SAN DIEGO — Savings and loans still view the tried-and-true residential loan as their dominant asset.
But faced with ever-tightening profit margins, they are looking for new ways to squeeze income out of their residential loan businesses. That search has led many thrifts to become more active in the secondary mortgage market, where thrifts traditionally have bought and sold loans.
Instead of simply buying and selling loans, S&Ls increasingly are buying and selling marketable securities that use mortgages as collateral.
For S&Ls, the key to the appeal of mortgage-backed securities is liquidity, said Mike Wilson, associate director of research for the Chicago-based U.S. League of Savings Institutions. "A loan might make a good investment (to an S&L) but if you want to sell it quickly, it could be difficult. And if it doesn't meet certain standards, it's going to be tough to sell it at all."
At the end of 1987, mortgage-backed securities accounted for $191.8 billion, or 15.1%, of total assets at institutions insured by the Federal Savings and Loan Insurance Corp. That is a dramatic increase from 1982, for example, when mortgage-backed securities accounted for just $61 billion, or 8.5%, of total assets held by FSLIC-insured institutions.
"Interest in mortgage-backed securities has soared during the past two years," according to Wilson. The bulk of those mortgage-backed securities held by S&Ls have been the "plain old vanilla variety"--securities that are offered by the Federal Home Loan Mortgage Corp. (Freddie Mac), the Government National Mortgage Assn. (Ginnie Mae) and the Federal National Mortgage Assn. (Fannie Mae), Wilson said.
Those government-chartered institutions, which buy home loans in order to boost the liquidity of lending institutions, introduced mortgage-backed securities during the 1960s as one more way to help keep lenders liquid.
Mortgage-backed securities now account for a hefty percentage of the assets held by those quasi-government agencies. For example, the loan portfolio of Fannie Mae, which celebrates its 50th birthday on Wednesday, includes $140 billion in outstanding mortgage-backed securities and more than $100 billion in acquired loans.
When loans are sold outright, whether by a Fannie Mae or a private corporation, the seller receives a cash payment. But when loans are used as collateral, the buyer acquires "securities that are backed by the (homeowners') principal and interest payments," Wilson said.
Turning loans into collateral for marketable securities "is a change from the days of loans being just loans," according to Bob Hamer, treasurer of Home Federal Savings & Loan. "Loans are becoming more of a commodity and there's an increasing demand (among investors) for that type of commodity."
S&Ls traditionally have bought and sold loans to fine tune their loan portfolios. Cash generated by loan sales often is used to make additional loans or bolster an institution's liquidity. S&Ls are using mortgage-backed securities for much the same reasons, according to Wilson. And, many mortgage-backed securities help S&Ls satisfy regulatory requirements that they keep a minimum amount of their assets in loans.
Investors view mortgage-backed securities as generally safe investments, but the securities do have some drawbacks.
For example, it is hard to predict when residential mortgages used as collateral will be paid off, especially when interest rates dip and consumers line up to refinance their home loans. That uncertainty runs counter to the goals of investors who plan on collecting interest and principle payments for the scheduled life of loans.
And, because the securities offerings are often complex, "about half of (S&Ls) don't feel comfortable with them yet," Wilson said.
Mortgage-backed securities can be intimidating. For example, one fairly common securities package channels interest and principal payments to different investors. That package has been dubbed STRIP, for Separate Trading of Interest and Principal Security.
For San Diego-based Imperial Corp. of America, the parent company of Imperial Savings, mortgage-backed securities account for about 20% of current assets, up from just 3.4% in 1984.
Mortgage-backed securities accounted for about 6% of Home Federal's assets at the end of 1987, but Hamer said that total could swell to about 20% of total assets within five years.
At Great American First Savings Bank, mortgage-backed securities accounted for 21.5% of the S&L's $15.2 billion in assets.
"That represented an important part of our overall profitability during 1987," according to James A. Krzeminski, senior vice president.
Great American views mortgage-backed securities as a "more liquid investment than the underlying mortgage loans," according to Krzeminski.