Now that it has purchased a thrift focusing on wholesale lending, Marine Midland Bank plans to create a midsize mortgage company emphasizing that side of the business.

The new operation, integrating First Federal Savings and Loan Association of Rochester, will rely on rigorous oversight and geographic diversification to prosper, said executive vice president Robert E. Roth.

Mr. Roth and another Marine Midland executive, David J. Hunter, will co- manage the mortgage unit.

Marine Midland is mounting the venture at a tough time for mortgage lenders. Many industry experts believe enormous operations are necessary to realize economies of scale.

Also, a lot of lenders are scaling back on using outside salespeople, saying a recent wave of lawsuits over broker fees has raised questions about the integrity of these wholesale lenders.

"We recognize the challenges" of running a midsize shop that relies heavily on brokers, Mr. Roth said. "But we believe we have the right approach."

Over the next two months, the bank will establish a separate subsidiary for mortgage operations that are now housed with other consumer lending programs. The stand-alone unit will be based in Buffalo, and include the home lending business of Rochester, N.Y.-based First Federal. The thrift, purchased last week for $620 million, had a mortgage wholesaling unit in Annandale, Va.

The addition of First Federal will double annual mortgage originations- to close to $4 billion-and allow Marine Midland to extend lending operations beyond the Eastern Seaboard, Mr. Roth said.

The combined servicing portfolio puts Marine Midland among the top 20 or so in that aspect of the business. But the portfolio's size-$20 billion- makes the company vulnerable, industry observers said.

Pressure to perform has never been more acute for midsize mortgage companies like Marine Midland's. If their parent companies aren't willing to pony up capital and technology, they shouldn't be in the business, said George A. Bicher, a mortgage analyst with Alex. Brown & Sons.

"Banking companies are continually pushing to increase operating efficiency," Mr. Bicher said. "In this environment, a poorly positioned processing business should be divested."

Certainly, the addition of the First Federal's business will give Marine Midland the ability to boost originations and thus, the servicing portfolio.

But First Federal was primarily a wholesale lender, and Marine Midland plans to expand that business. Through the merger and subsequent growth this year, Marine Midland's origination mix will shift from 90% retail to 60% wholesale, Mr. Roth said.

The wholesale push comes at a time when some lenders are abandoning the broker channel altogether, fearful of being caught up in litigation over improper fees outside salespeople allegedly charge.

"Certainly there are elements of risk that need careful management," Mr. Roth said.

The mortgage unit will have "a very strong risk management team," seasoned executives, and checks and procedures to ferret out potential problems, he said.

"We see this as an opportunity for Marine Midland to continue its progress and growth in the mortgage business," he said.

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