The mortgage business, big thrifts' bread and butter for years, has become unfashionable at many of them.

With profit margins razor thin, thrifts are scurrying toward better- paying lines of business - home equity loans, car and boat loans, credit cards, and increasingly, commercial loans.

Charles John "Bud" Koch, chief executive of Cleveland-based Charter One Financial Corp., is no slouch when it comes to diversification. Charter One has been offering home equity loans for more than a decade, has a successful commercial leasing business, and is weighing the sale of insurance.

But Mr. Koch hasn't allowed himself to be distracted from his thrift's basic mortgage business.

"Whether it's good or bad, our curse in life is that we know how to do those things very well," he said recently, referring to home loans. "My guess is, it'll be a long time before mortgages aren't close to 50% of our production."

Mr. Koch, 50, represents the third generation of Kochs to run what is now Charter One Bank, today the Midwest's second-largest thrift at $14 billion of assets. He became CEO in 1988 and chairman last year.

His grandfather founded Charter One's predecessor, First Federal Savings Bank, 62 years ago in one of Cleveland's Czech neighborhoods - not far from Bud Koch's downtown office. He was succeeded by Mr. Koch's father, who had been an aeronautical engineer with defense giants Lockheed and McDonnell Douglas.

Bud Koch, also an engineer, spent several years plying that trade at such companies as Westinghouse Electric Corp. before joining the thrift in 1976, the year his father became chairman.

From those experiences, Mr. Koch said, he and his father learned to think strategically and make sure that products were priced to make money.

Indeed, pricing discipline is key in the mortgage business these days. Profit margins on the dominant, standardized mortgages - those readily purchased by the government-backed housing corporations - are flimsy.

"In order to make a buck, you have to be a very low-cost provider," Mr. Koch said."The people that make out are the people that drive prices down."

Charter One drives down its costs by "cutting corners" on the standard credit guidelines of the Federal National Mortgage Association and Federal Home Loan Mortgage Corp.

For example, the thrift often uses its large data bases to appraise houses electronically when making mortgages. That's a lot cheaper than sending appraisers to do a physical inspection and works just as well for the typical tract house, Mr. Koch said.

For borrowers with large down payments, Charter One waives the stringent income verification required by Fannie Mae and Freddie Mac - another cost savings that adds to its profits.

Of course, Fannie and Freddie are going down this path themselves - reducing the paperwork that drags out the home loan process. Eventually, that will "make it tougher to compete," he said.

The thrift also often assumes a larger proportion of risk on low-down- payment loans than Fannie Mae and Freddie Mac - requiring borrowers to get private mortgage insurance only with down payments of less than 15%.

By law, Fannie and Freddie may not invest in loans with down payments of less than 20% that are not insured. So Charter One can beat some mortgage bankers to those loans, Mr. Koch said, and sometimes pick up extra profits.

So what's next for Charter One? More of the same, according to Mr. Koch. "We've had a very, very focused opinion on where we want to go," since the early 1980s, he said. The thrift will continue to pursue new geographic markets. It's asset-doubling 1995 deal with FirstFed Michigan Corp. was its first foray outside Ohio. And it will venture into more new product lines.

Will a fourth generation of Kochs join the company? Mr. Koch said it was unlikely. Son Charles Brian, 23, is an economist with Deloitte & Touche, and thinking of graduate school. John Patrick, 21, a college senior, is eyeing the Peace Corps.

Mr. Koch succeeded his father as CEO of the Cleveland thrift, which his grandfather founded in 1934.

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