When conditions suddenly shift in the mortgage market, the nation's smaller thrifts are often the first to adapt.

As consumers clamored for-fixed-rate loans during the refinance boom of the past two years, small thrifts quickly embraced the ways of mortgage banks. They wrote fixed-rate mortgages, sold them into the secondary market, and retained the lucrative servicing rights.

Now, as adjustable-rate loans return to favor, the thrifts are starting to produce those with gusto, usually to hold in their portfolios. At some thrifts, virtually all new mortgages are now adjustables for the portfolio, a complete reversal from last year.

This readiness to shift strategies is reflected clearly in the table on page 12A, which lists the 50 leading mortgage players among all thrifts with assets of $1 billion or less. Virtually all are active both as holders of mortgages and as servicers of loans sold to investors.

The nimbleness, combined with a strong knowledge of local markets, has helped establish small thrifts as formidable competitors. Indeed, many say they are not in the least bit worried by the industry's giants.

"We don't feel threatened at all by the Countrywides," said Robert Stoico, president and CEO of First Federal Savings Bank, Fall River, Mass. "A lot of our customers would rather deal with a thrift our size, particularly with consolidations taking place."

At the end of last year, most of top small thrifts in mortgages were servicing for investors more loans than they held, the result of strong demand for fixed-rate loans. Simply put, the thrifts wanted to profit without taking on the risks of 30-year fixed-rate mortgages.

"We tried to capitalize on [the refinance boom] by maximizing servicing, because down the road servicing fee income will have a substantial impact" on the bottom line, said Mr. Stoico of First Federal.

The $457 million-asset thrift boosted its servicing fee income 40% in 1993 over the previous year, and plans to grow it by another third this year, Mr. Stoico said.

About 85% of the loans serviced by First Federal were sold to Fannie Mac and Freddie Mac, which also are the chief destinations for loans made by mortgage bankers.

At the same time, First Federal managed to increase its portfolio by originating adjustables and fixed-rate loans with maturities under 12 years.

First-ranked Provident Savings Bank grew its servicing portfolio steadily over the past four years, said Craig G. Blunden, president and chief executive of the Riverside, Calif., thrift. Provident sold about 90% of its new loans during the period, he said.

That's the only way it feels it can compete in a market dominated by the secondary market agencies, Mr. Blunden said.

The strategy is also his thrift's answer to the low-spread adjustables that the largest thrifts can offer, Mr. Blunden said. Thrifts the size of Provident Savings, which has $629 million of assets, can't match the thin spreads of the large thrifts and expect to survive, Mr. Blunden said.

Holding Regains Appeal

But, as interest rates rise and consumers begin to favor adjustable loans with low start rates over fixed rate mortgages, even small thrifts are returning to their roots as holders of loans.

At Provident, for example, most of the loans made in the last 60 days have been adjustables headed for its portfolio.

At First Federal, a about half the $80 million in the pipeline are adjustables for its own portfolio or for sale to other thrifts.

Mr. Stoico of First Federal said he receives two or three calls a month from thrifts that have trouble originating all the loans they need for their own portfolios, and are shopping around at other thrifts.

Change Called Good for Thrifts

In general, thrifts will be in a "much stronger position to grow their market presence" now that adjustables are popular again, said Robert R. Davis, director of economics and research at the Savings and Community Bankers of America.

Many thrifts long have excelled in making and holding adjustables. Mortgage banks, by contrast, have preferred fixed-rate mortgages, because the secondary market for those loans is more developed.

Savings and Community Bankers expects that thrifts will have substantially more than last year's 23% market share.

Some small thrifts certainly have big ambitions. Mr. Stoico said First Federal hopes to build its servicing portfolio to $5 billion in six or seven years, up from $866 million today.

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