While mortgage lending was in a slump, mortgage investment by banks and thrifts was on the rise last year.
In the 12 months through September, the top 50 commercial banks increased their investment in mortgage loans and securities by 22%, an annual American Banker survey found. For the industry, mortgage investment was up 20% during the same period. Thrifts' mortgage investments rose 11.2%.
Though rising interest rates hurt loan volume, they make mortgage-backed securities and loans held in portfolio more valuable, because fewer consumers refinance loans and more principal and interest are passed along to investors.
Analysts said the increase in holdings represented a rebound in investment following the refinancing boom that ended last year. "What you started with was a low point in September 1998. We're getting back to normal status, or back along the trend line," said Campbell Chaney, an analyst with Sutro & Co.
The 36 banks in the top 50 that increased their investments did so by an average of 280%, with some of the larger gains attributable to acquisitions. But investment for the industry as a whole was up almost as much as for the top 50, as total mortgage-backed securities and loan holdings jumped 20.55%, to just over $1 trillion.
Bank of America of Charlotte, N.C., far outpaced all commercial banks, with $131 billion of mortgage investments, up 264.13%. First Union Corp., also of Charlotte, followed with a 3.96% increase, to $76 billion. New York-based Chase Manhattan Corp. came in third with $69.9 billion, a 5.82% decline.
Among thrifts, Washington Mutual of Seattle was the leader, with $115 billion, an 8.92% increase. Golden State Bancorp of Glendale, Calif., followed with $40 billion. Golden West Financial of Oakland, Calif., ranked third, with $37.5 billion.
Popular Inc.'s holdings increased about 8.5%, to $3.5 billion of mortgage investments. The surge was aided by a new government program that provided incentives to the bank, including tax exemptions and subsidies for mortgages to low-income families, according to Eric Rivera, a vice president and Popular's Banco Popular unit.
Though many expect interest rates to continue rising, some banks are looking to sell.
David Fisher, senior vice president and treasurer at Associated Banc-Corp. in Green Bay, Wis., said the 322% increase in its mortgage investment, to $4.9 billion, was due solely to acquisitions, and that the bank has been taking steps to lower its mortgage exposure.
"We're trying to change the mix of balance away from residential mortgages," he said. "With residential mortgages, you have great prepayment risk and your return on equity or investment is lower than with commercial or consumer loans."
Mr. Fisher said Associated wants to divest its residential mortgage holdings now that interest rates are rising. "It's a nice time to get out, before rates fall again," he said.
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