Prudential Insurance Co. of America, which surged to prominence in mortgage banking in the early 1990s, is now considering a massive retreat from the business.

Sources say Prudential is considering selling much and possibly all of its Residential Services Corporation of America, which encompasses several mortgage-related business. The unit could fetch well over $1 billion.

The deliberations follow some heavy losses by Prudential in mortgage banking. Like most mortgage lenders, Residential Services has suffered a sharp decline in business volume in the aftermath of the refinancing boom of 1992 and 1993.

At the same time, Prudential has been reconsidering earlier ambitions to become a broad-based provider of financial services. Now, analysts say, it wants to refocus on insurance and money management, in an effort to make its earnings more stable.

Prudential's board of directors was slated to review the mortgage unit's future at a meeting on Tuesday at Newark, N.J., headquarters, and an announcement of a sale effort could come as early as today, sources said.

A Prudential spokesman declined to comment.

One source insisted that a decision to sell was carved in stone even before the board meeting. The source, who requested anonymity, said that all of Residential Services would be put on the market.

That would include Prudential Home Mortgage, which services some $75 billion of mortgages. Last year, the company produced $24 billion of mortgages, ranking No. 3 after Countrywide Credit Industries and Norwest Corp., according to SMR Research, Budd Lake, N.J.

All of this marks a sharp turnabout for Prudential. The company's mortgage unit, started virtually from scratch in the mid-1980s, took the industry by storm in the late 1980s and early 1990s. Along with Countrywide, it symbolized the rise of nonbank competitors in the home loan field.

But the fortunes of both Prudential Insurance and the mortgage unit took a turn for the worse over the past year.

The parent company posted a loss of $907 million in 1994 and suffered a $1.2 billion erosion of its capital base, to $9.5 billion.

Analysts say that Residential Services Corp. was a major contributor to the poor performance because its volume of mortgages issued dropped by more than 40%. This prompted the company to cut its work force by more than one-third, to 3,200.

"Prudential tried to pursue a strategy of becoming a financial supermarket. We've seen the costs of that," said David A. Havens, an insurance analysts with Standard & Poor's Ratings Group.

In October, Prudential hired Arthur F. Ryan, formerly of Chase Manhattan Bank, as its new chairman. According to company observers, Mr. Ryan has led a review of Prudential that has determined the need to concentrate on core businesses.

"They cannot afford the volatility that comes with mortgage lending," said Mr. Havens, who added that the substantial capital which could be gained through a sale would be "very attractive" to the insurer.

Most of the Residential Services value lies in its servicing portfolio, according to several top industry executives. The recent downturn in originations has made originations and ancillary lines of business less attractive.

However, part of Prudential's originations effort - a division serving corporate executives who are relocating - was singled out as something with high franchise value. That division formed the basis of the company in the mid-1980s.

According to one source, Goldman, Sachs & Co. has been given the mandate to pursue a sale and will be assisted by Inter-Atlantic Securities, a boutique investment house.

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