for servicing, the potential is vast. The California facility and the existing one in St. Louis each have the capacity to handle about $60 billion of loans, Mr. Hainey said.

Mr. Wendel of Mercer Management, who has studied the mortgage insurance industry closely, says he believes the earnings GE reaps from its expanding servicing business will more than offset any customer defections from the mortgage insurance business.

"GE Capital is so good at taking costs out of processing businesses that they're a natural for servicing," he said.

Such words, of course, are of little comfort to anxious mortgage bankers. "I'm not too pleased about seeing GE as a competitor and they definitely are," said a production chief at one large mortgage company.

All the same, a number of mortgage bankers are taking GE's ambitions in stride.

"We compete with them head to head in some areas and they bring value added in others," said Mark Oman, president of Norwest Mortgage Inc. "If I get angry, I don't have to use them for mortgage insurance. We use them, so obviously I'm not that angry."GE Brings ServicingTo Life...How GE will stack up after acquisition,on basis of June 30 volumesLoansserviced(in billions)1 Countrywide Credit $66.502 Fleet Mortgage* 66.253 GE Capital 58.954 Prudential Home 53.005 Citicorp 52.00*Fleet subservices an additional$2 billionSource: Inside Mortgage Finance

Three Years of Deals That Couldn't Quite Fly

The GE-Shearson deal capped a tortuous sales effort that stretched out for more than three years.

In 1989, Michigan National Corp. appeared to be on the brink of buying Shearson Lehaman Hutton Mortgage. Then, in 1991, BankAmerica showed serious interest. GE Capital itself thoroughly investigated the unit that year.

Sale Unravels

Next, some Arabian investors moved into the picture, teamed with the owners of a San Francisco thrift. But their deal unraveled.

Sources say the selling effort was intensified this year by Harvey Golub, who in February became, chief executive of American Express 10 Co., the unit's parent.

In the latest round of bidding, GE Capital apparently squared off with Chase Manhattan Corp., Margaretten Financial Corp. and Source One Mortgage Services Corp.

Eyebrows Raised

The final sale price, $70 million, struck some observers as unusually low -- certainly far below the norm for big servicing deals.

But others said it was impossible to evaluate the price without seeing the unit's balance sheet. GE bought the unit's stock, not just the servicing assets. That means the company effectively assumed the unit's liabilities.

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