The thrift industry stands to gain from the Federal Reserve's recent reduction of short-term interest rates, but the continuing decline in longer-term rates remains problematic, analysts said.

Though their competitors in the mortgage banking world are prospering, "for thrifts this is a challenging environment," said Thomas O'Donnell, an analyst at Salomon Smith Barney.

The Fed's modest, 25-basis-point shaving of the federal funds rate this week will let thrifts be more aggressive about cutting the rates they pay on deposits.

"It becomes less of a public-relations problem to try to push deposit rates down," said Kevin Timmons, an analyst at First Albany Corp. "If everybody's doing it, you're not going to be singled out."

Since the 1980s, most thrifts have preferred to hold adjustable-rate mortgages in their portfolios rather than fixed-rate loans. Many were stuck with fixed-rate loans that yielded far less than their cost of funds when rates skyrocketed early in that decade.

But in the current environment, consumers want to lock in low rates. Mortgage refinancing applications last week reached their highest level since January, according to the Mortgage Bankers Association of America. Refinancings account for 62.8% of mortgage applications; adjustable-rate loans, only 6.5%.

"ARM production has been nonexistent for about a year now," said Charles J. "Bud" Koch, chairman of Charter One Financial Inc., Cleveland. Normally, he said, Charter One's originations are 60% adjustable-rate and 40% fixed- rate. But all this year, fixed-rate loans have made up 90% of the thrift's production, he said.

This year, Mr. Koch added, his institution has been turning to its mortgage banking arm, Charter One Mortgage Corp., for more of its production. The unit sells its loans in the secondary market.

When rates are rising, Charter One lends more as a traditional thrift. "We have the capability of going either way," Mr. Koch said.

Indeed, thrifts that have mortgage banking operations have been making money on the origination side of the business, Mr. Timmons said. He pointed to Dime Bancorp in New York as an example of a thrift that has done well in this declining-rate environment.

To cope with the runoff in adjustable loans, and lack of demand for new ones, Charter One has been building up nonmortgage assets such as car loans, business loans, and commercial real estate loans, as well as second mortgages and home equity loans.

On the commercial real estate side, the fallout from lower rates has been a "silver lining" for Charter One, Mr. Koch said.

In recent years, Charter One found that it would usually get to make only the construction loans on a project. Wall Street conduits-which originate loans with securitization in mind-would supply the "takeout," or permanent, financing once construction was complete.

Charter One couldn't compete with the rates the conduits were offering, and its portfolio was shrinking. Recently, however, that shrinkage has slowed, Mr. Koch said.

Spooked by global market turmoil since late August, several large conduit lenders-notably Credit Suisse First Boston and Lehman Brothers-have pulled back. And lenders, such as Capital America and WMF Mortgage Group, that hedged their commercial mortgage holdings by shorting Treasuries, were hit with a double whammy when interest rates fell and the value of commercial mortgages did the same.

As a result, borrowers looking to refinance their construction loans have been knocking on Charter One's door, Mr. Koch said.

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