The home mortgage market isn't what it used to be.
Once ruled firmly by the nation's thrifts, the market was set on its ear by the Financial Institutions Reform Recovery and Enforcement Act of 1989.
Nowadays, thrifts account for just 22% of all new mortgages, down from 42% before the bailout law. The new leaders: mortgage banks and their government-sponsored partners -- Fannie Mac and Freddie Mac.
Mortgage banks like Countrywide Credit, previously known only to industry insiders, have become full-fledged financial celebrities. As a group, they now handle about half of all mortgage originations, up from about one-third in 1988.
"Mortgage banks are the real winners of FIRREA," says Gareth Plank, an analyst with Mabon Securities.
How did all this come about? For one thing, the bailout law thinned the ranks of the nation's thrifts by about one-third, to 2,100. And it restrained the surviving institutions with tough new capital rules.
That left a big opening for mortgage banks, which sell most of their new loans to Fannie Mae and Freddie Mac, formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.
The new prominence of mortgage banks helped lift the agencies' purchase volume 356% in the five years through 1993, to $529.7 billion.
While the agencies' buying spree headed off a widely feared credit crunch in home loans, it put new pressure on even the largest of thrifts.
"Frankly, it's just harder to compete," says Robert Barnum, president of California-based American Savings.
As a result of implicit government backing, the agencies are able to buy mortgages with relatively low interest rates. Though that may help consumers, it clearly hurts thrifts trying to book mortgages for their own portfolios.
Profit margins at thrifts are 50 to 70 basis points lower than they were in the '80s, says analyst Thomas O'Donnell of Smith Barney.
The $17.3 billion-asset American Savings tries to compete around the agencies. It mines niches that mortgage bankers can't exploit, making loans that secondary market agencies won't buy.
For example, American goes after loans above the $203,000 loan limit of the agencies. Or it makes loans in inner cities on more flexible terms than Fannie and Freddie.
Some small thrifts, meanwhile, have pulled out of first mortgages altogether. First Federal Savings and Loan Association, Middletown, N.Y., now focuses on home equity loans to fulfill the mandates of its thrift charter.
A Question of Scale
"We looked actively at becoming a mortgage banker, and came to the conclusion that it was a scale business," says Ken Abt, president and CEO of the thrift. "We were just never going to meet the scale the competition was, and therefore we shouldn't get into it."
To be sure, the bailout law hasn't been the only factor in the rise of mortgage banks and the secondary market agencies.
The lowest interest rates in a generation sparked a refinance boom, as consumers rushed to lock in low rates through fixed-rate loans. Mortgage banks, which specialize in such loans, reaped a bonanza.
Now as rates move up again, adjustable-rate mortgages -- the strong suit of thrifts - are returning to favor.
Thrifts are expected to win back some market share, but much of the gain by mortgage banks has been permanent, experts say.
Mortgage banks solidified their position in the early '90s with stock offerings. Twelve went public. Now some are finding wealthy parents in the form of big commercial banks.
In May, Chemical Banking Corp. snapped up Margaretten, and last week Chase Manhattan Corp. signed a deal to take over American Residential Mortgage.
Faced with weak demand for commercial loans, banks have been eager for new places to put their money, analysts say. And mortgage banking fits naturally with banks' burgeoning consumer businesses.
Meanwhile, most thrifts that remain in the business have begun to operate more like mortgage banks, selling off at least some of their originations and earning fees by servicing the loans.
"I think FIRREA really snapped everyone awake," says Sam Lyons, senior vice president of mortgage banking at Great Western Financial Corp., the nation's second-largest thrift company.
"It caused them to stop thinking about being 100% portfolio lenders and start thinking about becoming a mortgage banker for some part of their activity," Mr. Lyons says.
Most thrifts just don't earn enough on loans now to grow their capital and thus their portfolio, he says.
Some 45% of loans made by thrifts last year were sold into the secondary market, according to the Savings and Community Bankers of America. The trade group did not track that number in the ' 80s.
Fannie Mac has marketed itself aggressively to thrifts, says Donna Callejon, senior vice president of mortgage-backed securities and marketing. The agency added 350 new thrift customers between 1991 and this year.
The largest thrifts, such as California-based Home Savings of America, Great Western, World Savings and Loan Association and American Savings, have the capital and the market clout to continue as substantial portfolio lenders. But most of them also sell loans routinely to Fannie Mac and Freddie Mac.
Experts agree that the secondary market will continue to eat into thrifts' share of the market. Eventually, mortgage banks and the agencies may even challenge thrifts' dominance in adjustable mortgages.
"In five or 10 years, the securitized ARM market will look just like the fixed-rate market," says Robert Litan, a deputy assistant attorney general in the anti-trust division of Justice department. Mr. Litan formerly researched financial institutions at the Brookings Institution in Washington.
Fannie and Freddie will securitize most ARMs, "raising questions about the long-term viability of thrifts," says Mr. Litan. He is not alone in voicing such concerns.
The agencies are "too omnivorous, and try to grow too fast; says Herbert Sandler, chief executive of World.
"What happens if no loan made in 15 years is made without going through Fannie and Freddie?" he asks. "Do we want a duopoly with two CEOs that control the entire housing market?"