For big thrifts, the home mortgage business was a feast last year. This year, it's looking more like a famine.
Rising interest rates boosted the popularity of adjustable-rate mortgages in 1994, providing the thrifts with a rich banquet of the loans that have long been their specialty. But now that rates have swung the other way, thrifts are back on a stringent diet as borrowers opt for fixed- rate loans.
In the second quarter, thrifts' residential loan volume fell for the first time in a year despite efforts to market fixed-rate loans. And there are no prospects of a rebound soon.
At the nation's largest thrift, Home Savings Bank, Irwindale, Calif., second-quarter originations plunged 43% from a year earlier, to $1.6 billion.
At Great Western Bank, the second-largest thrift, mortgage lending fell 15%, to $1.7 billion. At American Savings Bank, Irvine, Calif., the drop was 18%, to $900 million.
What's behind all this? For one thing, a narrowing of the difference between short-term and long-term interest rates left the rates on undiscounted adjustables at very similar levels to the rates of 30-year fixed mortgages, said Sam Lyons, senior vice president of mortgage banking at Great Western.
The spread between a fully indexed adjustable-rate loan and a 30-year fixed-rate mortgage narrowed throughout the second quarter, going from a little over 100 basis points in April to 20 basis points, according to HSH Associates of Butler, N.J.
Recently, Great Western's fully indexed 11th district ARM was at 7.59%, while its 30-year mortgage was at 7.60%.
"You can see why ARMs are drying up," said Paul Havemann, vice president at HSH Associates.
Meanwhile, thrifts have been hindered by their relative inexperience in fixed-rate lending. Most have favored writing and holding adjustable mortgages - a strategy aimed earning attractive interest income while guarding against swings in market rates.
Earlier this year, several of the large thrifts unveiled plans to maintain loan volume in a fixed-rate market by writing those loans, selling them into the secondary market, and retaining the servicing rights. In other words, the thrifts planned to behave more like mortgage banks.
But, the thrifts concede, shifting to this strategy can be difficult.
"Making the transition to mortgage banking is a heart-wrenching discipline," said Mr. Lyons of Great Western.
Thrifts are not accustomed to the strict underwriting and documentation standards of the secondary market, nor the discipline of locking loans in for a certain period before closing and trading them, Mr. Lyons said.
And gearing the old-time salaried loan officers at thrifts to compete with their commission-driven counterparts at mortgage banks "is not an easy task," he added.
Mario Antoci, chairman of American Savings, said American was not participating in the refinance miniboom at mortgage banks because it just hasn't learned that part of the business yet.
American's agents are used to making loans for the purchase of houses, he said. The thrift has not yet bought lists of borrowers with high-rate loans - a staple of the refinance business - that would enable its loan agents to do the intensive telemarketing common at mortgage banks.
Not surprisingly, the share of fixed-rate loans at the large thrifts trailed the market during the second quarter.
Fixed-rate loans did not exceed 18% of total originations at Home Savings, Great Western, or American, though applications in July are running more heavily to fixed-rate loans.
The latest numbers from the Federal Housing Finance Board indicate that 62% of mortgages made in May were fixed rate, up from 59% in April. That number was expected to rise in June.
One portfolio lender that appears to be cracking the fixed-rate market is Bank of America. In the second quarter, it made $2.02 billion in home loans, down from $2.57 billion in the year-earlier period but up from the first quarter's $1.65 billion.
Forty-one percent of loans originated during the second quarter carried fixed rates - a "radical change" from the 5% to 10% customary at the bank, according to Arthur D. Ringwald, executive vice president and director of BankAmerica Mortgage.
"We need to blend the best of being a portfolio lender and the best of being a mortgage bank," Mr. Ringwald said. "That strategy is starting to bear fruit, because we're doing very well in fixed-rate products."
The key, Mr. Ringwald thinks, is bringing top mortgage bankers to senior levels of management. In the past year and a half, Bank of America has done just that with hires like Mr. Ringwald himself, formerly at Sears Mortgage Corp., and Muir Atherton, now manager of secondary marketing at BankAmerica Mortgage and formerly senior vice president for secondary marketing at American Residential Mortgage Corp., La Jolla, Calif.
Despite the hurdles, the big thrifts say they will do enough fixed-rate business to maintain loan volumes for the rest of the year at current levels.
"It's possible that some ARM portfolio lenders will see a steady decline in volume, but that is not in our plans," said Mr. Lyons of Great Western.