Merger of bank and thrift charters could call into question the relevance of a popular index for adjustable-rate mortgages.

The cost-of-funds index, compiled by the Federal Home Loan Bank of San Francisco, determines interest rates lenders and investors collect on an estimated $100 billion of home loans.

Some observers say profits on the so-called Cofi lending might fall after charters are merged as some thrifts become even more banklike or are acquired by banks. That's because the cost of funds is usually lower in a banklike operation.

Even the makeup of the index after a charter merger could prove troublesome.

"The problem is that if you merge the charters and if you merge the insurance funds, the current definition of Cofi doesn't quite work anymore," said Fred Forster, president of Home Savings Bank, Irwindale, Calif., the nation's largest thrift.

The Home Loan Bank says it is determined to provide continuity and that it will use the same kind of institutions in compiling the index regardless of what happens to their charters.

"Just because Congress eliminates those institutions as a separate charter type doesn't mean we can't continue to use the same criteria we've been using in determining who's a part of the index," a Home Loan Bank representative said.

But veteran thrift watcher Bert Ely of Ely & Co. maintains that the Home Loan Bank can't settle this subject on its own.

Anticipated consolidation in the industry would sharply reduce the universe of institutions available for the index, he said.

"All the traditional benchmarks (of thrifts) are disappearing, based on insurance fund, charter-type," qualified-thrift-lender-debt, and so forth, Mr. Ely said.

Unless Congress intervenes, thrifts may face class actions by disgruntled consumers who question the continuing validity of the index, Mr. Ely added.

With charters merged, profits on ARMs linked to the cost-of-funds index might also fall, some say.

Thrifts typically add a margin of about 2.35% to arrive at the monthly rate on an ARM loan.

Their profit consists of that margin and - at the largest, lowest-cost thrifts - the difference between their actual cost of funds and the Cofi average.

In recent years, the gap between the actual cost of funds at the large thrifts and the Cofi average has narrowed, as high-cost thrifts have been bought out.

Thrifts have tried to combat the effects of this trend.

For example, Great Western Bank, Chatsworth, Calif., has for several years aggressively marketed checking accounts in order to decrease its reliance on more expensive certificates of deposit.

Home Savings of America and American Savings Bank, Irvine, Calif., are now following suit.

But with merged charters, according to Mario Antoci, chairman of American Savings, traditional thrifts are likely to find returns on Cofi lending diminishing more rapidly.

That's because under a single charter thrifts are expected to become even more banklike and to reduce their cost of funds by offering more checking accounts.

Those who continue to follow the strategy of funding loans through CDs will face new pressure to become more like banks, he said.

Sam Lyons, senior vice president of mortgage banking at Great Western, said uncertainty about profitability linked to the index could push thrifts to diversify their ARM holdings.

That was one factor in Great Western's decision to market an ARM linked to the London interbank offered rate, Mr. Lyons said. This product currently accounts for 37% of Great Western's loan production, he said.

Analyst Jonathan Gray of Sanford C. Bernstein & Co., New York, said he likes the index because it allows thrifts to match their cost of funds to their assets. He said he expects the index will continue to be useful even after charters are merged.

Even if Cofi loans became less profitable after charter mergers, profits would fall slowly, according to John Robinson, director of the Office of Thrift Supervision's western region. And the effect on thrift portfolios would be tempered as borrowers pay off their mortgages, he said.

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