The heads of three mortgage banking companies agree on one thing in their annual reports: 1994 was a difficult year. In fact, each of the executives calls the year "difficult" in the opening sentence of his letter to shareholders.

But how difficult?

Ronn K. Lyttle, chairman and chief executive of Capstead Mortgage Corp., Dallas, was able to report that his company had the best performance in the mortgage banking industry, with its earnings falling only 9.2%.

For John F. Farrell Jr., chairman, and Terrance G. Hodel, president of North American Mortgage Co., Santa Rosa, Calif., the damage was an 82% decline in earnings.

And to James A. Conrad, president, and Robert W. Richards, chairman of Source One Mortgage Services Corp., Farmington Hills, Mich., difficult meant going from a profit of $40.1 million in 1993 to a loss of $43.5 million last year.

One big difference for Capstead was that it was not burdened by a devalued mortgage servicing portfolio. Instead, it acquired servicing for the first time last year that accounted for more than half of its profits. And unlike other mortgage banks, Capstead holds adjustable-rate mortgages for investment while selling its fixed-rate loans. Income from the loan portfolio also increased during the year.

For this year, Mr. Lyttle says, the company will be selling jumbo mortgages in smaller bundles so it can reduce the warehouse period to a minimum, thereby cutting risks. And it will be buying what it calls "B paper" from its correspondents. It is also offering ancillary products to its loan customers.

At North American, the two top executives provided a good outline of events in the industry for the year. Turning to this year, they say: "We believe your company is properly positioned from both a financial and an operational viewpoint to prosper in what has begun as another difficult year . . . We have substantial cash that we can use for acquisitions as well as for investments which may be required to take advantage of new technology which will be available to our business."

The Source One brass probably had the toughest task, having to report an accounting change that resulted in a $44.3 million writedown, the closing of about a third of their branches, and staff cuts of about 50% in the production area. They characterized the accounting change as "conservative," involving the discounting of cash flow from servicing at a market rate rather than by cost of capital.

They also noted that merger discussions fell through when market conditions deteriorated abruptly.

The company is looking toward improved returns for its parent company, Fund American Enterprises Inc., as a result of its downsizing and its status as a low-cost servicer.

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