Rising rates last year prompted more community banks and thrifts to hold loans in portfolio, according to an annual survey by America's Community Bankers.

Just over half the institutions surveyed - 51% - sold no loans into the secondary market last year, up from less than one third in 1998. Loans sold in the secondary market declined to 71% of origination volume, from 82% in 1998.

Brian Smith, the trade group's policy director, said the number of community banks selling loans to wholesale private-sector companies rose last year to equal the number selling to Fannie Mae and Freddie Mac. He released the results of the survey at a convention in Phoenix.

Higher interest rates helped make adjustable-rate mortgages - which are less likely than fixed-rate mortgages to be securitized and more likely to be held by the lender - more attractive to consumers, Mr. Smith said.

"When rates are at 7% or below, you can't give away an adjustable mortgage," he said, "but now these types of loans are more popular."

He said that over the last few years, borrowers wanted long-term, fixed rate loans, which community banks originated but did not want to hold, and instead sold as quickly as possible. "We were one-night stands with our customers," he said. Today, he said, the liability structure is better, and the banks are keeping some of the loans.

Jeffery R. Hayward, vice president for single-family business at Fannie Mae, said the change does not concern Fannie. "We want the business, and we'll engage customers any way we can," Mr. Hayward said. "If it means you have one way of doing things, we'll do that." He added, "We let the market determine how it wants to engage us."

However, Mr. Smith said that the increased production of adjustable-rate mortgages and the overall decline in volume could eventually threaten the GSEs. "These trends will continue for 2000," he said. "Adjustable-rate products will be even more attractive when the rate is at 8.5%, which is where it should be around the middle of the year, and total originations will drop below the last two years."

The survey, based on responses from 355 community banks and thrifts, also found that of the respondents that sold to the GSEs, 42% said they did business exclusively with Freddie, compared with 24% that deal exclusively with Fannie. The average origination volume, however, was $63 million for those selling to Freddie, compared with $250 million for those selling to Fannie. Mr. Smith also said that the discrepancy was attributable to historical relationships between smaller lenders and Freddie.

Mr. Hayward agreed, saying that many small lenders have been involved with Freddie since the early 1980s, but that Fannie does a substantial amount of business with smaller lenders. 'We have 3,000 customers, and half are small banks," he said.

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