Investors have brought several high-flying West Coast thrifts down to earth amid growing fears that a surging refinancing boom will deplete adjustable-rate mortgage portfolios.

Shares of three big West Coast thrifts with large ARM portfolios — Washington Mutual Inc. of Seattle, Golden West Financial of Oakland, and Golden State Bancorp of San Francisco — have tumbled an average of 20% since late December as declining interest rates have threatened to set off a consumer stampede into fixed-rate loans.

“Thrifts have gotten off to a rough start this year,” Thomas O’Donnell, an analyst with Salomon Smith Barney, said in a report last week. “Thrifts will likely decline in the near-term because market sentiment toward them has very quickly become very negative. We expect the industry to have rough sledding for a quarter.”

ARMs, which offer low initial “teaser” interest rates and low down payments, are popular among first-time homebuyers, who often lack the funds to obtain a fixed-rate loan. The loans are subject to periodic interest rate adjustments — usually every six months in accordance with a specified index — and can reach double-digit rates. California thrifts, for example, use the Federal Home Loan Bank of San Francisco cost of funds index.

In addition, ARMs are typically short in duration, about three to four years, because borrowers tend to refinance into fixed-rate loans as soon as conditions become favorable — as they are now.

And while most players in the mortgage industry have benefited from lower rates and the growing refinance market, the conditions have burned the California thrifts’ stocks because they specialize in adjustable-rate lending.

After soaring over 100% from March to December, between December 26 and January 9, Washington Mutual plummeted 20%; Golden West 24%; and Golden State 17.4%. Each of the companies regained some ground on Wednesday.

Craig Davis, president of Washington Mutual Home Loans and Insurance Services Group, a unit of the thrift company, dismissed the concerns. “We are really a broad product lender, the best lender for all reasons and all seasons,” he said. “Going into a refi boomlet or an all-out refi market, if our business mix shifts away from ARMs, we can be a mortgage banker, originating fixed-rate loans and selling them in the secondary market.”

Maringal I. Domingo, senior vice president and chief financial officer of the Wamu unit, said that when rates fall the way they did in the most recent cut in the federal funds rate, “our funding costs drop. But the interest on our loans lags that, so our spreads or margins have widened.”

Officials of Golden West Financial and Golden State Bancorp did not return calls from American Banker.

An increase in refinancings overall could also reduce the value of the thrifts’ fixed-rate servicing portfolios, said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Va.

Analysts say the outlook is not as bleak as the market would indicate. The slide in the thrifts’ shares is the result of investor overreaction, these analysts say.

The market is just in a bad mood, said Mr. Miller, adding that the refinancing boom is a ball and chain on the thrifts’ neck. “It definitely is a concern — I would never underestimate a refi boom — but I just think the positives here will offset any negatives,” he said.

For one, just because borrowers may be tempted by lower interest rates to refinance, that does not mean they will be able to move, said Richard A. Eckert, an analyst with Sutro & Co. in San Francisco. Many ARM loans contain prepayment penalties that discourage refinancing, he said.

In addition, if the economy slows, investors will be concerned about asset quality, according to Mr. O’Donnell. Thrifts generally have better asset quality than lenders with commercial, consumer, and commercial real estate loans, he said, and could become safe havens for investors.

Mr. Miller said the thrifts have shown in the past that they can attract borrowers to ARMs by offering the teaser rates or through other savings options. What’s more, Mr. Miller said, any losses to a refinancing boom will be offset by recent gains in the value of the thrifts’ mortgage-backed securities portfolios, increased fees for originating fixed-rate loans, and margin expansion.

In addition, Mr. Miller said both Washington Mutual and Golden State hedge their servicing portfolios, as do most lenders, partially making up for any losses.

Market sentiment toward them has quickly cooled, Mr. O’Donnell said, but he said the industry should pick up after the first quarter and that share prices will rise. In a report issued Friday, Mr. O’Donnell said he is not even convinced that a refinancing boom is in the offing; if the recent and upcoming Fed rate reductions revive the economy, he said, long rates may trend up.

But if a refinancing boom does occur, Mr. O’Donnell said, thrifts specializing in ARMs should be able to protect their portfolios from excessive runoff and, when ARM volume declines, reduce expenses and buy back shares.

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