Sometimes when I see the latest figures on mortgage lending published by the Federal Housing Finance Board, I get scared.

I am reminded of the well-known observation, "Those who cannot remember the past are condemned to repeat it."

What brings this to mind is that the board reported that only 14% of the conventional loans closed in February had adjustable interest rates, the lowest percentage since such data were first published, in 1986. (The March figure wasn't much different - 16%.)

The reason for this oddity, the board says, may be that ARMs are not attractive enough these days to induce borrowers to risk the possible rate increase.

In February of last year, interest rates were 1.78% lower on the average ARM than on the average fixed-rate loan. But this February the differential narrowed to 0.53%. And in many cases, ARM rates without the initial interest rate discount exceeded the rate on fixed-rate loans.

From the public's point of view, there are obvious reasons to turn away from adjustable-rate loans. With a fixed-rate loan, borrowers can play "heads I win, tails I bet it over again." If rates rise, they can sit with their low-cost fixed-rate loan. If rates fall, they can refinance.

But why do the lenders accept this? Why on earth are they willing to go back to the dependence on fixed-rate loans that got them into such trouble when rates rose in the late 1980s?

Sure, some lenders are immediately turning around and selling the mortgages, so they have no interest rate risk.

But institutions that hold on to these fixed-rate mortgages are risking the same borrowing-short/lending-long dilemma that brought so many thrifts - and some banks - to their knees in the debacle in the late 1980s and early 1990s.

In this regard, when people ask where is the money that the thrifts lost and the Federal Savings and Loan Insurance Corp. had to raise, the answer is that only a small part went to unscrupulous operators and the excesses of extravagant chief executives.

The vast bulk went to cover the portfolio losses of thrifts, with the beneficiaries being people who held 6% and 7% mortgages when the lenders were paying in the mid-teens to get the money to fund them.

But what can a lender do if the public wants only fixed-rate loans and will not accept ARMs, on which these losses cannot develop?

One simple answer - if the loan looks like it could be a loser, if there is no corollary business to make an overall profitable relationship, if there is no fear or loss of future profits from declining the fixed-rate loan request, then why not "just say no."

Seasoned bankers know that the biggest threat to a bank is tight competition and sloppy lending. The combination can give away the shop.

And there is only one answer to this. If you have done your analysis and figured that there is little probability of matching competitors' rates and a large chance of losing money on the loan, then why make it?

When a potential borrower comes in and says, "Either you give me what I want or I will move my account," your platform employee should be trained to say:

"I'm sorry you are leaving. But please understand our position. And if you ever want to come back, we'll welcome you with open arms."

Mr. Nadler is a contributing editor of the American Banker and professor of finance at Rutgers University Graduate School of Management.

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