LOS ANGELES - In a key strategy shift, some of the nation's biggest thrifts are preparing to actively market fixed-rate mortgages.
For the last year, the thrifts have been cashing in on a consumer preference for adjustable-rate loans, long their specialty because the adjustable feature limits interest rate risk on loans held for investment.
But with the drop in fixed rates, consumers have begun to move away from adjustables. Determined to maintain high lending volume, the big thrifts expect to shift gears and make fixed-rate loans that they intend to sell in the secondary market.
"We've got to be ready for the next time when rates fall," said Mario Antoci, chairman of American Savings Bank, Irvine, Calif., the nation's fourth-largest thrift.
Like the other California thrifts, American Savings in the last year has built its portfolio with adjustable loans linked to the 11th District's cost-of-funds Index.
But as rates on so-called Cofi loans head up, American Savings is offering the hybrid three-year, five-year, and seven-year ARMs that are linked to Treasury indexes and have fixed rates for the first few years.
In addition, American plans to compete aggressively in the 30-year fixed-rate market. All these loans will be sold into the secondary market, and American expects them to account for 20% of its $5 billion loan volume by yearend.
At the nation's largest thrift, Home Savings of America, Irwindale, Calif., executives say they are following a similar strategy.
"We're trying real hard to be competitive in those product lines, and to get the word out to our realtors that they can come to us for things other than just Cofi ARMs," said Fredric J. Forster, president of Home Savings.
The spectacle of thrifts chasing fixed-rate loans is not so surprising as it may seem at first glance.
"The big thrifts are not going to roll over and play dead when we get back to a fixed-rate market - leaving that market open for the mortgage bankers to take a big share," said analyst Thomas O'Donnell of Smith Barney, New York.
In the refinance boom, the large California thrifts were sidelined by publicly owned mortgage bankers like Countrywide Credit Industries of Pasadena, Calif., Mr. O'Donnell said. But this time, they plan to fight back.
To be sure, the competition from mortgage banks has waned because of the disappearance of many of them.
But thrifts are also feeling the competitive pressure from large banks, like Bank of America, that have increased their mortgage banking capacity with recent acquisitions, Mr. O'Donnell said.
Thrift executives say that beyond the drive for market share, a broader strategic change is under way.
Thrifts can no longer make it on interest income alone, since margins have shrunk as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. have grown.
The thrifts need substantial fee income to bolster the bottom line. Servicing income derived from loans sold into the secondary market is a natural for thrifts, executives say.
At Home Savings, Mr. Forster said he wants to double loan production, so that the thrift is making more loans than it could ever hope to hold in portfolio.
That means making all kinds of loans - Cofi loans for the portfolio, and all kinds of fixed and hybrid loans for the secondary market while retaining servicing income - typically, about 0.25% of the unpaid principal each year.
"It's an ideal set of circumstances," Mr. Forster said. "You're creating loan servicing - future income - without deploying a whole lot of capital."
"We may have years when we sell three-quarters of our production, or years where we sell none of our production, " he said.
"The ideal circumstance is to disengage the appetite of the loan origination process from our capacity to hold or not hold," he said.
Mr. Antoci said that he is now willing to accept that American's portfolio may have to shrink in strong fixed-rate markets.
"The strategy is to build the servicing portfolio when it makes sense and build the loan portfolio when that makes sense," Mr. Antoci said. "To be able to do the whole ball of wax and to be competitive."
At the nation's third-largest thrift, Great Western Bank of Chatsworth, Calif., Sam Lyons, senior vice president of mortgage banking, warns that following this strategy is like walking a tight rope. In the refi boom year of 1993, about a third of Great Western's $8.8 billion in loans carried fixed rates.
"The trick is not to abandon adjustable-rate lending," said Mr. Lyons, even while pursuing the fixed-rate market.
But, if you hit the balance right, said Mr. Lyons, "it can be the best of both worlds.
