More than 60% of thrift assets and over one-quarter of all bank assets are real estate loans. By comparison, only 24% and 18%, respectively, of total assets are in these institutions' investment portfolios.

Investment managers regularly use an array of professional financial disciplines to manage the risk-and-reward composition of their securities portfolios. Rebalancing is performed on a regular basis to ensure that portfolio performance is in line with the institution's overall risk/reward profile.

Mortgages, on the other hand, are more complex than most securities. In addition to credit and interest rate risk, they have operational risk. The performance of these portfolios is driven not just by the relatively efficient capital markets, but by the vagaries of human behavior. Yet most mortgage portfolio managers put a new mortgage on the books, collect its monthly payment, and hope for the best. This is not necessarily the optimal way to maximize returns and minimize risks.

But there are ways banks and thrifts can enhance the performance of their portfolios and achieve objectives.

If the objective is to enhance earnings, companies can sell mortgage loans above par to book a gain; sell adjustable-rate loans and buy fixed- rate loans to increase net interest rate margins; or sell loans to fund additional loan growth. Increased asset turnover means increased fee income.

To strengthen capital ratios companies might sell loans to generate earnings and improve net worth; downsize the institution through loan sales; or use loan sale proceeds to fund deposit reduction and repayment of borrowings.

Another goal is to improve liquidity. This can be accomplished by selling loans or swapping them for more marketable securities or by using the proceeds for loan sales to fund additional loan growth.

To manage interest rate risk the strategies range from selling fixed- rate loans and reinvesting in adjustable-rate ones or vice versa, depending on whether the bank is asset- or liability-sensitive.

If credit risk is a concern, the manager can divest geographically concentrated mortgages and reinvest in other areas or sell delinquent mortgages.

Successful execution of these strategies requires a comprehensive understanding of the implication of each strategy, mortgage portfolio characteristics, behavioral dynamics of the borrowers, and secondary markets.

Mr. Healy is a managing director at Bay View Financial Trading Group, a Miami investment bank and servicing broker.

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