On the surface, mortgage banks had a good year in 1995, with profit margins increasing to a fairly healthy 8.8%, from 4.6% in 1994.

But lenders got lucky last year, according to an analysis by the Mortgage Bankers Association. Falling interest rates enabled them to make sturdy profits in selling their loans in the secondary market. This happened because higher-rate loans become more valuable when rates fall between the time the loans are closed and when they are delivered to the secondary market.

In 1994, lenders made little profit in the secondary market because rates were generally rising.

And David Lereah, chief economist for the MBA, said lenders were still struggling last year with excess capacity built up during the refinancing boom of 1992 and 1993. Further, profit margins remained well below those of the early 1990s.

Figures from the annual MorPro study by KPMG Peat Marwick are equally grim. They show that net loss per loan origination - not including servicing value - climbed 34% last year, to $1,730.

So what does this all mean for 1996?

Interest rates this year have generally risen, though erratically, and profits from selling loans in the secondary market are not likely to be as large as they were last year. Mr. Lereah pointed out that the early part of the year was tough because of rising rates but that, more recently, the environment has been favorable as the rate trend turned down. "I don't think marketing profits will be as strong as they were in 1994," he said.

Lenders could get a shot in the arm from sales of subprime loans. Many mortgage banks have flown into this niche, where secondary-market margins are generally much higher than on conventional loans. Countrywide Credit Industries, for example, says it has benefited this year from strong margins on subprime sales but notes it did not sell subprimes last year.

One anomaly in the cost studies of both the MBA and KPMG is the profit performance of the largest servicers.

"Economies of scale" is a buzz phrase in the industry, and many servicers are pulling out all stops to bulk up their volume. But the largest servicers showed thinner servicing profit margins than the smaller ones.

For 1997, the consensus is that origination volume will slip. The nation's two largest independent mortgage companies, Countrywide and North American Mortgage Co., have each reported downtrends in recent months, both in loans closed and in their pipelines.

With interest rates now tending to favor adjustable-rate loans, portfolio lenders could be taking share away from mortgage banks. It's hard to find much good news in any of this for the MBA's membership.

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