With specialized lenders licking their wounds, commercial banks are poised to post sizable gains in the fast-growing market for home equity loans.

Some 500 banks across the country helped push total home-equity originations to $292 billion last year, up 8% from 1997, according to a study by David Olson Research, Columbia, Md.

In all, banks grabbed 57% of the market last year, said David Olson, the company's chief. And the share is sure to be even bigger this year, he said.

"The market is in for a big switch, and banks have the opportunity to move in," Mr. Olson said.

Specialized home equity companies, often leaders in the field, are reeling from a brutal 1998. They suffered from surging prepayments early in the year and turbulent capital markets in the summer. Both problems crimped securitization, the main funding source of nonbank players.

"Six firms have gone under in the past three months, and we're right on the verge of several others doing the same," Mr. Olson said.

Banks, meanwhile, have been scooping up loan portfolios at bargain prices and raising their targets for originations.

"We will continue to see commercial banks entering the market because there are good spreads to be made," said John A. Imbriale, managing director of home equity for GMAC Residential Funding Corp.

"Line-of-credit products are already dominated by banks, and that will continue," he said. "The difference is that they will be moving to dominate other types of home equity products as well."

Mr. Olson cited BankAmerica Corp., Bank One Corp. and First Union Corp. as banks likely to come on strong in 1999. Others mentioned: Chase Manhattan Corp., Citigroup Inc., and Wells Fargo & Co.

"I think commercial banks will try to be a dominant player in the home equity and subprime market," said Daniel R. Stephen, a senior vice president at Union Bank of California, San Francisco.

"Commercial banks see home equity lending as a relationship product," he added. "You have to be able to offer it in order to maintain control of you client."

However, he said, all banks in the field will face some big challenges in the years ahead.

"Baby boomers are maturing and turning into savers, rather than borrowers, and they have traditionally been our prime pool," he said. "They won't be replaced by Generation X-ers, which are a smaller pool, not as creditworthy, and shop based on price, not relationships."

Texas, which legalized home equity lending in 1997, has shaped up as a major battleground. Last year, it was the fifth-biggest state in the field, with $4.4 billion of originations, Mr. Olson said.

California was first, with $19.4 billion, followed by Florida, Illinois and New York.

Nationwide, the study found, First Union and its newly acquired Money Store unit originated the most-$9.89 billion. Associates First Capital was second, with $7.2 billion, and Household Finance was third, with $7 billion.

Mr. Olson predicts that home equity lending, including both subprime and traditional quality, will increase by 8% this year, to $315 billion.

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