Like the other large thrifts, Home Savings Bank, Irwindale, Calif., faces a dual challenge in this fixed-rate market. Usually an adjustable-rate lender, Home Savings has to work harder to originate loans in this market. It must also protect its portfolio of adjustable-rate loans from mortgage bankers, who see the large thrift portfolios as a rich source of refinance business. To cope with such markets, the nation's largest thrift has embarked on a new strategy. It has decided to supplement its portfolio lending with more fixed-rate loans that it can sell in the secondary market. This year the new strategy may have diluted Home Savings' aggressive stance in the market for ARMs priced on the 11th District cost-of-funds index. In the first quarter, Home Savings originated $1.8 billion of home loans, 27% less than a year earlier. By contrast, other large thrifts used the quarter to amass a hefty volume of ARMs for their portfolios. Recently, Frederic J. Forster, president and chief operating officer, spoke to American Banker.

Q.: How is Home Savings faring in this tough market?

FORSTER: We're seeing somewhat of a drop in our demand for adjustables. It's being replaced by a very strong demand for fixed-rate loans, and we're responding.

We've also just introduced FHA and VA loans.

Q.: What portion of your applications recently have been for fixed-rate loans?

FORSTER: It went from virtually nothing a year ago to as much as 40% to 50% on various days in June. About one-third of our activity used to be refinance and two-thirds purchase loans.

Today it's much more 50-50, or maybe even more refinance.

Q.: How are you withstanding efforts by mortgage bankers to refinance ARM borrowers into fixed-rate loans?

FORSTER: I'm not overly concerned about that. I'm concerned about the overall market being smaller than I would like it to be.

And certainly as we migrate from adjustable to fixed, you're going to see larger market shares going to mortgage bankers primarily.

We've changed our orientation (to include fixed rate loans), and they're scared to death of us.

Q.: Why are they scared of you?

FORSTER: I think they don't need more competitors any more than we do.

The big advantage we have, and have had forever, is the fact that we have a large portfolio that we can choose to hold loans in, and they don't.

On the other side, there is nothing they do that we can't do.

Q.: I'm not sure I understand why you're not concerned about mortgage bankers targeting your portfolio for refinance.

FORSTER: I would be concerned if we didn't expect it. But we did, and we have a response.

The very product (fixed-rate loans) they are going to use to assault our ARM portfolio we have as well.

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