SAN DIEGO - In a market that has lenders scrambling to find business, California Federal Bank is paying special attention to credit quality and pricing, says chairman Edward G. Harshfield.
In a wide-ranging interview with American Banker this week, Mr. Harshfield said that California Federal is managing its risk through limits on the geographic concentration of mortgages as well as on the size, loan- to-value ratio, and type of loan.
"There are restrictions on our production people," Mr. Harshfield said. For example, "if you hit a certain percentage with jumbos, you can't do any more."
The result, Mr. Harshfield said, is that the overall credit quality of loans originated has improved, because CalFed takes its pick of the loan supply.
To manage credit risk, CalFed also has adopted credit scoring to underwrite loans. The thrift uses not only its own credit scoring model, but credit scoring data from Fannie Mae and Freddie Mac as a reference point.
So far, CalFed's California-based credit scoring model has reached more conservative decisions than the agencies' national models, Mr. Harshfield said. CalFed is currently testing Freddie Mac's automated underwriting system, which uses the credit scoring technique.
With $14 billion in assets at the end of the first quarter, CalFed was the eighth-largest mortgage originator among thrifts. The thrift originates loans in California and Nevada.
About 60% of its portfolio is made up of adjustable-rate mortgages linked to the 11th district cost-of-funds index, an unusually low proportion for a large California thrift. The rest is in ARMs linked to Treasury indexes, and is funded through borrowings tied to those indexes.
Even though dispersing risk is CalFed's big picture, it is actually concentrating risk in one segment of its business: the low-income minority market.
The thrift has typically done 15% to 17% of its mortgage business with low-income borrowers. In response to changing demographics, this year the thrift plans to do 22% to 23% of its business with such borrowers.
Mortgage executives, such as Freddie Mac Chairman Leland Brendsel, have recently raised concerns about the credit risks of some popular low-income mortgage products. But Mr. Harshfield said that at CalFed the jury is still out on whether low-income lending is riskier than middle-class mortgage lending.
He said CalFed is closely watching its credit scores to see if lending to low-income borrowers will result in a "credit penalty."
Regardless of risk, mortgages to low-income borrowers are generally less profitable because the loan amounts are smaller, Mr. Harshfield said. The lower balances mean there is a smaller base on which to spread fixed costs.
At the same time, it's generally more expensive to approve these loans, Mr. Harshfield said, because many low-income borrowers do not have department store or credit card lending records.
Like other lenders, CalFed turns to rent receipts and utility statements, instead of credit bureau reports, to gauge credit history in those cases. Doing that costs more.
Like other large thrifts, CalFed has responded to lower long-term rates in the past few months by writing more fixed-rate loans and selling them to Fannie Mae and Freddie Mac.
But Mr. Harshfield expressed frustration at the resistance among CalFed's sales staff, who specialize in ARMs, to selling fixed-rate loans.
On the broad question of whether the market still needs specialized mortgage portfolio lenders, Mr. Harshfield said he believes several hundred such institutions will survive the merger of the bank and thrift charters.
In the U.S. financial market, institutions no longer need such specialized charters, Mr. Harshfield said. But as a practical matter, about a third of the nation's 1,800 thrifts will continue to focus on mortgage lending, because that's what they know best, he added.
At CalFed, he said, assets would have to grow to at least $20 billion before the thrift can make a good profit. That asset base would allow CalFed to spread its relatively high fixed costs, he said.
