Some of the securities offerings that have evolved during the past year "can be really bizarre, even to financial industry professionals," Wilson said. "There are people in the business who have pretty much sworn these things off until they get a better understanding."
Hamer linked the ever-increasing complexity of the secondary market to the number-crunching ability of high-speed computer programs that easily handle computations that were too time-consuming just a few years ago.
Not surprisingly, most of the mortgage-backed securities purchased by local S&Ls were acquired from the federally chartered Ginnie Mae, Fannie Mae and Freddie Mac.
But home loans aren't the only instruments being used as collateral. In San Diego, S&Ls also have used multifamily residential loans, car loans and credit card payments as collateral for securities.
Elsewhere, a major life insurance company recently used a super computer to help craft so-called "death bonds"--tradeable securities that collateralize loans taken out on life insurance policies.
S&Ls are attracted to some of those complex securities offerings because they qualify as assets that can be used to meet regulatory net-worth requirements.
The market for mortgage-backed securities is growing increasingly complex, but the theory that drives them remains relatively simple.
S&Ls hope to make a profit by selling the security-backed loans at a price that is slightly higher than their cost of originating the loans. But S&Ls might accept a loss on a securities offering if they can make it up by collecting processing fees on those home loans, Hamer said.
S&Ls in the past have preferred "vanilla" securities, but institutional tastes are expected to change because an estimated 70% of home mortgages now are used as collateral in mortgage-backed securities.
With that residential market nearly saturated, thrifts have begun to explore securities that are backed by commercial mortgages, according to Ernie Elsner, a senior vice president of Duff & Phelps, a Chicago-based firm that rates securities offerings.
Less than 1% of commercial mortgages are now used as collateral for mortgage-backed securities, according to Elsner. But Duff & Phelps recently rated six commercial transactions for California thrifts, including Great American and Coast Savings Bank.
"By selling a portion of their commercial real-estate loan portfolios to institutional investors . . . (S&Ls) can increase funds available for mortgage origination," according to Elsner.
The use of fixed-rate commercial loans as collateral for mortgage-backed securities "looks to be a big growth area in the future," according to Richard H. Keyes, first vice president for Great American.
Experts agree that investors might find fixed-rate commercial mortgage-backed securities to be even more attractive than securities backed by residential loans. That enthusiasm is generated by the fact that commercial loans, unlike residential loans, usually are not paid off early.
Consequently, while the extremely complex nature of the commercial securities will slow market growth, S&Ls eventually will view the offerings as "more predictable" than offerings backed by residential mortgages, Elsner said.
Moody's, Standard & Poor's and Duff & Phelps all hope to become the industry leader in the crucial area of rating those increasingly complex offerings. Ratings will help issuers improve the liquidity of offerings, and investors will feel more comfortable, Elsner said.
Moody's has gone as far as supplying "after-the-fact" ratings to investors who purchased securities offerings that previously were rated by Standard & Poor's, according to an executive at a San Diego thrift.
In many cases, Moody's ratings were lower than those issued by Standard & Poors. "That caused quite a stir, because the investors are now not sure of the quality of what they're holding," the executive said.