As profit margins in the mortgage banking business continue to erode, more companies are looking to the mortgage insurance industry for help.

SunTrust Banks Inc. and First Tennessee National Corp. got approval in the last two months from the Office of the Comptroller of the Currency to establish mortgage reinsurance subsidiaries.

With a reinsurance subsidiary, a banking company assumes a portion of the risk on loans it originates and, in return, gets some of the mortgage insurance premiums.

Since the Comptroller's Office ruled last year that mortgage reinsurance is a permissible activity for banking companies, several have been approved to set up reinsurance subsidiaries, including Chase Manhattan Corp., PNC Bank Corp., Banc One Corp., and Norwest Corp.

"With the excess capital that is generally available to banks, I think a natural thing they're trying to do is find a place to put that capital," said Warren A. Raybould, senior vice president of national accounts for GE Capital Mortgage Insurance Co.

SunTrust Mortgage officials did not return calls for comment.

FT Mortgage Co., a subsidiary of First Tennessee, is one of the largest originators and servicers. It originated $7.2 billion of mortgages in the first three quarters of this year.

James B. Witherow, chief executive officer of FT Mortgage, said the company is working with several mortgage insurers to set up a reinsurance subsidiary.

Mr. Witherow said that as the company becomes more comfortable at assessing risk it will decide how much risk the reinsurance unit should assume.

Roy Kasmar, president and chief operating officer of Amerin Corp., a mortgage insurer, said lenders would probably be willing to assume more credit risk as they become more sophisticated at evaluating and understanding it.

Mr. Raybould said he expects more mortgage companies, including those not owned by banks, to set up captive reinsurance companies in 1998.

But Banc One's plans have stirred some controversy.

It wants to set up its reinsurance subsidiary as a quota share arrangement, meaning the unit would pay claims starting with the first dollar of loss. In addition, Banc One is willing to assume more risk than other banking companies that have set up reinsurance subsidiaries.

The mortgage insurance industry's trade group, Mortgage Insurance Companies of America, wrote to the Comptroller's Office asserting that Banc One was acting as a primary insurance company because it would get a majority of the premiums.

Brad L. Conner, senior vice president of strategic services at Banc One Mortgage, called that claim false and defended the quota share arrangement.

"This is far and away the cleanest structure from a true risk-share perspective," he said.

Mr. Conner said his company is very close to completing its plans for the reinsurance subsidiary.

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