Mortgage lenders are countering continued low volume by beefing up their servicing portfolios and looking toward subprime loans.

At Poughkeepsie Savings Bank, servicing is supplying fee income and offsetting losses the thrift takes when selling loans to Fannie Mae and Freddie Mac.

Rates, along with processing fees and other expenses, have led to an inadequate spread, said Joel A. Brotman, senior vice president in charge of residential lending at the upstate New York institution.

"It's been that way for the last couple of years" throughout the industry, he said.

For instance, Poughkeepsie Savings would give up about 50 basis points on a 30-year fixed rate loan priced at 8%, Mr. Brotman said. The loss represents the spread between the loan at 8% and a security paying around 7.5%.

"Hopefully, the value of servicing will be more than the loss you incur when originating and selling the loan," Mr. Brotman said.

Poughkeepsie Savings is remaining ahead of the game, he added. "We're still making money."

The thrift, like many others, is also keeping mortgages on its books to earn interest income.

Streetcar Brothers Mortgage Corp. is also retaining more of the servicing income from loans that are originated and sold into the secondary market.

"We tend to retain more of the servicing as things slow up," said F. Bruce Posey, vice president at the Billings, Mont., mortgage lender. "It's nice to have that cash flow," he said.

The company, which has weathered many lending cycles since its founding in 1922, is servicing three times the number of loans that it did a year ago, Mr. Posey said.

Banks are also looking to subprime loans to boost their mortgage unit's volume.

The mortgages, commonly called B and C loans, are made to borrowers with checkered credit histories, a group banks have usually shunned.

But the hands-off approach is rapidly changing, said Hugh Miller, president of Delta Funding Corp., a Woodbury, N.Y., company that is a conduit for nonconforming loans.

The company, which had no bank clients a few years ago, now works with a growing number of them, Mr. Miller said.

Banks are recognizing that it is in their best interest to originate these loans, Mr. Miller said.

"If they don't, customers will take their loan applications and the rest of their business somewhere else," he said.

By working with conduits, banks are able to get riskier loans off their books, a strategy that sits well with regulators.

And demand for these loans is heating up on Wall Street, Mr. Miller said. "A lot of investors are going that way to get the extra yield" that B and C securities offer.

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