American Savings Bank is one of many thrifts that have been eagerly adopting strategies in and out of their core mortgage business to bolster profits.
At the Irvine, Calif., institution, one such strategy has been the aggressive purchase of servicing rights on adjustable-rate mortgages from other thrifts and from mortgage banks.
Through the purchases, which began two and a half years ago, American has generated much-needed fee income. Last year, the purchases yielded $8.7 million in net servicing income, according to John Donohue, executive vice president of portfolio management. That was 47% of American's total net servicing income. The thrift has $26 billion of loans in its servicing portfolio.
The adjustable-rate mortgages are linked to a variety of indexes, including Treasury rates and the London interbank offered rate.
With its servicing purchases, American also has gained new customers to whom it can sell other banking products, such as checking accounts and consumer loans, Mr. Donohue said. In looking at purchase deals, the thrift has favored packages with lots of borrowers in its home market of California, he said.
About half of American's purchases have come from thrifts and the rest from mortgage banks. North American Mortgage Co., Santa Rosa, Calif., has been an aggressive seller; American has purchased more ARM servicing from North American than from any other lender, according to Mr. Donohue.
American's strategy of buying ARM servicing rights is opportunistic. ARM rights are cheaper than fixed-rate rights. Because of high prepayments on ARM loans, there are fewer bidders on ARM servicing packages, and American has found it can bid successfully in this market, Mr. Donohue said.
"If you are an efficient servicer of ARM loans, meaning (you can) deal with all states and all types of indexes, then there is an opportunity there for you," Mr. Donohue said, "because most large servicers are in more of a plain, conforming type of servicing."
Fewer deals have been on the market in the past six months than in the previous year and a half, Mr. Donohue said, but American expects to purchase about $1.5 billion in servicing rights this year. The thrift is now using 60% of its servicing capacity, and can easily expand its servicing portfolio, he said.