Commercial banks, rich with capital, continue to have an insatiable appetite for mortgage assets as they seek to build their mortgage units into behemoths.

Today, however, fewer independent mortgage companies are available than was the case just three years ago. But experts believe new properties will inevitably come on the market, attracted by the deep pockets of the banks.

Midsize companies - or the mortgage units of midsize banks - are frequently mentioned as putting themselves on the block because of the difficulty many are having in competing with the giants. Many such companies do not want to, or cannot, make the big investments in technology needed to keep pace with the market. However, investment bankers and others involved in bringing properties into the market are reluctant to name names.

The number of independent mortgage banks - and the strong profitability many companies came to rely upon - has been shrinking since the refinance boom ended in 1993. Countrywide Credit Industries and North American Mortgage Co. are the only large publicly held companies that have survived, and even North American was on the block for a time.

There are several smaller public companies such as Resource Bancshares Mortgage Group and Imperial Credit Industries, but no sales rumors have surfaced about them.

Brenda White, a managing director at UBS Securities who advises both buyers and sellers of mortgage assets, said that banks can get a better return on equity on mortgage assets than independent mortgage companies because of their financial leverage and the nature of their balance sheets. Commercial banks are able to raise funds in the public market more efficiently than an independent company, she said. And, when the mortgage market lends itself to the strategy, commercial banks can hold adjustable rate loans in portfolio, something independent mortgage companies can not do.

Ms. White said that mortgage assets would continue to consolidate, though it is difficult to pinpoint which companies will remain in the business and which will not.

As the mortgage industry goes through cycles, so does the merger and acquisition activity. When business is booming, banks enter the business in a big way, often paying premium prices to get volume.

During the down times, corporate parents cast off mortgage assets as if they were toxic. The units often sit on the auction block for extended periods.

Independent mortgage companies put up for sale in 1993 were Lomas Mortgage USA, Troy & Nichols, Sears Mortgage, and Sunbelt. In 1994, Margaretten Financial, American Residential Mortgage, Plaza Home Mortgage, Arbor National Holdings, and Directors Mortgage were all put on the auction block.

In 1995 consolidation continued. Sellers in 1995 were KeyCorp, Barclays America, Amsouth Bancorp., Wachovia Corp., Household International, Arcs (the home mortgage unit of Bank of New York), Prudential Home Mortgage, Source One, and First Bank Systems.

During the last five years, as companies exited the industry, both productivity and assets have been concentrating rapidly among the top 25 lenders and servicers. The girth of the top companies allows them to originate and service loans at low costs. According to experts, midsize companies facing this disadvantage are getting out of the business. Large thrifts facing too much competition would benefit from consolidation, according to one industry analyst.

"Midsize players are at a competitive disadvantage versus the big players," said UBS Securities' Ms. White. "They are either not in the position to - or not willing to - commit the capital to keep up" with the large players, she said.

A mortgage product salesman at a large investment bank said the overwhelming cost of capital and technology to compete successfully is the main driving force behind decisions to exit the business.

He added that the investment is worthwhile only if cross-selling benefits are achieved, which, he said, is widely touted but seldom achieved.

Servicing profits used to sustain mortgage lenders during down times in the industry cycles. This is no longer possible, the mortgage salesman said.

"In the good times there are tremendous prepayments. The bad times now are really bad and the good times are few and far between," he said.

But maybe even more important than interest rate cycles is who runs the mortgage unit, said a mortgage banking executive, who spoke on the condition of anonymity because his thrift is currently bidding on mortgage asset sales.

"Anyone who says politics has nothing to do with the decision to be in mortgages or not is crazy," he said. "If the head of the unit is in a big position in the bank organization, it is important." He named Art Ringwald at Bank of America and Francis G. Seabrook at Barnett Bank's mortgage unit as examples of heads of mortgage units with important positions within the bank parent company. Mr. Ringwald is group executive vice president and director of BankAmerica Mortgage, and Mr. Seabrook is president and chief executive at Barnett Mortgage Corp.

Jonathan Gray, a mortgage analyst at Sanford C. Bernstein & Co., said he sees untapped opportunities in large thrifts, particularly those based in California.

"There is a great opportunity for shareholders of these thrifts for one or two combined," Mr. Gray said. He named H.F. Ahmanson, Great Western, Golden West Financial, California Federal Savings, and American Savings as examples of companies that could reap cost benefits through a merger.

"A combination of two or more of those could be a dominant force in the industry second only to Fannie Mae and Freddie Mac," he said. It is a disappointment to shareholders, he added, that there have been no major mergers, outside of regional activity, in the thrift arena.

"California thrifts hold large amounts of adjustable rate loans, which are hard to come by," Mr. Gray said. Adjustable rate loans will become attractive when rates eventually rise, which they will.

"Then, California thrift portfolios will be attractive," Mr. Gray said.

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