Commercial banks appear to have been working hard to build their home-loan portfolios.

Despite heavy prepayments tied to the refinancing boom, the industry increased its holdings of single-family mortgages by 7.5% in the year through March 31.

The portfolios of the 65 largest lenders climbed by about 22%, though much of that pin was attributable to mergers. (See accompanying table.)

San Francisco's Bank of America, for example, showed growth of 43% because of its merger with Security Pacific. For the year to June 30, with the merger no longer a factor, the bank showed a decline in its portfolio holdings of about 1%.

Shift Away from Fixed Rates

The banks showed slightly less willingness to add fixed-rate mortgages to their holdings, even though such loans are much in demand by consumers. Adjustables constituted about half their portfolios as of March 30, against about 46% a year earlier.

"Several things are going on," said Alden Toevs, a managing vice president at First Manhattan Consulting Group.

"There's been some return of loan demand. But mostly, the banks are looking for a place to park money until customers come back and start asking for product. They are looking for yield and will accept prepayment risk to get it."

Mr. Toevs sees the buildup of bank portfolios as short-lived and expects a turnabout tied to accounting considerations. "Things are ripe for a major sell-off of bank mortgage assets once interest rates rise," he says.

As of next year, banks will be required to value assets that are held for sale at market, he points out. They have had a considerable cushion of value on the older portions of their fixed-rate portfolios because the decline in interest rates has increased the market value of the mortgages held.

But the newer fixed mortgages are diluting that cushion, and a rise in rates would erode it even further. And the banks, fearful of having to mark down their portfolios, would likely begin to sell off their fixed-rate holdings.

"Once interest rates rise, there's a steamroller effect of major proportions," Mr. Toevs says.

Some of the top 65 lenders, meanwhile, continued to hold high percentages of fixed-rate loans. Prominent among them were Chemical Bank, about 70%; NationsBank Texas and Wells Fargo, both about 74%; Comerica, 80%; and NationsBank California, about 94%.

The same banks, though, had relatively small portions of assets in home loans, so their exposure to rate risk is limited.

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