Golden West Financial Corp. may be in for a tougher earnings environment over the next year or two, but its president said that it is prepared to stick to its knitting, as it has done in past lulls.
Following a year in which traditional adjustable-rate mortgages exploded in popularity, rising short-term interest rates are already squeezing its net interest margin and should dampen consumer demand for its bread-and-butter product.
The Oakland parent of World Savings Bank views low expense ratios as a key factor in success in the commoditized mortgage business - and has consistently stood out for its efficiency - but Russell Kettell, its president, quickly downplayed one potential cost-cutting strategy almost immediately after mentioning it Wednesday.
Besides the natural drop in commissions and bonuses as loan volumes fall, shrinking sales staff through attrition can be used to cut down on costs, Mr. Kettell said at a financial services conference sponsored by Citigroup Inc.'s Smith Barney.
Nevertheless, Golden West will be slow to encourage it, he said, in part because it is "very difficult to attract, train, and retain good people" with expertise in ARMs, particularly loan officers.
"If we have to make a choice, we're going to not worry about keeping expenses high, if that means keeping the right people for the long term," he said. If volume shrinks this year or next, "the last thing" Golden West wants to do is lose its best salespeople.
Mr. Kettell also pointed to the past to assure investors that neither the rate environment nor the risk of regional declines in home prices poses much of a threat to Golden West's profits.
The past seven years have included five different lending environments - including generational lows in fixed rates and yield curves that ranged from steep to inverted. In each environment, Golden West was able to increase origination volume while keeping the ARM percentage of its volume at least 80%, he said.
At points, heavier prepayments or low volume yielded slow growth or declines in its loan book, but over the whole seven-year period the book grew 275%, versus the 200% or so rise in overall residential mortgage debt, he said.
Last year Golden West's originations climbed 36% - while industrywide volume dropped between 25% and 30% - and its assets grew 30%. It will not try to price more aggressively to maintain volume, Mr. Kettell said.
As for credit risks, Golden West is protected by a long-standing focus on loan-to-value ratios, low loan balances, and other underwriting characteristics that produce safer loans, he said.
The two most recent periods of rapid appreciation in the housing market were in the late 1970s and the late 1980s. After each period prices fell in specific areas, and nationwide appreciation slowed to 1% to 2% before returning to normal levels, he said.
Golden West's credit losses remained low in each period, he said, with chargeoffs rising to just 18 basis points in the early 1990s, when price declines hit its home state of California hardest.
