WASHINGTON - Market share of adjustable-rate mortgages continued its free fall in June. The Federal Housing Finance Board reported last week that only 25% of home loans made in June carried adjustable rates, down from the previous month's 38% share.
Just six months ago, in January, 59% of all mortgages made were ARMs.
What's changed? Long-term rates have fallen steadily all year, dropping by 41 basis points in June alone, to 7.89%, the lowest average rate on 30- year fixed mortgages since April 1994, according to the finance board.
Earlier this year, the average interest charge on fixed-rate mortgages exceeded 9%.
Even at thrifts, which specialize in making adjustable-rate loans for their portfolios, ARMs made up only 44% of all loans closed in June - the first time in more than a year that they had totaled less than half of average production.
At small thrifts, the shift to fixed-rate mortgages has been pronounced. For some, that will mean sharply lower earnings as business volumes drop. Others, however, actually do better in a fixed-rate market.
Here is how three small thrifts are faring in this market:
Bay View Federal Bank, San Mateo, Calif.
At Bay View, single-family mortgage volumes are estimated to be less than half of last year's level as ARM loans dry up, according to Adam Zoger, vice president.
The $2.7 billion-asset thrift expects to make $180 million of single- family mortgages this year, down from $400 million last year.
The thrift is now emphasizing originations through its branches rather than through wholesale purchases from mortgage brokers.
Last year, mortgage brokers were clamoring to originate ARMs for sale to thrifts. This year, Mr. Zoger said, that source has dried up because brokers have returned to originating fixed-rate loans for large national lenders, like NationsBank and Chase, which have the lowest rates.
At its retail branches, Bay View is wooing customers with discounted fixed and adjustable rates.
"We've offered what we call relationship pricing, where there are some discounts if they have a direct deposit with us of their paycheck or if they keep a certain amount of deposits with us," Mr. Zoger said.
Peoples Heritage Bank, Portland, Maine.
At this $2.2 billion-asset thrift, the loan pipeline has doubled recently, as falling rates for fixed mortgages spur the local real estate market, according to Edward Costello, vice president of mortgage risk management.
About 86% of applications are currently for fixed-rate mortgages. Last October, the situation was nearly the opposite - 75% of applications were for ARMs.
Mr. Costello estimated that mortgage earnings at the thrift would rise 20% this year.
First Federal Bank, Waterbury, Conn.
Ross M. Strickland, executive vice president, said his $2.1 billion- asset thrift doesn't care much whether the market tends toward fixed-rate or adjustable-rate loans.
Business this year is about evenly divided between the two, he said, with first-time homebuyers preferring fixed rates and affluent, move-up buyers going for ARMs.
Loan volumes in the second quarter were flat from the same period of 1994, he said.