Even while the mortgage industry, is experiencing a boom in originations of unprecedented magnitude, the assets of the nation's thrifts continue to shrink.

At midyear, assets of the 300 biggest thrifts had dwindled by about 4% from the level a year earlier, and thrifts as a whole showed a drop of about 7%.

(Tables ranking the top 300 thrifts begin on page 13.)

The major reasons for the shrinkage all boil down to one factor: low interest rates, which have stimulated the public appetite for fixed-rate loans.

Untimely Strategy

Thrifts prefer to hold loans for investment, so they avoid interest rate risk by promoting adjustable loans and shunning fixed rates. This untimely strategy has resulted in a significant loss of market share in originations even while prepayments continue to drain their investment portfolios.

On the other hand, the low-rate environment has brought with it a sharp rise in interest margins, and this has swollen the profits of thrifts and helped them to deal with the credit-quality problems that have be-deviled them in recent years. As a result. their capital ratios continue to expand.

Speaking of the California thrifts, which represent about a third of the industry, William C. Ferguson of Ferguson & Co. asks, "Will high net interest margins continue to generate sufficient income to offset the costs, both provisions for losses and realized losses, of deteriorating real estate assets over the next two years?" Ferguson & Co. operates a rating service for banks and thrifts.

Capital Ratios Rise

Mr. Ferguson also points out that the industry's ratio of core capital to tangible assets climbed to 6.77% by the end of the second half, from 6.39% at the end of 1992 and 5.6% at the end of 1992. The decline in assets has obviously been helpful.

Sam Lyons, a senior vice president of Great Western Financial Corp., Chatsworth, Calif., also expresses some worries about the near future.

"It's going to be difficult, in a low-interest-rate environment, to generate and hold adjustable-rate assets," he says.

"Some have found it so difficult that they are holding fixed-rate assets. If 1994 is like 1993, it's going to be hard to grow assets unless you want to do something risky, like lending on non-owner-occupied properties and other things that thrifts have not normally originated. Portfolio lenders may be tempted to take such risks in 1994."

Mr. Lyons also says some thrifts may be pushed to get back into multifamily lending, an area they have pulled away from in recent years.

Most thrifts vow they are ready to muscle up and fight the good fight for market share with mortgage bankers, once interest rates turn upward at last. But the industry faces a number of obstacles in mounting the fight.

One is the refinancing mania, which simply refuses to die. At least one prominent economist is even predicting a further decline in long-term rates, which would presumably trigger yet another wave of refinancings.

A second obstacle is the rapid expansion of the secondary markets. With the securitization process becoming so efficient, and with mortgage banking companies growing so strong as a result, the thrifts may find it harder to bounce back than it would have been even a few years ago.

And, indeed, many thrifts believe the secondary-market - Fannie Mae and Freddie Mac - is their principal tormentor rather than the mortgage banks themselves.

Threat of a Price War

Another hurdle for the thrifts is the possibility of a price war. Some observers believe such a battle could develop soon, regardless of the direction of interest rates.

Jonathan Gray, a securities analyst with Sanford C. Bernstein & Co., New York, puts it this way,: "Banks and thrifts are likely to stage an aggressive onslaught to recapture share of originations, spearheaded by price cutting, as [changes in accounting rules] will make mortgage banking far more profitable.

Consolidation Scenario

"While banks and thrifts have receded from making fixed-rate mortgages . . . they are completely at ease with selling and servicing these loans, and the accounting changes contemplated would greatly enhance the profitability of mortgage banking activities."

Mr. Gray also expects a wave of acquisitions of mortgage banking companies by banks and thrifts. He believes all the public mortgage companies, except Fleet, are potential targets.

To be sure, the shrinkage of thrifts has not been uniform. Some institutions have shown smart gains in assets and deposits, but the expansion has been almost entirely through acquisitions (see table on this page).

Many of the robust gains were scored by thrifts in areas that escaped the boom-and-bust cycle of the last several years, especially those in middle America's industrial heartland.

Washington Mutual Savings Bank, based in Seattle, Wash., was a case in point. The company jumped 10 places to No. 9 on the list of top thrifts and became the nation's largest thrift outside California with the acquisition of Pacific First, a Seattle thrift.

Further Deals Planned

Lee Lannoye, executive vice president of residential real estate lending, said, "Acquisition is one way to grow." He added that the company was planning additional purchases.soon.

The thrift also continues to open new offices, especially in or near supermarkets, and to market aggressively. It plans to offer a no-fee loan with a prepayment penalty, starting in a few days.

Standard Federal Bank also vaulted into the top 10. The thrift, based in Troy, Mich., acquired a string of branches from two other Michigan institutions.

It also has a large acquisition pending and has been originating 10-year mortgages at a rapid rate in recent months.

David Hochstim, an analyst with Bear, Steams & Co., New York, says Standard is one of the thrifts he looks on favorably because of earnings strength and its growth record. "In some cases, other lenders in the area have simply stopped making loans because they don't have the capacity to handle the heavy volume. And Standard has been picking up what others have turned away."

Mr. Hochstim says there is excess capacity in the thrift industry, and he expects consolidation - mergers and acquisitions - to be a significant theme for the industry in the next few years.


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