Mellon Financial Corp.'s decision to slash its jumbo mortgage operation highlights the special problems that this category of lending poses for banking companies.

Many consider jumbo mortgage lending valuable only as a component of a cross-sell strategy, not as a stand-alone business.

The Pittsburgh company told employees on June 7 that it would eliminate more than half of the 180 jobs in the jumbo mortgage group at its Boston Co. subsidiary. Mellon said it would try to move the displaced employees into other jobs within the company.

Mellon executives declined to amplify a brief statement provided through a spokesman. The statement said that the leaner jumbo mortgage group - which the banking company has renamed Mellon Private Mortgage - will focus on lending to existing clients of Mellon's private asset management and private banking businesses.

The statement suggests that the jumbo lenders at Mellon have gotten the cross-sell message. It also indicates they will stop sourcing loans from mortgage brokers.

"As a stand-alone business, that operation is not financially attractive," the spokesman said, referring to the broker channel. "The large volume of business we originate via brokers and third-party relationships nationwide does not fit that strategy and is being wound down."

Customers acquired through the broker channel "don't generally become private banking or private asset management customers anyway," the Mellon spokesman said. "Their relationship was with the mortgage broker."

The jumbo mortgage business is tricky for banks. On one hand, bigger is better. On the other hand, jumbos - particularly super-jumbos, in which the Boston Company specialized - carry greater prepayment risk when rates are falling.

At the same time, the super-jumbo market is likely to be among the first to deflate when the current real estate boom passes its peak, as many fear will soon happen. To justify taking such risks, many banks position the super-jumbo business as a way to get a foot in the door with wealthy clients.

At press time, it could not be determined how important the jumbo-mortgage cross-sell opportunity had been to the Boston Company before the downsizing. Mortgage brokers who have worked with the Mellon unit suggest that in some areas, the firm was not even trying to cross-sell other bank products, while in others, it may have been trying too hard.

Mellon bought the Boston Company in 1993. Along with the jumbo mortgage business, the firm provided private banking, private asset management, and institutional asset management services, and included Boston Safe Deposit and Trust, a bank that provides trust and custody services.

Neil Bader, chief executive of IPI Skyscraper, a Manhattan mortgage brokerage that handles a high volume of jumbo loans, said he has worked with the Boston Company for 10 years, and it stands out in his memory as the one private bank lender that did not try to push a deposit relationship when making a jumbo loan.

"They don't have quid pro quo for a deposit relationship or net worth requirement," Mr. Bader said.

"All the [other] major private banking positions require either high net worth and some type of nominal relationship or a major relationship, depending on the strength of the customer," Mr. Bader said. But Boston Company "did it as a stand-alone transaction."

But a former mortgage broker on the West Coast, who did not want to be identified, told a very different story. He said he brokered loans in the Los Angeles area in the mid-1990s and remembers the Boston Company very aggressively using the jumbo as a way to win other business from rich clients.

"Typically they said you had to open an account with the Boston Company, and they hinted heavily that if you brought [the client's] assets over, that might help," the former broker said. Even before a loan was closed, he said, the Boston Company would solicit his clients for other business

To endear itself to those clients, the ex-broker said, the Boston Company would price its jumbo mortgages lower than its competitors. Jumbos, which exceed the purchasing limit for Fannie Mae and Freddie Mac, typically carry higher interest rates because of the greater risk. But "for CEOs of Fortune 1000 companies, [Boston Company] was giving away jumbo mortgages at conforming rates."

"The emphases at the Boston Company have probably changed over time since the Mellon acquisition," said Kurt Reisenberg, managing director of the VIP Forum, a Washington firm that advises private banks.

Mr. Reisenberg said he was not surprised to see Mellon downsize the Boston Company's jumbo business. "You're seeing a reconfiguration of what matters to affluent clients and what institutions are doing to make money off them.

"The credit business has gone down substantially as a percentage of affluent clients' needs," Mr. Reisenberg said. Investment management fees and commissions on investment products increased to more than 35% in 1998, from just over 15% in 1990. "Mortgages have not had that kind of growth."

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