Midsize Thrifts Leading a Retreat from Home Loans

In a fresh sign of the pressure on profits in mortgage investment, a $2.2 billion-asset California thrift is retreating from the home loan business.

Last month, Cenfed Bank of Pasadena halted the wholesale purchase of mortgages from brokers. Instead, it is shifting its focus to commercial real estate and multifamily loans, as well as government-insured loans to small businesses.

"You have to find different kinds of products, or you have to shrink," said D. Tad Lowrey, chief executive of the 69-year-old thrift. "There will not be a role for surviving thrifts unless they change."

Cenfed's experience mirrors that of the thrift industry as a whole. Large and small thrifts alike have been hard-pressed to make money on their mortgage holdings as profit margins have narrowed under the influence of the low-cost government-sponsored Fannie Mae and Freddie Mac.

Also playing a role have been large outlays for technology by major lenders, and the persistence of low interest rates that favor fixed-rate loans.

To boost profitability, the nation's largest thrift, Home Savings of America, Irwindale, Calif., said last month it would shrink its $50 billion-asset portfolio, mostly home loans, by as much as 40% in five years. Home Savings has also begun to make consumer loans.

But experts say that midsize thrifts such as Cenfed will reinvent themselves first - and provide an early indicator whether large thrifts can follow.

"With these middle-market thrifts, you can make a change in a small amount of time and conceivably have it hit the bottom line in very short order," said Charlotte A. Chamberlain, an analyst at Wedbush Morgan Securities, Los Angeles.

"With an Ahmanson or Great Western, there are no quick fixes because you have inertia and the huge mass of the institution," Ms. Chamberlain said.

But if Cenfed and others succeed, Ms. Chamberlain said, chances are good that the large thrifts will, too.

As midsize thrifts turn away from mortgages, they are turning to car loans, home improvement loans, and small-business loans.

For example, $4.7 billion-asset Downey Savings Association, Newport Beach, Calif., is emphasizing automobile loans, while Bay View Federal Bank., San Mateo, Calif., with assets of $3 billion, has entered the car loan and home improvement loan business through its recent purchase of a consumer lender.

Cenfed entered the market for Small Business Administration loans last July, through its purchase of Los Angeles County's largest SBA-lender, Government Funding Corp., Hollywood.

Unlike home loans, SBA loans rarely prepay, Mr. Lowrey said. They're linked to the prime rate and adjust monthly, and are more profitable than adjustable rate home loans. The federal government's guarantee on 75% of the loan balance helps to manage the additional risk.

The thrift has no immediate plans to shrink its single-family portfolio, Mr. Lowrey said. But that option is very much in the cards, he said.

Mr. Lowrey said Cenfed is reviewing each of its business lines, as it reaches to double its current 7.5% return on equity. "If they don't meet our return-on-equity target, we have to get rid of them," he said.

Commercial and multifamily loans, which make up 17% of Cenfed's assets, are also growing in importance at the thrift.

Midsize thrifts may be nimbler than the big ones, but moving into new high-yielding lines of business is no piece of cake for them, either.

Some, such as $4.1 billion-asset SF Fed Corp., San Francisco, have chosen to become part of larger institutions. SF Fed was acquired last month by First Nationwide Bank, San Francisco.

"I'm not a quitter. I don't give up easily, but I think our association realized that it was going to get more difficult, and maybe to some degree impossible, for midsize thrifts to compete in the financial industry," said Roger L. Gordon, former chief executive of San Francisco Federal Savings, and now an executive vice president at First Nationwide.

Mr. Gordon said he didn't wish to discount Cenfed's chances of success, but his thrift concluded that entering new business lines would take too much time and money.

"It would have taken earnings away from our investors, and by the time we could start realizing some payback, we would have been acquired anyway," Mr. Gordon said.

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