Savings institutions hold a lot more mortgages in portfolio than other home lenders, thanks largely to their focus on adjustables. That's paying off now, but some experts see a squeeze coming.

To have and have not: Actually, the question for thrift institutions is to bold or hold not. Holding mortgages in portfolio instead of selling them to the secondary market is a deliberate strategy that has been made far more palatable in recent years by the rise of adjustable-rate mortgages (ARMs) and their ability to slash interest rate risk.

Increasingly, the mortgage banking industry--and S&Ls--are electing to emphasize one course or the other. Mortgages held in portfolio represent more than three-fourths of all assets at some S&Ls, less than a third at others. For a certain group for whom ARMs have become the staple mortgage product, this has been a banner year as the continuing climb in rates has sapped the fixed-rate market.

Call report data aggregated specifically for U.S. Banker by researchers at the Savings & Community Bankers of America and reproduced in the accompanying tables shows the largest S&L mortgage holders in the country. The biggest thrifts are clustered near the top, predictably, but smaller institutions leap over larger ones in these tables if the littler guys are portfolio lenders and the bigger ones aren't.

The mortgage holdings data refers only to 1- to 4-family loans; it excludes home equity credit lines and mortgage-backed securities, even MBS originated by the S&Ls themselves.

In today's rate climate, many S&Ls have worked extra hard at generating adjustables to lure consumers recoiling from higher fixed rates. ARMs have become big sellers (see "A Return to ARMs," September 1994), and that snowball is still headed downhill, given that average rates on 30-year fixed-rate mortgages hit 9.06% in mid-October, according to HSH Associates of Butler, NJ--some 175 basis points higher than they were Jan. 1. Analysts expect the Federal Reserve to hike rates yet again at its mid-November meeting, further dampening the overall mortgage market.

The surge in ARMs has meant that thrifts are selling "much fewer" mortgages than they did last year, says Robert R. Davis, director of economics and research at SCBA. Members have "been very aggressive on the ARM side." He argues that "portfolio lenders lend stability to the mortgage market... they're there with bricks and mortar" at a time when mortgage bankers are closing offices or selling out.

The giant West Coast thrifts like Home Savings of America and Great Western Financial, which have specialized in ARMs like the 11th District Cost of Funds Index (COFI) loan, have flourished. "For the large California houses, this is their moment in the sun," says David Partridge, director of the financial institutions practice at consultant Towers, Perrin. "They're willing to put on ARMs (at rates) the secondary market thinks are underwater."

Home Savings has been busily adding COFI loans to its portfolio, says CEO Charles Rinehart, and any fixed-rate loans it has on its books are very old.

Rinehart talks up the virtues of portfolio lending. He believes that fixed-rate loans, the province of mortgage bankers who sell to the secondary markets, are becoming less competitive as rising rates have hammered the "high-risk" portion of securitized loans that's often linked to derivatives. Once, "Wall Street could sell them at a lower-than-economic level because of the engineering they'd done," he says, but as investors get more sophisticated and refuse to buy those products, it's more likely that fixed-loan rates will have to rise--increasing the spread between them and ARM rates.

Home Savings executives also got an unexpected boost from last January's Northridge, CA, earthquake, as borrowers with damaged homes scrambled to put their finances back together, Rinehart says. "The portfolio lender owns the loan and can be flexible in terms of workouts," he says, while consumers whose loans had been sold found themselves subject to delays and rigid rules. "We got a lot of positives out of that."

Decision Not to Sell

Seattle's $18.6-billion-asset Washington Mutual has been keeping all its loan production in portfolio for a year, says William A. Longbrake, its chief financial officer. He says the policy stems from a decision to do financing through repurchase agreements and Federal Home Loan Bank borrowings rather than build capital still further by selling loans.

While the thrift is still putting fixed-rate loans on its books, "obviously, the mix has changed dramatically" in favor of ARMs, Longbrake says. Most of those ARMs are constant-maturity loans tied to Treasuries; Longbrake considers the 11th District COFI "a lousy index. It lags the market, and in times like this it looks attractive, and you can generate lots of volume, but economically, it depresses margins." That's because the composition of the index--which tracks the average cost of funds at Western thrifts--has changed in a way he says makes it less appealing relative to other sources of funding.

In a recent report, thrift analysts at Salomon Brothers Inc. predicted turbulent waters for the S&L industry, with rising rates and the drop in mortgage originations leading to weaker earnings and mounting consolidation.

Ways to Survive

Salomon identifies a few "survival strategies" and links institutions with them. There are the ARM specialists (Home Savings, Great Western, Golden West Financial, parent of World Savings; and Sovereign Bank FSB), which they say "have a sales culture and generate the loan products that they need for growth." Then there are portfolio lenders/mortgage bankers like Standard Federal, Home Savings and Charter One, "which have large origination networks and use ARM loans and 15-year fixed-rate loans for their portfolios, while selling the 30-year fixed-rate loans and retaining the servicing."

On the other end of the spectrum are the wholesalers emphasizing mortgage-backed securities at the expense of originations, such as FirstFed Michigan and Roosevelt Bank of Chesterfield, MO. Indeed, mortgage holdings represent just 31% of the asset base at FirstFed and 34% at Roosevelt.

Roosevelt has made a mark as a low-cost producer, generating an efficiency ratio of 38% last year--half the industry average. A whopping 96% of the loan portfolio and the mortgage-backed securities are backed by first mortgage loans, and 80% of the thrift's assets are in cash, MBS or investment-grade securities, company officials noted recently.

Pointing to the inherent cyclicality of the mortgage business, experts are wondering how much longer ARMs--and portfolio lending--can shine. The Salomon analysts expect that ARMs, "the primary source of asset growth for S&Ls...will be difficult to originate over the long term." In large part, that will be because interest rates, despite their recent climb, are expected to remain relatively low on an historical basis, and fixed-rate loans--which most consumers prefer, all things being equal--will hold their own.

Moreover, the Salomon group argues that "increased technological enhancements in the origination, distribution and servicing of mortgages will push even more S&Ls out of the business unless they can modernize at the same pace" as government-sponsored enterprises like Fannie and Freddie or big nonregulated intermediaries like GE Capital Corp. or Countrywide Funding.

"By the end of '95, I think the portfolio business will be getting squeezed hard," says Partridge of Towers, Perrin. "The thrifts that win will be the ones that say, 'Okay, but we will try to get more of the customer's wallet.'" That way, even if margins get eroded and originations fall, consumer loans and fees can help compensate.

Some thrifts are clearly moving in that direction. At $2.2-billion-asset Loyola Capital Corp., holding company for Loyola Federal Savings Bank in Baltimore, a portfolio lender with more than half of its total assets in residential loans, earnings rose 16% in the first half over 1993. Mortgage originations were off sharply in that period, but other consumer loan originations almost doubled.

It makes sense that portfolio lenders that service their own loans can cross-sell to their mortgage holders. Says Home Savings' Rinehart: "I think there's a recognition that having that loan remain there in the hands of the original lender makes that relationship a bit longer-term."Top Mortgage Holders Among Savings Institutions Dollars in Billions As of June 30, 1994 1 to 4 Family totalRank Name of Institutions City Loans Assets 1 GREAT WESTERN BANK A FSB BEVERLY HILLS CA $26.0 $36.02 HOME SAVINGS OF AMERICA FSB IRWINDALE CA $25.3 $51.33 WORLD S&LA FED S&L ASSOCIAT OAKLAND CA $21.0 $28.84 AMERICAN SAVINGS BANK FA STOCKTON CA $7.6 $17.35 FIRST NATIONWIDE BANK A FSB SAN FRANCISCO CA $6.7 $14.96 STANDARD FEDERAL BANK TROY MI $6.7 $11.27 WASHINGTON MUTUAL A FSB SEATTLE WA $6.1 $9.88 CALIFORNIA FED BK A FSB LOS ANGELES CA $6.0 $14.89 CITIBANK FSB SAN FRANCISCO CA $5.0 $12.710 GREEN POINT SAVINGS BANK NEW YORK CITY NY $5.0 $6.911 GLENDALE FEDERAL BANK FSB GLENDALE CA $5.0 $15.812 DIME SB OF NEW YORK FSB GARDEN CITY NY $4.9 $9.713 FIRST FS&LA OF ROCHESTER ROCHESTER NY $4.0 $6.714 BANK UNITED OF TEXAS FSB HOUSTON TX $3.9 $8.515 GUARANTY FEDERAL BANK FSB DALLAS TX $3.4 $8.716 LASALLE TALMAN BANK FSB CHICAGO IL $3.3 $6.217 COMMERCIAL FED BK A FSB OMAHA NE $3.2 $5.618 SOVEREIGN BANK A FSB WYOMISSING PA $2.9 $5.019 COAST FEDERAL BANK FSB LOS ANGELES CA $2.9 $8.020 METROPOLITAN FED BK FSB FARGO ND $2.9 $8.021 THIRD FS&LA OF CLEVELAND CLEVELAND OH $2.9 $4.522 DOWNEY SAVINGS&LOAN ASSN NEWPORT BEACH CA $2.7 $3.723 ROOSEVELT BANK A FSB CHESTERFIELD MO $2.7 $8.024 EMIGRANT SAVINGS BANK NEW YORK CITY NY $2.7 $6.225 WASHINGTON MUTUAL SB SEATTLE WA $2.6 $8.826 CHARTER ONE BANK FSB CLEVELAND OH $2.6 $5.827 FIRST FEDERAL OF MICHIGAN DETROIT MI $2.5 $8.128 HOUSEHOLD BANK FSB NEWPORT BEACH CA $2.5 $8.629 CITIZENS FEDERAL BANK A FSB MIAMI FL $2.4 $4.530 HUDSON CITY SAVINGS BANK PARAMUS NJ $2.3 $4.731 CAPITOL FS&LA TOPEKA KS $2.0 $4.032 WASHINGTON FS&LA SEATTLE WA $2.0 $3.633 PEOPLES BANK BRIDGEPORT CT $1.9 $6.234 FIRST FINANCIAL BANK FSB STEVENS POINT WI $1.8 $4.935 COLLECTIVE BANK EGG HARBOR NJ $1.6 $4.636 AMERICAN SAVINGS BANK FSB HONOLULU HI $1.6 $3.037 CITIZENS SAVINGS BANK PROVIDENCE RI $1.6 $4.038 CORAL GABLES FS&LA CORAL GABLES FL $1.6 $2.439 AMERICAN SVG OF FLORIDA FSB MIAMI FL $1.5 $3.240 SAN FRANCISCO FS&LA SAN FRANCISCO CA $1.5 $3.541 COLUMBIA FIRST BANK A FSB ARLINGTON VA $1.5 $2.642 LONG ISLAND SAVINGS BK FSB SYOSSET NY $1.4 $4.443 REPUBLIC BANK FOR SAVINGS NEW YORK CITY NY $1.3 $6.244 EUREKA BANK A FSB FOSTER CITY CA $1.3 $2.345 SACRAMENTO SAVINGS BANK SACRAMENTO CA $1.3 $3.046 GREAT LAKES BCORP A FSB ANN ARBOR MI $1.3 $2.747 FIRST FED BK OF CA A FSB SANTA MONICA CA $1.3 $3.748 CITIZENS BANK OF MA BOSTON MA $1.3 $3.249 ST PAUL FEDERAL BANK CHICAGO IL $1.3 $3.950 CHEVY CHASE BANK FSB CHEVY CHASE MD $1.3 $4.851 CENTERBANK WATERBURY CT $1.2 $2.852 SECURITY BANK SSB MILWAUKEE WI $1.2 $2.453 LOYOLA FEDERAL SAVINGS BK BALTIMORE MD $1.2 $2.254 ANCHOR SAVINGS BANKS FSB HEWLETT NY $1.2 $8.855 ASTORIA FS&LA LAKE SUCCESS NY $1.2 $4.456 LEADERS FEDERAL BANK MEMPHIS TN $1.2 $2.157 FIRST FEDERAL BANK A FSB WATERBURY CT $1.2 $2.258 BELL FS&LA CHICAGO IL $1.2 $1.859 CRAGIN FEDERAL BANK CHICAGO IL $1.1 $3.060 BANKERS SAVINGS PERTH AMBOY NJ $1.1 $1.761 POMONA FIRST FS&LA POMONA CA $1.1 $1.762 FIDELITY FEDERAL BANK A FSB GLENDALE CA $1.1 $4.163 ALBANY SAVINGS BANK FSB ALBANY NY $1.1 $2.864 NEW HAVEN SAVINGS BANK NEW HAVEN CT $1.1 $1.965 APPLE BANK FOR SAVINGS GARDEN CITY NY $1.1 $3.866 NEW BEDFORD INST FOR SVG NEW BEDFORD MA $1.0 $2.467 TCF BANK MINNESOTA FSB MINNEAPOLIS MN $1.0 $3.568 BANK OF AMERICA FSB PORTLAND OR $1.0 $3.869 OHIO SAVINGS BANK CLEVELAND OH $1.0 $1.970 GREAT FINANCIAL FEDERAL LOUISVILLE KY $0.9 $1.571 KEY SAVINGS BANK VANCOUVER WA $0.9 $1.272 ROOSEVELT SAVINGS BANK GARDEN CITY NY $0.9 $2.273 ROCHESTER COMMUNITY SB ROCHESTER NY $0.9 $3.574 NORTHEAST SAVINGS FA HARTFORD CT $0.9 $3.375 BK OF BOSTON CONNECTICUT HARTFORD CT $0.9 $4.076 NORTHWESTERN S&LA CHICAGO IL $0.9 $1.377 SOCIETY FIRST FSB FORT MYERS FL $0.9 $1.578 ITT FEDERAL BANK FSB NEWPORT BEACH CA $0.9 $4.079 AMWEST SAVINGS ASSN BRYAN TX $0.9 $2.880 RIDGEWOOD SAVINGS BANK NEW YORK CITY NY $0.9 $1.781 MID AMERICA FSB CLARENDON HILLS IL $0.8 $1.682 UNION FSB OF INDIANAPOLIS INDIANAPOLIS IN $0.8 $1.683 CENFED BANK A FSB SANTA MONICA CA $0.8 $1.684 GERMANTOWN SAVINGS BANK BALA-CYNWYD PA $0.8 $1.685 INVESTORS SAVINGS BANK FSB WAYZATA MN $0.8 $1.086 SOUTHERN CALIFORNIA FS&LA BEVERLY HILLS CA $0.8 $1.987 SECOR BANK FSB BIRMINGHAM AL $0.8 $1.488 NORTHWEST SAVINGS BANK WARREN PA $0.8 $1.489 DOLLAR BANK FSB PITTSBURGH PA $0.7 $2.390 ANCHORBANK SSB MADISON WI $0.7 $1.491 UNITED POSTAL SAVINGS ASSN ST. LOUIS MO $0.7 $1.292 PEOPLES HERITAGE SB PORTLAND ME $0.7 $2.193 MARYLAND FS&LA HYATTSVILLE MD $0.7 $0.994 CITIZENS FED BK FSB A FSB DAYTON OH $0.7 $1.895 FIRST FS&LA OF AMERICA HONOLULU HI $0.7 $0.996 DERBY SAVINGS BANK DERBY CT $0.7 $1.297 EAGLE FEDERAL SAVINGS BANK BRISTOL CT $0.7 $1.198 STOCKTON SAVINGS BANK FSB STOCKTON CA $0.7 $1.299 WESTERN FINANCIAL SB FSB IRVINE CA $0.7 $2.1100 PROVIDENT SAVINGS BANK JERSEY CITY NJ $0.6 $1.6 Source: Savings & Community Bankers of America, FDIC.

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