A home builder might think it profitable to have a mortgage business to take advantage of its captive market. Ryland Group had such synergy in mind when it jumped aggressively into the business 15 years ago.

But now the Columbia, Md., company is in the process of paring down its involvement in mortgages and focusing on its core business of building. Its Ryland Mortgage Co. will continue to originate loans for Ryland homebuyers, but will no longer retain servicing rights on new loans and plans to sell its securitization business.

"We decided that, in order for the entire corporation to benefit, we should focus on home building," said Larry P. Cates, director of investor relations.

"It's a corporate issue rather than a mortgage-finance issue," he added. "Our margin on home building was weak the last few years because we were unfocused. We need money and have a source through the mortgage company. Our long-term strategy is, where is the best investment for our money and what is the best return for our shareholders? A dollar we make on the home building side is better than a dollar made on the mortgage banking side.

"We are keeping our servicing portfolio now, but are not looking to build it," Mr. Cates said. "As a home builder, which is our primary business, and in conjunction with the company's capital structure, we can cash in the current value of new servicing rights and invest the money in land."

He said Ryland could receive a better balance-sheet value in this way. "An investor who buys a Ryland share does so because we're a builder," he said.

Mr. Cates said Ryland's decision would have been the same even if interest rates had not surged.

But Stephen Kim, a housing analyst at Smith Barney, said he was still concerned that the competitive market due to high interest rates was hurting Ryland's originations business.

The percentage of Ryland homebuyers has been "disconcertingly low," Mr. Kim said. "They expect that capture rate to rise and let them originate more loans. But customers are looking for better rates, and the builders may be small players in the mortgage business. Ryland's capture rate was 52% in the second quarter of 1994. They want 70%," Mr. Kim said.

However, Mr. Cates said Ryland would not do battle in today's intense pricing wars.

"We are not willing to play in that competition," Mr. Cates said. "We do hope to be in the competitive range. We are not a low-cost leader." Ryland cannot compete with discount adjustable rates, Mr. Cates said, but it can compete with fixed rates if the yield curve flattens even more.

"I do not expect their capture rate will increase dramatically," Mr. Kim said. "We want to see them say they are only going for the capture market, and not aggressively going after outside business," Mr. Kim said.

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