Great Western Hitches 'Lama' Loans To Libor Rate in Bid to Lure

Great Western Financial Corp. hopes that mortgage borrowers will want to take a ride on a "Lama."

No, not the ill-tempered South American beast renowned for spitting, but rather one of its new Lama loans, linked to the London interbank offered rate. The new loans, called Lamas because they are adjustable-rate mortgages linked to the Libor annual monthly average, are designed to have a stable rate while being attractive to domestic and international investors.

"Averaging is the key innovation of Lama and provides Lama-indexed loans with greater interest rate stability, a feature prized by homebuyers," said E. Sam Lyons, Great Western's senior vice president for mortgage banking.

"At the same time, using Libor as the basis for the indices enhances the appeal of these ARMs in the secondary market - domestically and internationally. By enhancing ARM secondary market salability, Lama should ultimately enhance the overall availability of mortgage credit."

Four adjustable-rate mortgages introduced by the company are tied to a new Fannie Mae index based on an average of Libor rates.

Several attempts to popularize mortgages linked to Libor have failed because of the index's unfamiliarity and unpredictability.

Great Western views the new loans as a means to wean its clientele from loans linked to the 11th district cost of funds index, known as Cofi.

Great Western will continue to offer Cofi ARMs, according to Mr. Lyons. "Cofi has been our bread-and-butter product since we introduced it to the market in 1981. The Lama-indexed loans we're introducing will supplement our traditional product line, not replace it," he said.

Lama meets a key need for the company, Mr. Lyons said. "Lama is ultimately derived from the preferred interest rate benchmark of broader financial markets. As a result, Lama should appeal to an even broader universe of investors and consumers."

Mr. Lyons said Great Western "expects to retain the bulk of Lama-indexed loans it originates as portfolio investments. However, when ARM loan demand is at very high levels, Lama puts us in an improved position to sell loans to fund more loans. The consumer is the ultimate beneficiary."

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