Capstead Mortgage Corp. is an anomaly among large mortgage servicers. The Dallas mortgage bank services almost $50 billion of mortgage loans but doesn't originate any.

Still, Ronn K. Lytle, Capstead's chairman and chief executive officer, said he does not worry about his company's inability to produce new loans to replace those that run off.

"We believe that we can buy servicing in good markets and bad as cheaply as we could originate them," he said.

Most mortgage banks both originate and service loans to protect themselves against interest rate movements. When rates go down, consumers are more likely to apply for a new loan or refinance existing loans. The value of servicing decreases with lower rates because loans are paid off quicker.

Mr. Lytle, who has been with the company since it was spun off from erstwhile mortgage giant Lomas Financial in 1985, has an aversion to the origination side of the business. He says the high fixed costs of an origination franchise outweigh the benefits of having loan production as a hedge when servicing values fall.

But Capstead has been an originator on Mr. Lytle's watch. The company specialized in jumbo loan production in the early 1990s. Many industry observers thought at that time that Capstead was on the verge of either building or buying a large production network.

When origination volume plunged in 1994 as a result of high rates, many lenders had to drastically cut the size of their production staff. Mr. Lytle said this experience, more than anything else, convinced him that producing loans was not a business Capstead wanted to be in.

"We never anticipate having to downsize now, because we don't have the origination component," he said.

Analysts welcome the fact that Mr. Lytle has remained focused on the strategy of servicing loans and investing in securities, and has not been tempted to diversify beyond these businesses.

"I think Mr. Lytle comes across as very credible and very straightforward. He feels confident about his business," said Eric Boyce, an analyst with First Dallas Securities.

Mr. Lytle, a former securities analyst himself, said he constantly scrutinizes what other mortgage companies are doing and has modelled Capstead after three of the most profitable companies-Countrywide Credit Industries Inc. and the government-sponsored enterprises Fannie Mae and Freddie Mac.

On the servicing side, Mr. Lytle said he wants Capstead to be as efficient as Countrywide. Capstead will continue to purchase about $10 billion to $12 billion in servicing a year to feed its portfolio, Mr. Lytle said. At that rate, Capstead could have a servicing portfolio of almost $100 billion in five years.

Although Capstead lacks production capability, it hedges against lower interest rates by investing in mortgage-backed securities, a core business of Fannie Mae and Freddie Mac. Because it doesn't guarantee mortgages, Capstead doesn't assume the risk that Fannie Mae and Freddie Mac have to.

"Capstead's whole focus is to eliminate credit risk and manage interest rate risk," said Gary Gordon, an analyst with PaineWebber Inc.

The company is structured as a mortgage real estate investment trust. As an REIT, Capstead must pay at least 95% of the income earned from its mortgage security investments as dividends to stockholders to avoid paying federal corporate income taxes on the earnings.

Mr. Lytle said Capstead's investment portfolio is about $6.5 billion. Lower rates are a boon for the investment portfolio because the spreads on these securities widen when rates drop.

"They have a balanced approach. They can generate profits in virtually any interest rate environment," Mr. Boyce said. To that end, Capstead boosted its third-quarter dividend 2.5%, to 61 cents a share, this week.

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