Commercial banks increased their investment in residential mortgages amid last year's refinancing wave, mostly through heavy investment in securities.
American Banker's annual survey shows that the top 50 banks' portfolios of mortgage loans and securities grew 9.55%, to $766 billion, in the 12 months through Sept. 30. The entire industry's holdings grew 9.68%, to $1.2 trillion. (Tables start on page 8.)
The industry's holdings of pass-through mortgage securities jumped 13.7%, to $277 billion, and its investment in collateralized mortgage obligations grew 34.05%, compared with a mere 4.28% increase in whole- loan investment.
The data suggest that mortgages-and particularly mortgage securities-are taking on increased importance for the industry. Total bank assets grew only 8.17% in the same 12 months.
The numbers also suggest that banks were able to score at least modest gains in what has been an extremely hot home finance market.
Mortgage debt outstanding grew only 8.6% in the 12 months. And the growth in bank holdings of whole loans, though small, shows that banks are allocating more money to the sector, said James X. Callahan, executive director of Pentalpha Group of Greenwich, Conn.
The BankAmerica-NationsBank merger on Sept. 30 made BankAmerica Corp. the industry's No. 1 investor in mortgages. Its total: $127 billion, up 0.85%.
All the growth came from purchases of pass-throughs, which grew 19.15%, to $31 billion. BankAmerica's holdings of collateralized mortgage obligations declined 41.08%, and its whole-loan holdings fell 3.56%.
Mr. Callahan said it makes sense that a newly merged bank like BankAmerica would have most of its mortgage investments in liquid securities, whose value can be readily determined. "It's easier to value someone's balance sheet when you can look at the trading screens," he said.
Banks tend to buy the shorter-dated tranches of collateralized mortgage obligations, and these bonds paid down quickly last year, he added.
Among the top 50, Comerica Inc. of Detroit reported the largest decline in residential mortgage investments: 20.82%, to $4.95 billion. A spokeswoman said the bank is allowing its mortgage loans and securities to run off, and is replacing them with higher-yielding commercial loans.
Comerica continues to originate mortgages, but now prefers to place them in the secodnary market rather than hold them, she said.
Banc One Corp., which merged the next month with First Chicago NBD to form the new Bank One Corp., was the fifth-largest bank investor on Sept. 30. It had reduced its holdings by 10.4%, to $29.3 billion, mostly through a 13.07% reduction in its whole-loan portfolio.
"Most banks don't view carrying conforming loans in portfolio as a profitable venture," said Thomas F. Theurkauf, analyst at Keefe Bruyette & Woods. "Many are deliberately trying to reduce their levels of one- to four-family whole loans."
Last year was marked by an unprecedented wave of mortgage prepayments. The Mortgage Bankers Association of America estimates that half of last year's record $1.47 trillion of originations were refinancings.
To lock in the lower borrowing costs, most consumers opted for fixed- rate loans. That made banks and thrifts less willing to put new mortgages on their books; they prefer to hold adjustables.
"The bottom line is that the market was dominated by fixed-rate mortgages, not adjustables," said David Lereah, chief economist at the Mortgage Bankers Association of America. Adjustables are difficult to sell when rates are falling, but "you can get fixed-rate mortgages out in the secondary market very easily," he said.
As loans were being paid off quickly, banks could put their new cash to work more easily by investing in securities than by originating loans for their portfolios, Mr. Callahan said. "It takes 90 days for a loan to close, but you can go out and buy a security in five minutes," he said.
The widespread perception that banks are running out of regulatory capital also gives banks an incentive to hold bonds rather than loans, Mr. Callahan said.
Mortgage-backed securities issued by Fannie Mae and Freddie Mac have an implied government guarantee, so banks have to set aside less regulatory capital to cover defaults than they would for uninsured loans.