Prism Financial Corp., a Chicago mortgage company, is following the contrarian dictum that you should buy when there's blood in the streets.

As interest rates rise, other mortgage companies are getting rid of employees and closing branches to reduce overhead. But Prism announced Tuesday that it has acquired Mortgage Express, a Palm Beach Gardens, Fla.-based mortgage broker. It was Prism's third deal in two months to buy a mortgage originator.

Prism ranked 13th among retail mortgage originators last year, with $8.3 billion, according to National Mortgage News.

The company, which went public with a $32.55 million offering in May, says the originations bust is playing into its hands. Its management says now is the time to buy production offices and loan officers -- while they are dirt-cheap.

"In the last 60 days pricing has come down and become more attractive," said Bruce Abrams, chairman and chief executive officer. "We acquire more in a down market than in an up market."

And Prism does not pay the full price up front. Rather, it structures its acquisitions with "earn-outs." In other words, it makes a small cash payment, usually equal to the book value of the acquired company -- which, in the case of a mortgage brokerage, is not much. Over time, it lets its new subsidiary keep some of its profits as additional payment for the acquisition.

That way, Prism will not take a big loss if the acquired company fails to produce.

But like any company that goes against the prevailing wisdom, Prism faces some skepticism in the marketplace. Wednesday morning its stock was trading at $16.25 -- a record low, and off 43% from its July 15 high.

Indeed, its strategy is so counterintuitive that Prism's stock has attracted the attention of short-sellers. They say the company is vulnerable to declines in production volumes and profit margins, and doubt it will meet Wall Street's earnings expectations. According to First Call/Thomson Financial, Prism is expected to earn 94 cents a share this year and $1.22 in 2000.

"They're trying to grow their way out by making acquisitions, which is the wrong thing to do," said a New York hedge fund manager, who says he is short Prism stock. "This is the time to cut expenses."

Critics also note that Prism does not service loans. Servicing is widely viewed as a hedge against falling volumes; when rates rise, borrowers are less likely to prepay and servicers collect more fees.

But Mr. Abrams said Prism has other means of protecting itself against the cyclical nature of the mortgage business. It bought Apollo Housing Capital LLC, a Cleveland company that pools and syndicates tax credits for low-income housing investments -- a less cyclical business than mortgages, Mr. Abrams said.

Prism noted all of its loan officers work 100% on commission. And half of its 150 branches are "net branches," in which the branch manager pays for all the branch's expenses, including rent, in exchange for a fatter commission on each loan.

Acquisitions are "a very cheap way to get more production volume," said Joel K. Gomberg, an analyst at William Blair & Co. who has had a "buy" rating on the stock since shortly after his firm took Prism public in May. "It's very low-risk."

Mr. Gomberg said he expects that as a result of its acquisitions and the hiring of 75 new loan officers, Prism will originate about $8 billion of loans again this year. The Mortgage Bankers Association has forecast that originations would fall 15% this year industrywide.

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