Glendale Federal Bank is dumping its entire $1.8 billion portfolio of derivative mortgage investments at an after-tax loss of $30 million, the company announced Monday.
Glenfed said the move was prompted by an accounting rule change that gives thrifts until yearend to calculate holdings in their portfolios as being available for sale. Until now, the thrifts had considered the securities long-term investments that they would hold until maturity.
The collateralized mortgage obligations, or CMOs, that the California thrift is unloading were once the hottest investments on Wall Street. A series of interest rate jolts over the past two years brought the products back down to earth.
Glendale said it began its sale this fall and that one-half of the CMO portfolio has already been placed.
Industry observers expect an insurance company, a pension fund, or a mutual fund to emerge as purchasers of the portfolio.
Glenfed chairman Stephen J. Trafton said the thrift will invest some of the proceeds in higher yielding adjustable rate assets to "significantly improve the bank's interest rate position and increase its interest rate spread."
In addition to freeing-up the CMOs, Glenfed reclassified a $1 billion portfolio of whole mortgage securities, but indicated it does not plan to sell that group of investments.
Industry observers say the move by Glenfed follows smaller CMO portfolio restructurings by other thrifts that also wanted to take advantage of the accounting change. Analysts said the transactions should not have a major impact on the CMO market, which is already seeing sharply reduced activity from the departures of many large investors and investment banks.
Even though the market is soft, the moves by Glenfed and a number of its peers, "doesn't mean thrifts won't buy CMOs," said Campbell Chaney, a mortgage banking analyst with Rodman & Renshaw in San Francisco.
Instead, Mr. Chaney said, the thrifts are "taking advantage of an ability to reclassify their investments" and position themselves for greater yields.
