During the two-year refinancing boom, many commercial banks watched from the sidelines as mortgage banks built market share dramatically.

Now they are taking advantage of the industry's consolidation and jumping into mortgage banking with a vengeance.

They have plenty of good reasons -- an appetite for fee-based income, a desire to establish home leanding as a core business, an eaerness to capture the high interest margins now availablke to portfolio lenders on adjustable-rate loans.

Securities analysts and other industry experts have been quick to recognize these merits.

Some are Doubtful

But many also believe success in mortgage banking isn't a slam-dunk for banks.

Their doubts boil down to two topics: timing and culture.

They question whether it's wise to enter a highly cyclical business during a major downturn. And they wonder whether the entrepreneurial style that allows mortgage banks to survive and prosper through such roller-coaster rides will clash with the more conservative style of commercial banking.

Gary Gordon, an analysts at PaineWebber Inc., New York, is far more skeptical. "When you buy into mortgage banking, you're buying two things -- production and servicing," he says. "What would hurt is a decline in rates. You have to price the risk over a long period of time for a full range of rate forecasts.

"What happens to servicing if the economy slips into recession and the long bond goes to 6%? On the originations side, what if rates go higher, there's low volume, and a lot of price competition?"

Jonathan Gray, a seeurities analyst with Standord C. Bernsterin & Co., New Yor, has been more enthusiastic than most about the bank's acquisitions. But even he acknowledges that timing can cause problems.

"The question is price," he said. "The analysis of what to pay is confounded by declining production volumes. A buyer may not know what it's buying What is the value of the entity as a going concern?"

Understanding the Business?

Even assuming that price problems can be surmounted, some observers question whether banks really understand the mortgage banking business and genuinely want to be in it.

They ask whether banks want to run mortgage banks as a line of business or as a product line.

Do they look on mortgages as something to be sold to bank customers, a bring-'em-in-the-door product with cross selling potential? Or do they see mortage banking as a discrete line of business with is own priorities and goals?

How commercial bankers handle this question will be the key to their results, says Graham Williams, president of ITT Residential Capital Corp., San Francisco. As someone who came to ITT after holding the top slot at Bank of America's mortgage unit, Mr. Graham has done a lot of thinking about the issue.

"I think the most effective thing to do is to keep mortgage banking as separate as possible, but to offer the mortgage bank your advantages as a portfolio lender," he said recently. Let the mortgage banker be a mortgage banker, he added, but give him a commecial-bank funding base.

This would mean the mortgage unit would have low-cost financing for loans awaiting sale into the secondary market. It would also permit the unit to offer various kinds of adjustable-rate mortgages that aren't available through Freddie Mac or Fannie Mae.

Analysts also point out mortgage banking is a highly cyclical business and question whether the banks have the heart or the savvy to survive and prosper during the roller-coaster rides. In particular, they question whether banks are prepared to take the writedowns to which larger portfolio of intangible assets are vulnerable.

Another nettlesome issue, bankers say, is how to integrate the credit culture of bank with the entrepreneurial attitudes at mortgage banks. "For a bank, the credit decision and the lending decision are the same thing. That is not true for mortgage bankers," said Mr. Williams.

Since a bank lends a hold ther asset, it makes a decision as to the creditworthiness of the borrower and then lends based on that criterion. A mortgage banker, however, lends if the applicant meets secondary-market hurdles. If he can sell the loan, that's all that really matters.

Acting Like a Mortgage Banker

The main problem seems to be one of shifting gears; how to behave like a mortgage banker when the loan is to be sold, and how to act like a portfolio lender if it's not.

"Banks tend to impose layers onto the underwriting process," says Mr. Williams. While this is fine if a bank is going to hold the loan, it plays havoc with a mortgage bank's ability to originate loans at competitive prices.

"Mortgage banks have been driven to efficiencies that portfolio lenders needn't have," said Mr. Williams. "It's a thin-margin business and if you impair that, there could be trouble."

There are current examples of this, sources say.

U.S. Bancrop, which is trying to sell much of its mortgage banking operation, has been plagued with inefficiencies in its originations machine, according to people familiar with the situation.

"They have far too many people looking at every loan," said a mortgage insider who looked at the company as part of the sale process.

Tom O'Donnell, an analyst with Smith Barney Shearson, New York, also worries about how well mortgage banking will fit with commercial banking.

"The culture is so different," he said. "If a bank is smart and lets the mortgage bank do its work, that's fine. But put a banker in charge of mortgage banking and maybe you move out the very people that you bought that had made the business work. And that would be trouble."

Pay Structures Vary

The issue of clashing cultures also applies to compensation policies, with commercial banks being more tight-fisted than mortgage banks (See article, this page).

Mr. Gordon of PaineWebber is skeptical about cross-selling opportunities as a motive for banks to buy mortgage banking businesses.

"The concept that the mortgage loan is a key financial product helps you sell ancillary products is a suspect thing," he says. "It hasn't been proved. Do you have a warm and fuzzy feeling about your mortgage company?"

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