The merger wave among California thrifts is shaking up the ranks of mortgage lenders in the nation's largest housing market.

First Nationwide Bank, leapfrogs from No. 13 to No. 3 with its planned purchase of Cal Fed Bancorp, according to TRW Redi Property Data. The deal, which would create a $32.3 billion-asset thrift, was announced on Monday.

And American Savings Bank, already California's second largest home lender, would jump to the top spot if Washington Mutual Bank can deliver on its ambitious plans. Washington Mutual, whose deal with American would create a $42 billion-asset thrift, has vowed to expand rapidly in the mortgage business.

But even as the new giants take shape, the state's mortgage market, like the national market, remains remarkably fragmented. As a result, many competitors say they are unfazed by the deals. They say there is still more than enough business for everybody.

"There are so many players - mortgage companies, brokers, thrifts and banks - that nobody has a very big market share," said Mark Korell of Norwest Mortgage.

"We survive on a 2 to 3% market share, year-in, year-out, and it's good business," added Jim Boyle, senior executive vice president and chief lending officer at Coast Savings Financial, an $8.4 billion-asset thrift in Los Angeles. .

"We have a very good, loyal customer base and a lot of referrals," he said. "Once you get established in the marketplace, you open your door, you get a loan. We don't have to go to any unusual lengths."

To be sure, few lenders are dismissing the new competition entirely. After all, the Washington Mutual-American deal marks the entry into the market of one of the nation's most respected thrifts. Washington Mutual is based in Seattle.

"The competition in California will be tougher with Washington Mutual here, because it's a very fine organization, very competitive," said Terrance G. Hodel, president of North American Mortgage Co., Santa Rosa. "Their service is good, their pricing is very, very good. Our people always say it's very tough to beat these people."

Kerry Killinger, chief executive of Washington Mutual, has said he plans to surpass BankAmerica Corp. - California's current mortgage originations leader - in an effort to amass more home loans to hold as investments.

But many experts say that size alone will not guarantee success for the new giants. Even the merger partners themselves acknowledge so much.

Carl Webb, president of First Nationwide, said California's homebuyers are so savvy that they are not likely to be impressed by large competitors.

"This market is so big, so diverse, and so sophisticated that you're dealing with a client out here that doesn't (care) if WAMU owns American Savings or who owns what," Mr. Webb said.

"At the end of the day, that mortgage customer is going to pursue the most efficient channel possible," Mr. Webb said.

With their increased heft, First Nationwide and the Washington Mutual might be expected to enjoy new economies of scale. For instance, they may be able to afford larger investments in mortgage technology - and thereby cut operating costs.

But Stephen W. Prough, chief executive of $4.7 billion-asset Downey Savings & Loan Association, Newport Beach, Calif., says he doesn't feel at any disadvantage.

"The No. 1 goal for financial institutions is to control costs, and provide a reasonable return to shareholders," he said. "I think a midsize institution has just as much ability to do that as a large institution."

As an example, Mr. Prough said Downey has cut its loan origination and processing costs by using readily available, personal computer-based systems to originate and underwrite its loans. It does not have to rely on expensive in-house technology that only the largest mortgage players can afford, he said.

Meanwhile, some smaller players have cut back so greatly on mortgage lending that the new megadeals are of only passing interest.

"We've pretty much abandoned the single-family market, because at our size and volume, the return on equity was not there," said D. Tad Lowrey, chief executive of $2.1 billion-asset Cenfed Financial Corp, Pasadena.

"The business fundamentals changed a long time ago," Mr. Lowrey said.

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