As mortgage bankers prepare for a new refinancing wave, they are struggling to digest the enduring effect of the last one - a strict new emphasis on the bottom line.

The signs were everywhere last year.

In December, PNC Mortgage, Vernon Hills, Ill., announced it would no longer buy loans from wholesale brokers, which wrote up to 20% of all PNC's loans. The company said it was paying too much for low-quality loans, and preferred to focus on writing loans through its own loan officers.

Earlier in 1995, GE Capital Mortgage discontinued its retail lending program, through which mostly small lenders had written GE loans. The program had never generated large volumes, and reportedly did not make enough profit to satisfy a more cost-conscious approach at GE.

Some players chose to exit the mortgage business altogether. Notably, Prudential Life Insurance Co.'s mortgage unit was put up for sale, and Wells Fargo hired Norwest Mortgage Inc. to write its home loans.

Industry executives say that a host of factors conspired to create a new emphasis on cost cutting in a hitherto more relaxed business.

The mortgage industry, which expanded to write a record $1 trillion of loans in 1993, continues to be too large for current volumes - estimated at $654 billion last year, and $765 billion this year. Fierce competition has driven down prices, forcing a new focus on costs.

And the influx of new capital, primarily from commercial banks, is changing the economics of the industry. The largest lenders can afford to buy, and constantly improve, expensive computer systems to originate and service ever larger volumes of loans. At these companies, the costs of originating and servicing each loan is consistently going down, and everyone must strive to keep up.

"The name of the game is keeping your costs down on everything, every little operation - the cost of borrowing money, the cost of distribution to the public," said David Loeb, chairman of Countrywide Credit Industries, Pasadena, Calif.

Within that context, Mr. Loeb and other executives said PNC's decision to abandon the wholesale purchase of loans from mortgage brokers makes eminent sense.

"There's no money in wholesale lending. The brokers get everything and then some," Mr. Loeb said. Countrywide is building up its direct business with consumers, in order to decrease its reliance on third parties, he said.

Fees to mortgage brokers have climbed in the last few years, as lenders jockey for volume by offering lucrative deals to brokers. Brokers these days get not only all the origination fees but also a portion of the servicing release premium, noted Saiyid T. Naqvi, chief executive of PNC Mortgage.

In addition, loans made by brokers tend to be refinanced more quickly, he said. When rates go down, brokers are quick to resolicit their customers. These and other factors led PNC to abandon the wholesale business, Mr. Naqvi said.

PNC's exit from wholesale lending is the latest sign that the mortgage business is rationalizing, said Luke Hayden of Chemical Residential Mortgage. In other words, players are adjusting their strategies to match the real costs and profits of the mortgage business.

So do the largest lenders, such as Countrywide, Chemical, and Norwest, plan to follow PNC's lead?

Not anytime soon. To exit wholesale lending or any other channel means that you give up a whole segment of the market to your competitors, said Mark Korell, group president of lender and investor services at Norwest Mortgage Inc., Des Moines. That's something that a really large lender just cannot afford to do.

Still, Mr. Korell warned that if brokers charged too much, the pressure to cut back on wholesale lending would mount.

"Brokers have to compete with other forms of production, don't they? If they take too much out of the equation, they're not going to be able to stay in business," he said.

"The moral of the story here is that the mortgage banking industry, like every other industry, over time will act in a rational way," Mr. Korell said. "Capital is movable. Not too many people are going to stay in a business where they can't make adequate returns to their shareholders."

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