Heavy competition continues to separate the wheat from the chaff in mortgage lending profitability, with specialized firms beating out the lending giants.

According to a survey released at the Mortgage Bankers Association of America annual convention here, the variance among profit margins in 1996 increased more than 30% from the year before-meaning that some firms are increasingly successful, while others are falling by the wayside.

"We're seeing more winners and losers," said Tiffany Rowan, assistant economist for the MBA. "What this is going to mean in the future is we'll see more companies exit the industry, merge with others, or outsource" their mortgage operations, she said.

In addition, the MBA's "Profit Trends in Mortgage Banking" study found that the largest loan producers were the least profitable. Lenders who originated more than $4 billion in loans last year had an average profit margin of only 7.1%, versus an industrywide average of 13.3%.

The next tier of lenders, those who originated $1 billion to $3.9 billion per year, was the most profitable, with average profit margins of 23.3%.

On the servicing side, midrange was better than supersized, the survey found. Servicers with more than $10 billion in volume had the smallest profit margin, at 6.9%, while those with $1 billion to $10 billion in loans enjoyed profit margins of more than 25%.

Expanding into new areas is one of the best ways to increase profitability, Resource Bancshares Mortgage Group CEO Edward J. Sebastian told lenders. "If you're going to rely solely on A business, you have to keep doubling and tripling" volume to keep up profitability, he said.

Instead, Resource moved into subprime lending this year to boost margins. "We're adding A-minus and B paper to maintain our 25% (profit) growth rate," Mr. Sebastian said. "Eighty percent of that production comes from brokers and correspondents, which is a natural fit."

The company also bought subprime originator Meritage Mortgage in April. Its monthly production reached $30 million in August.

Additionally, Resource Bancshares is adding equipment leasing and commercial mortgage lending to its product line to keep profit growth stable. Although mortgage companies may have ignored it in recent years, "commercial mortgage lending is back," Mr. Sebastian said.

Expenses increased more than 49% for all lenders surveyed, the study found, to an average of about $57.1 million in 1996. Companies' move toward automated systems played a factor in this increase, Ms. Rowan said. But an increase in average revenue almost completely offset this spending boom- revenue increased 48% in 1996, to $63.1 million, the survey found.

Profit margins overall fell slightly for the year, the MBA survey found.

The average profit margin for the 213 lenders surveyed was 13.3%, down from 14.6% in 1995. This seems to contradict another MBA survey released earlier this month; according to the "1996 Cost Survey," profit margins of lenders surveyed increased to 12.3% in 1996, from 9.9% in 1995.

Ms. Rowan attributed the disparity to the lenders studied. The "Cost Survey" looked at a range of lenders, she said, while the profitability survey focused on the larger ones.

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