With interest rates expected to remain low, community banks are seen as likely to increase their secondary market participation in 1998.

At a real estate conference last week in Indian Wells, Calif., the secondary market, especially for nontraditional products, was trumpeted as a growth opportunity for banks.

Portfolio lending has been very good for community banks in the past, said Paul C. Taylor, a senior economist at America's Community Bankers. Still, many with portfolios of mortgages that could readily be sold have not felt the need to engage in the secondary market, he added.

But lower rates may change that, he said.

"A refinance boom, and the conversion of adjustable-rate mortgages into fixed-rate mortgages, and a very flat yield curve are coming together in 1998. And that clearly could convince some of our members to utilize the secondary market more fully," Mr. Taylor said.

The trade group's survey of more than 280 community banks during the fourth quarter found that 16.1% were selling loans to wholesale servicers and private conduits, up from 12.5% in 1996.

The percent of respondents selling loans to Freddie Mac increased to 31.4% in 1997, from 30.6% in 1996. Participation through Fannie Mae decreased to 19.6%, from 20.7% in 1996. The percentage selling to other banks and financial institutions increased slightly, to 17.1% from 16.8% in 1996.

"Nineteen ninety-eight may be a year in which community banks choose to securitize somewhat more of their portfolio due to the surge in activity brought by lower interest rates and mortgage rates," Mr. Taylor said.

With rates low, high-loan-to-value and home equity securitization are areas that banks may plunge into.

High-LTV second mortgages are a lucrative lending niche, and if mortgage lenders do not start offering these mortgages to customers, their competitors will snap up the opportunity and the customers, said Timothy J. O'Neill Jr., senior vice president of First Indiana Bank, Indianapolis.

These loans are typically securitized and sold to investors rather than held in the loan portfolios of banks and thrifts. There has been a gradual shift in high-LTV lending toward A-credit, agency-grade first-mortgage loans as well as second mortgages, Mr. O'Neill said.

"As originators, you have options," he said. High-LTVs are usually discussed in the context of subprime lending and therefore are mistakenly labeled as subprime, he said. But home equity loans that increase a homeowner's total mortgage debt to 125% to 135% of home value are considered A to A-minus credits, he said.

The typical high-LTV borrower has a family and a good credit history, but increased debt resulting from medical bills, credit cards, short-term installment debt, or education costs, Mr. O'Neill said.

Securitization of high-LTV loans more than doubled, to $10 billion, in 1997, Mr. O'Neill said.

Last year was a profitable one for the majority of originators, who earned between 1.5% and 4% in fees from selling these loans in the secondary market, he said.

Since August, when First Indiana began originating and selling 125% home equity loans, it has been selling $13 million of the loans a month.

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