Weary of regulations, a small but growing number of thrifts are chucking their charters and becoming mortgage banks.

The trend is taking shape in California, where two institutions have made the switch in just the past six months. A third thrift, Long Beach Bank in Orange County, announced last week that it would join the group by yearend.

Bankers and consultants say the trend may well spread further, providing stark evidence of some thrifts' displeasure with regulations spawned by the industry's 1989 bailout and the 1991 federal deposit insurance law.

'Time to Get Out?"

"What a lot of thrift executives are asking right now is, 'Gee, is this the time to get out?'" said Edward Furash, a leading bank consultant based in Washington.

In California, regulations limiting mortgage banking activities have proved especially troublesome.

Many of the state's smaller thrifts have developed specialities in mortgage banking, which entails selling new loans on the secondary market and earning fees by servicing loans. Rules enacted in 1991, for instance, have restricted the ability of banks and thrifts to hold purchased servicing rights, a central asset in mortgage banking.

"The problem is that the regulators have given some institutions great difficulty in marrying a super-large mortgage bank with a thrift," Mr. Furash said.

Hamilton Financial Was First

Hamilton Financial Services-Corp., San Francisco, became the first company in the nation to relinquish its thrift charter and become a mortgage bank. The company, which had been increasingly active in mortgage banking, made the move in 1992 and has had few regrets since.

"The regulatory pressures are too great" on thrifts in mortgage banking, said William Kirschenbaum, Hamilton's chairman.

This February, Oaklandbased American Liberty Bank followed Hamilton's lead, opting to become a full-time mortgage bank. And in March, an Orange County bank, Colonial Bank, gave up its national charter to become a mortgage bank.

For Long Beach Bank, the decision was simply a matter of formalizing what the thrift had already become: a mortgage bank.

Greener Grass?

California thrifts that have become mortgage banks, assets in millions Date of changeHamilton SavingsBank $360 July '92San FranciscoAmerican LibertyBank 30 Feb.OaklandColonial Bank 150 MarchSanta AnaLong BeachBank 660 *Orange

(*)Announced last week

"It was as much a regulatory issue as a business issue," We can just run more efficiently this way," said John Daurio, the company's corporate counsel.

"I wouldn't be surprised if there are banks and thrifts out there that come to the same conclusions that we did," he added.

Home Savings Gets Branches

Long Beach Bank is selling its six branches and their deposits to Irwindale, Calif.-based Home Savings of America, the nation's largest thrift.

Long Beach Bank At a Glance

HEADQUARTERS: Orange, Calif. FOUNDED: 1979 CEO: R.E. Arnall ASSETS: $661 million BRANCHES: Six ROA: 0.74% ROE: 10.04%

The move by these thrifts comes as mortgage banks nationwide are getting bigger in search of economies of scale.

The thrifts dropping their charters "want to be a part of the mortgage banking industry in the future," said Mr. Furash, the consultant. "They don't want to be passed by."

Indeed, he said, specializing in banking operation is one of the few strategic options available to thrifts today.

So why are California thrifts, in particular, throwing themselves into mortgage banking with such gusto?

As Mr. Kirshenbaum of Hamilton points out, many of the state's smaller thrifts are young, open-minded institutions. "They're not of the mind-set that says 'We shall remain a thrift forever,'" he said.

"The smaller thrifts are the ones that are going to do it," he added "The large thrifts have enough resources to deal with the regulatory problems. A small thrift can't make it on spreads alone, and if they have a specialty to make money they have too many regulatory headaches."

Mr. Furash, however, isn't certain the grass will be greener as a mortgage bank.

"A lot of these thrifts have to think hard about whether they can be an independent mortgage bank," he said. The industry, he added, has resumed it's inexorable consolidation march that will sharply change the nature of the business.

"To make it in the mortgage business you have to make very, very large investments in technology to be efficient," he said.

But, Mr. Kirschenbaum said, an increasing number of banks and thrifts with large investments in mortgage banking will confront the choice. Most will be small thrifts, meaning more community-based depositary institutions could be lost to the lure of servicing fees.

"If a small thrift sees certain specialties it can pursue," he said, "it will run into regulatory cautiousness. After a while it's just cheaper to go out and get a warehouse line."

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