More community banks are selling loans to private conduits or indirectly to wholesalers, according to a new survey by America's Community Bankers.

Some 19.8% of the community banks that responded to the survey said they made such sales last year, up from 16.1% in 1997.

Wholesalers buy loans from brokers and sell them to Fannie Mae, Freddie Mac, or private investors. Private conduits buy loans and securitize them.

"The private-sector organizations are just getting better at competing effectively with the government-sponsored enterprises," said Paul Taylor, senior economist with America's Community Bankers.

The survey was sent to 124 community banks in January. The 65 banks that responded reported producing nearly $12.4 billion in originations and sold almost half-just over $6 billion-to the secondary market.

Twenty-three percent of the loans that the banks sold went to Fannie Mae, and 40% to Freddie Mac. Thirty-one percent went to private conduits, and 7% to other financial institutions.

Freddie Mac's leadership position is due to its historic relationship with community savings institutions, said Paul Taylor, senior economist with America's Community Bankers.

"Freddie Mac was originally created by the savings institutions as a path to the secondary market," he said.

Most loans made by First Bank of Lewiston, Idaho, are sold to Freddie Mac, said Donn Durgan, vice president of lending for residential real estate. The bank originated $128 million of mortgage loans in 1998.

First Bank's second-largest outlet is to companies such as Fleet Mortgage Group, Countrywide Home Loans and Norwest Mortgage, he said. First Bank sells all its government loans to these private conduits.

However, Mr. Durgan said, "we would prefer to sell to Freddie and Fannie, because we want to retain the servicing, That's our goal."

Mr. Taylor, the trade group economist, said the results of the survey were predictable, given the large number of refinancings and the record originations of 1998.

"When refinance activity slows, sales to the secondary market will actually increase, because refinancing takes mortgages out of portfolio and new production goes back into portfolio," he said.

Refinancings are expected to fall to less than 30% of total mortgage originations by the fourth quarter, he noted. Mr. Taylor said he expects the level of originations to drop to $1.45 trillion.

He said private conduits and other financial institutions are the only outlets for jumbo loans-that is, loans too large for sale to Fannie or Freddie.

"A lot of jumbos that might get securitized by private conduits are being used to refill portfolios that were emptied out by refinance activity," Mr. Taylor said.

Community banks polled for the survey also said they prefer to use Treasury securities as an index for adjustable-rate mortgages. Eighty-nine percent of the membership uses Treasuries, and the one-year Treasury bill accounts for 65% of the dollar volume of adjustable-rate mortgages, the association said.

ARMs also can be tied to the 11th District cost of funds index compiled by the Federal Home Loan Bank of San Francisco.

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