The recent hike in rates will temporarily reinforce the popularity of a highly successful mortgage product used by California thrifts. But signs point to a slowdown next year.
Bank executives and analysts are saying that mortgage loans tied to the 11th District Cost of Funds index, so-called COFI loans, will retain their advantage as long as short-term rates are on the upswing.
But that advantage may be short-lived and there are signs that thrifts are taking a more conservative stance in pricing and marketing the loans.
Adjustables linked to COFI have been the 800-pound gorilla of this year's mortgage originations market. Since COFI, which tracks the average cost of funds in California, Nevada, and Arizona, includes a mix of short-term and long-term instruments, it lags behind the Treasury market and tends to reprice slowly.
So while the average one-year adjustable mortgage that is linked to a Treasury security has skyrocketed by 1.85 percentage points this year, to 6.14%, teaser rates on one month COFI-based loans have increased by only 4 basis points, to 3.82%, according to HSH Associates, a New Jersey company that monitors mortgage rates.
"As rates continue to rise the COFI effect will continue," said Joseph Morford, a thrift analyst with Keefe, Bruyette & Woods.
Mr. Morford is concerned by some aspects of COFI's popularity. "These deep teaser rates are uneconomical. If rates stabilize they will be able to catch up on the COFI lag as the loans reprice but," if rates rise California's recovery could stall out, causing credit problems, he said.
Thrifts, while defending their lending policies, are seen to be taking a less aggressive stance. Downey Savings and Loan raised its start rates by 25 basis points last Wednesday and has increased rates a total of 1% in the last month, according to William Halapin, treasurer of the Newport Beach, Calif., thrift.
"Teaser rates appear to be not as deeply discounted over the last month," said Warren Raybould, executive vice president at California Federal Bank, Los Angeles. He thinks that the aggressive teaser rates were in part an effort by savings and loan associations to reestablish themselves in the market after their long hiatus. "The need to cut prices to get market share is diminished," he said.
One possibility put forth by some analysts is a pullback by thrifts in 1995 as they reach capital constraints. Charles Coulter, a vice president with Coast Savings Financial, said that was a dynamic that could come into play. "There are constraints on (thrifts) and we are aware of those issues," he commented.
Even if thrifts become less keenly competitive, the difference between COFI loans and one-year Treasuries is so great that the benefit will be largely academic for mortgage bankers.
"Mortgage bankers are a factor in this market only to the extent they have an alliance with my thrift competitors," said one savings and loan executive.
