Many lenders are likely to report significant drains on their mortgage servicing portfolios for the fourth quarter of 1995 and part of this year's first quarter, according to Doug Duncan, senior economist for the Mortgage Bankers Association of America.
Speaking at a mortgage conference here sponsored by Meridian Capital Markets Inc., Mr. Duncan said about 14% of the 236 companies that responded to a recent MBA survey said they had concentrations of adjustable-rate mortgages of 30% or more in their portfolios and an average of 63%.
"Some companies like to specialize in holding ARMs," said Mr. Duncan, "because they generate higher returns."
But the downside is that prepayments can rise sharply when interest rates get very low, as they did late last year and early this year, he added.
Now, the runoff appears to have slowed because of the recent upward spike in rates. According to the MBA, the weekly volume of applications for refinancings dropped by more than 50% as of March 22 from a month earlier. The association says it believes the boom in refis is over.
"No doubt a lot of these companies with ARM concentration are portfolio lenders" that hold adjustables for investment, Mr. Duncan said, but they include niche servicers as well.
In his presentation, Mr. Duncan also said mortgage companies built their share of single-family loan originations last year to 55%, against just 35% in 1990. Their gain came at the expense of both banks and thrifts. The banks' share fell to 25% from 33% in the five years, while the thrifts' shriveled from 30% to 18%.
The strong popularity of fixed-rate loans, the specialty of mortgage companies, over the last year and a half has been a significant reason for the mortgage bankers' gains in market share.
Other factors have been the growing strength of Fannie Mae and Freddie Mac, the secondary market agencies; the development of a secondary market for adjustable-rate loans; and the move by many thrifts to seek greener pastures than mortgage investment.
Shifts in share of the servicing market have also been pronounced, Mr. Duncan said. Mortgage companies increased their share to 40% from 37% between 1990 and 1995, while commercial banks climbed to 34% from 24%. But thrifts saw their share erode dramatically, to 17% from 34%.
Because the figures are cumulative, they are not as volatile as the annual originations numbers. So the drop for thrifts was all the more emphatic, falling by $276 billion even as the total market grew by 24%.