Selling its mortgage bank would help GE Capital solve a nagging problem, a former GE executive and others said.

Reacting to reports that Citicorp, Chase Manhattan Corp., and others have expressed interest in buying the mortgage banking unit, people familiar with GE Capital said a deal would let it focus on its more profitable but shrinking mortgage insurance business.

GE has been in the mortgage insurance business since 1981, selling coverage to lenders against default risk on low-down-payment loans.

GE entered mortgage lending in 1990 through its acquisition of a servicing portfolio from Travelers Corp., and expanded by acquiring Shearson Lehman Hutton Mortgage Corp. in 1993. The moves ruffled feathers among the insurance unit's customers, who resented GE's invading their turf.

The upshot, said the former GE Capital executive, who asked not to be identified, is that it has proved difficult for GE Capital Mortgage Services to build a large origination presence.

GE left the retail lending business in 1995 but is still a big wholesale lender. It originated $3.5 billion of mortgages in the first half of 1997, enough to rank it as the 17th largest lender.

GE Capital Mortgage Insurance Corp., the second-largest mortgage insurer, has seen its market share decline in the last few years. It was "pretty frustrating," the former executive said.

Edwin Ciskowski, an analyst for SunTrust Equitable Securities, said other mortgage insurers have generally avoided competing directly with their lender customers because it would be a competitive disadvantage.

Mr. Ciskowski argued that GE would be better off without the origination and servicing businesses because the mortgage insurance operations yield a higher return on capital.

GE Capital Mortgage Services is just a small part of the GE Capital juggernaut. Nicholas Heymann, an analyst with Prudential Securities, estimated that the mortgage operations contributed "well less than 5%" of GE Capital's overall earnings.

"Strategically, GE may have come to the conclusion that this business does not fit with some of their other businesses," Mr. Heymann said.

And GE Capital is increasingly focusing its attentions on international opportunities. Last month it bought Bank Prokredit, a Swiss consumer credit company, from Swiss Bank Corp.

Earlier in 1997, GE Capital purchased another Swiss consumer finance lender from Union Bank of Switzerland. GE also bought finance companies in Denmark and the Czech Republic last year.

Jenne K. Britell, the head of GE Capital Mortgage Services, is moving to Vienna to take charge of GE's consumer finance operations in central Europe.

GE Capital is also expanding its mortgage insurance operations internationally. The company already has operations in Canada and the United Kingdom, and recently bought Australia's largest mortgage insurer, Housing Loans Insurance Corp.

American Banker last week reported banks' interest in the mortgage banking unit. At first GE Capital said the unit was not for sale. When the rumors persisted, GE Capital said it had no comment.

Mr. Heymann said it would be wise for GE to sell the mortgage unit sooner rather than later, because mortgage lenders may not want to buy a lot of servicing if rates keep falling.

To speed sale, there is now talk that the portfolio could be auctioned off in chunks, because its sheer size of GE's portfolio,- nearly $100 billion - could make it difficult for one buyer to absorb.

Some servicing brokers think GE could get a better overall price for the portfolio by breaking it up.

"The best execution from a GE standpoint is to segment the portfolio," said Robert N. Husted Jr., principal of New York-based MIAC Risk Management Services.

Larger mortgage companies apparently still have a healthy appetite for servicing, despite worries about runoff. Mr. Husted said that even though rates are at their lowest since the celebrated refinance boom of 1993, prepayment concerns have not put a crimp in prices being paid for bulk servicing packages.

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