Executives of the big California thrifts say they may shift from the popular cost-of-funds index in setting the rates on their home loans.
They are looking for other options because investors have been turning up their noses at Cofi loans, and because mortgage securities based on Cofi traded at a discount through much of the boom in adjustable-rate mortgages last year.
The two largest thrifts - Home Savings of America, Irwindale, Calif., and Great Western Bank, Chatsworth, Calif. - are looking at new indexes that at the very least would diversify their predominantly Cofi-linked portfolios.
Executives say the primary problem with the index boils down to its lag. The index, an average of the cost of funds at thrifts in the San Fransisco Home Loan Bank district, lags two to three months behind the thrifts' actual cost of funds.
The lag depresses earnings during periods of rising rates, and it drives investors away from Cofi securities.
It is particularly problematic as thrifts try a more flexible origination strategy to cope with tougher capital standards that constrain portfolio growth, executives said.
Under that strategy, the largest thrifts, such as Home Savings, a unit of H.F. Ahmanson & Co., Los Angeles, plan to make loans that they can hold in portfolio or, in many cases, sell easily into the secondary market.
"Unfortunately, the best time to make Cofi loans is when rates are rising," said Mario Antoci, chairman of American Savings Bank, the nation's fourth-largest thrift. "Our coffers are full of loans, but unless we can hold them and grow with them, it can shut down the operation - unless we can sell them."
American is dealing with the situation by giving its loan brokers incentives to make loans that can be sold into the secondary market, such as those linked to the one-year Treasury bill.
Home Savings and Great Western also are working on more-saleable ARM products.
Earlier this year, Great Western launched adjustable-rate loans linked to a new index called Lama. The index is the 12-month moving average of the London interbank offered rate, known as Libor.
Sam Lyons, senior vice president of mortgage banking at Great Western, said 27% of loans that Great Western is originating are linked to Lama. Great Western believes such loans will fetch a better price on the secondary market, because investors are accustomed to dealing with the Libor index, he said.
He suggested that Great Western expects its portfolio to be evenly divided in the future between Cofi loans and the new index.
Other thrifts, including Home Savings and California Federal Bank of Los Angeles, are watching to see how the new index performs.
Meanwhile, Fredric J. Forster, president of Home Savings, said it was also considering an alternative index - a 12-month moving average of the T- bill rate. Mr. Forster said Home Savings believes the loans will be highly marketable to investors.