Wall Street Watch: Refinancing Boom Buoys Securities Adviser

As homeowners jam the phone lines to mortgage banks trying to get their loans refinanced, the phones at Pentalpha Group also have been ringing off the hook.

Pentalpha, based in Greenwich, Conn., has helped smaller banks keep up with phone marketers and bigger lenders by making better use of securitization.

Though most of Pentalpha's business is in commercial real estate securitization, the residential component has become noticeably more active as refinancing has surged, said executive director James X. Callahan.

As mortgage rates drop, banks are finding it increasingly difficult to raise deposits at rates low enough to leave a profit, and many are turning to securitization to continue lending.

Mr. Callahan said banks who don't securitize face a choice between shrinking or making higher-yield, higher-risk loans.

"Banks used to just like loans; they would hold loans and fund those loans with deposit money. The problem is those loans are not being borrowed again at these lower rates on the books of the banks," Mr. Callahan said.

"The main competitors for all banks today are not each other, but the securities markets," said Edward E. Furash, chairman of Furash & Co., a management consulting firm in Washington. "Securities markets set loan and deposit prices through securitization and money market funds."

Pentalpha helps banks to price, hedge, and ultimately package loans for sale, Mr. Callahan said.

Pentalpha advises banks on where to lend money given the market conditions and on how to hedge the loan risk for the 90 to 100 days before it is sold, he said.

"We act as sort of an aggregation and pricing service," Mr. Callahan said. "We know both pieces-we both buy bonds, and we originate loans. Internally we have all of the deal flow of a vertically integrated finance company, but we do it for the benefit of our banking customers."

With a staff of former Wall Street players, Pentalpha tries to bring "a Wall Street sophistication" to the table, said Mr. Callahan, formerly a managing director at Prudential Securities.

Mr. Furash acknowledged that there is a need for assistance.

"If a bank is not constantly in the securities market, trading for itself or its own customers, it often does not have a pulse on what the markets are doing, nor know the latest wrinkles in securitization or financing," he said.

But the switch to securitization "brings about a whole new set of balance sheet management problems as banks have to transition from being net-interest-margin-dependent to being fee-income-dependent by making loans and selling them in secondary markets."

Mr. Furash said that engaging a third party does not free a bank from its safety and soundness obligations to its regulator. u

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