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A profile of portfolio growth.

Much happened to financial institutions from 1991 to midyear 1994, as thrifts weathered a structural crisis, the nation suffered a recession and then a huge refinancing boom swelled loan volume. But one trend emerges in a study of this period - growth in home loan portfolios was strong.

Financial institutions, with their portfolio lending capability, have played an important role in providing a source of funding for buyers of residential real estate. This has been especially true as underwriting flexibility became an issue with the push early in this decade for banks and thrifts to reach low-income borrowers and homebuyers in inner-city neighborhoods.

Since 1991, loan portfolio growth in one- to four-family housing has been strong. (Loan portfolios are unsecuritized whole loans held by financial institutions.) This reflects a favorable interest rate environment, lack of other types of loan demand, improving consumer confidence, periods of strong demand for adjustable-rate mortgages and federal regulations promoting community redevelopment and fair lending.

However, loan growth in the multifamily sector has been anemic since 1991. Most market observers agree that this reflects unfavorable supply and demand in this housing market sector.

Financial institutions concerned with credit and interest rate-based capital adequacy requirements have found that residential loan securitization provides opportunities to better manage credit and interest rate risk. Increased securitization of residential loans has had an influence on residential lending by financial institutions in recent years.

This article provides information about recent changes influencing financial institutions' portfolio strategies and their residential loan portfolios. It also offers descriptive data about residential loan portfolios. The regional and descriptive nature of this article highlights the relative impact of lending practices on these financial institutions' home loan portfolios. The study focused on the period from 1991 to June 1994. Data provided on individual institutions will provide additional insight for practitioners.

The rise in mortgage securitization and financial institution holdings of mortgage-backed securities (MBSs) is due largely to lower risk-based capital requirements for securitized mortgages held in portfolio. Industry observers have noted that securitization enables financial institution growth with less capital.

Another reason for the rise in securitization is the popularity of adjustable-rate mortgages. During the period covered by this study, financial institutions tended to offer fixed-rate mortgages for securitization, while putting adjustable-rate mortgages in portfolio. And with financial institutions facing interest rate risk-based capital requirements, the popularity of securitization should continue.

According to the data bases used in this article, as of June 1994 commercial bank MBS holdings totaled nearly $330 billion. This represents a 20 percent increase in holdings from the end of 1991. Thrift holdings of MBS were nearly $124 billion, an increase of almost 19 percent from the end of 1991. This percentage increase figure was probably lowered by the amount of MBS that prepayed due to the huge refinancing volume during 1993 and early '94. Savings bank holdings of MBS were more than $2.4 billion and credit union holdings of MBS were more than $10.4 billion.

Securitization of multifamily mortgages has been increasing since the Resolution Trust Corporation (RTC) shaped and refined this new MBS market in the early 1990s. With multifamily loans at savings institutions on properties of more than 36 units now subject to a 100 percent risk class in relation to capital adequacy, asset securitization in this lending sector offers a welcome measure of flexibility for financial institutions. Furthermore, the loan-to-one-borrower ratio of 15 percent lessened savings institution involvement in multifamily lending in the early 1990s. This and other factors prompted many traditional lending institutions to leave the multifamily market. Some financial institutions decided to no longer provide multifamily loans because of poor portfolio performance, additional regulations and capital requirements.

Institutional efficiencies, as well as the customer base and profitability, can influence institutional decisions relating to originating, selling, servicing or putting loans in portfolio. Institutional dynamics, government regulation and the macroeconomic environment are the most important factors that can cause financial institutions to alter their loan portfolios. Although the thrift crisis of the late 1980s and the subsequent assimilation of many of the most-distressed institutions continued during some of the study period, many of the worst cases were assimilated by 1991.

A volatile period

The period is marked by considerable change in the financial services industry, particularly the thrift industry. Many thrifts were dissolved, merged or managed by the RTC. In addition, the nation was emerging from a recession during the period, and consumer confidence continued to build as the economy revived.

At the end of 1991, the data base used for the study showed there were 2,173 thrifts (149 RTC controlled), 11,111 commercial banks, 438 savings banks and 13,570 credit unions (of the credit union number, 4,861 had first mortgage loans greater than zero in their portfolio). This compares with June 1994 numbers showing only 1,632 thrifts (of this number, 18 were RTC controlled with total assets greater than zero), 10,722 commercial banks, 605 savings banks and 12,402 credit unions (of this number 5,031 had first mortgage loan amounts greater than zero).

Many thrifts no longer in existence in 1994 had been acquired by commercial banks. In addition, many former mutual thrifts now are savings banks. Many well-capitalized thrifts seeking lower costs switched from the federal savings and loan insurance fund (FSLIC), which went bankrupt in the thrift crisis, to the Bank Insurance Fund (BIF), which was newly created by the law that also created the RTC in August 1989, and are now identified as savings banks.

While consolidation continued in the thrift industry, the dollar value of residential loans originated and held in portfolio on one- to four-family units increased 6.3 percent. Residential loan portfolios increased 29.2 percent at commercial banks, 3.9 percent at credit unions and 29.6 percent at savings banks. Much of the increase relating to savings banks was the result of a considerable number of thrifts converting to savings banks. Furthermore, banks increased the percentage of residential loans to total assets during the period.

In the early part of this period the yield curve remained steeply sloped because of Federal Reserve policy. This policy helped restore the integrity of the financial services industry. The yield curve repositioned downward prompting large numbers of homeowners to refinance mortgages.

The latter part of this period was characterized by a very healthy housing market in many regions of the country. The steep yield curve observed during the period offered financial institutions many investment choices. Anthony Rodriques, senior economist, Research and Market Analysis Group of the Federal Reserve Bank of New York, suggests that increased bank participation in the government securities market was a result of the existence of a steep yield curve, slow economic growth and the need for banks to improve capital (Federal Reserve Bank of New York Quarterly Review, Summer 1993).

Total government nonmortgage securities held by banks increased from approximately $409 billion at the end of 1991 to $451 billion as of June 1994. The positive carry (the relationship between short-term and long-term rates) in the yield curve may have contributed to a portfolio shift away from multifamily loans to Treasury issues.

Literature review

Institutional and market inefficiencies (including regulations) that dynamically shape the residential lending business directly influence the housing industry. Allen Merrill, senior associate at the Los Angeles office of McKinsey & Company, writing in The Bankers Magazine, September-October 1989, found that small regional banks (he defined regional banks as those with total assets of $1 billion to $15 billion) had mortgage loan portfolios that did not exceed 10 percent of total assets in the late 1980s.

Consolidation among lenders may increase information flows and result in a more efficient allocation of resources. The result is a decline in the number of banks and thrifts, which will increase competition for financial services. As financial institutions seek to maintain adequate capital, portfolio decisions may become increasingly related to the search for profitability (fee income). This search for profitability may affect the decision whether to securitize loans or keep them in portfolio.

The securitized mortgage market is mature and highly liquid. Howard Albert, vice president and director of the Asset-Backed Securities Group of the Financial Guaranty Insurance Company, said in The Bankers Magazine in November/December 1991, that securitization is a result of improved data management and the creation of an instrument that shields securitized assets from other bank assets. Continuously improving capabilities for analyzing the assets underlying securitized mortgage portfolios should further improve the efficiency of this market.

Richard Cantor, assistant vice president, Capital Markets Division of the Federal Reserve Bank of New York and Rebecca Demsetz, a research officer for the Federal Reserve Bank of New York, in an 1993 article in the Federal Reserve Bank of New York Quarterly Review observed that the secondary market in mortgages has made possible the separation of the mortgage funding and origination processes. Their research shows that at the end of 1992 the value of MBS pools exceeded the value of residential mortgages inventoried by financial institutions. Furthermore, MBS even exceeded the entire value of corporate bonds in the United States.

Mutual funds and insurance companies are purchasing some of these securitized debt instruments. Frank Nothaft, deputy chief economist for Freddie Mac, wrote in the fall 1989 edition of Secondary Mortgage Markets that insurance companies and mutual funds financed almost 10 percent of the growth in residential mortgages in the 1980s.

New federal guidelines encouraging community development, such as those contained in the Community Reinvestment Act, are increasing the importance of examining financial institutions' residential lending practices. Securitization of residential mortgages may increase if financial institutions originate below investment quality loans to meet federal guidelines. This may frustrate the already difficult task of analyzing security pools because these entrants into the mortgage pool may potentially have different prepayment profiles.

Credit unions continue to grow despite the calls by other financial institutions for putting them on equal ground with the other lending industry players in terms of taxability. According to a survey by the Credit Union National Association Inc., 47 percent of its members had first mortgages held in portfolio in 1993, yet only 35 percent of credit unions offer first mortgages. This leaves significant room for growth in credit unions' residential mortgage business. Single-family mortgages account for the vast majority of credit union mortgage paper. Credit unions hold very little multifamily or other mortgage paper.

Commercial banks have been increasing their participation in the securitization of many financial assets including residential mortgages. This largely has been due to risk-based capital requirements imposed by federal regulators, and it has significantly influenced loan portfolio involvement by financial institutions, according to Jeff Little writing in The Bankers Magazine, Jan./Feb. 1990.

Albert provides good insight into the benefits for a bank of securitizing a loan portfolio. These include promoting growth without constraining bank capital, offering a source of liquidity and interest rate-risk management. Albert indicated that in 1991 many commercial banks were preparing for possible securitization of assets. It is important to note this idea because as commercial banks use securitization more, the volume of real estate loans held in portfolio will be affected.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) laid the foundation for the thrift industry to move beyond its crisis years. The act increased lending controls and capital requirements. Raymond Sczudlo, writing in The Bankers Magazine, November/December 1990, indicates that another goal of FIRREA was to end other inappropriately managed and conceived thrift investments.

Subsequent legislation and regulatory guidelines had a significant influence on residential lending by thrifts during the period of this study. FIRREA had a significant influence as well on the composition of the financial institutions in this study. Many adequately capitalized thrifts exited the Savings Association Insurance Fund (SAIF) and joined the Bank Insurance Fund (BIF).

Most of these institutions in the BIF are now identified as savings banks. According to Little, FIRREA opened the door for banks to become more involved in residential lending and mortgage banking.


The BankSource, CuSource, and TAFS CD data bases provide the data for the study. The Banksource data base is derived from the Federal Deposit Insurance Corporation (FDIC) call report tapes. All FDIC-insured banks are required to file quarterly.

The TAFS data base is derived from the Thrift Financial Report Tapes released quarterly by the Office of Thrift Supervision. Data for state-chartered savings institutions insured through the Savings Association Insurance Fund (SAIF) as well as FDIC-insured federally chartered savings banks are included in the TAFS data base. These two data bases, along with the CuSource database for credit unions represent the most extensive and widely recognized data sources available in the financial services industry.

Thrifts under RTC supervision during the study may be going through an imposed restructuring, and their residential real estate exposure may not reflect market trends. Therefore, thrifts controlled by the RTC were excluded from the study.

Data for credit union members is included in the CuSource data base. Many credit unions are very small, especially when compared with other financial institutions in this study. As [TABULAR DATA FOR FIGURE 1 OMITTED] [TABULAR DATA FOR FIGURE 2 OMITTED] evidenced earlier, many of these smaller credit unions do not offer residential mortgages. Therefore, credit unions not offering first mortgage residential real estate mortgages were excluded from the analysis.


Thrifts and commercial banks increased slightly during the study their residential loan portfolios relative to total loans. Credit unions increased their residential loans as a percentage of total loans from 18.08 percent in 1991 to 21.3 percent as of June 1994. Savings banks experienced a significant change, but this was mostly because of the previously mentioned institutional changes.

Thrifts continue to have more exposure than commercial banks to multifamily loans. Commercial banks increased their exposure to multifamily loans to total loans from 1.23 percent in 1991 to 1.6 percent as of June 1994. Thrifts increased their exposure to five-or-more family unit loans to total loans from 5.25 percent in 1991 to 5.68 percent as of June 1994.

Figures 1 and 2 illustrate the growth of residential lending by type of institution. Commercial banks experienced healthy growth in both their one- to four-family residential loan portfolio and five-or-more family unit residential loan portfolio. Thrifts and credit unions experienced a much slower growth rate in their residential loan portfolios than commercial banks during this period.

Figures 1 and 2 show the dollar value of institutional residential loan portfolios. It is interesting to note that although the value of one- to four-family unit and five-or-more family unit loan portfolios is increasing, the rate of increase appears to be slowing entering 1994. The slowdown in multifamily housing was most severe at commercial banks in the Northeast and New York regions, but thrifts showed surprising strength in these regions.

The media has reported extensively on the rolling recession that characterized the late 1980s and continued into the early 1990s. Many regions of the country experienced an expansion in the housing sector, but California and some sections of the Northeast were still weak in the early 1990s.

Many possible regional descriptions could have been used in this article, for example, Federal Reserve districts. However, this was not possible from a data base perspective because Federal Reserve districts bisect states. The regions in this study were formed to best account for regional residential market similarities during the period. The regions are described and illustrated in Figure 3.

Individual figures are listed by financial institution. The figures contain data by region on the value of residential loan portfolios and the percentage of these loans in relation to total loans (see Figures 4-6). The figures present data on one- to four- and five-or-more family units for all institutions, except credit unions where only data for one- to four-family unit [TABULAR DATA FOR FIGURE 4 OMITTED] [TABULAR DATA FOR FIGURE 5 OMITTED] [TABULAR DATA FOR FIGURE 6 OMITTED] loans is provided. In addition, the figures include data for the five largest financial institutions by region sorted by the value of residential one- to four-family unit loan portfolio values.

Thrift inventories of one- to four-family loans continued to be strong in the Ohio Valley region, while thrift inventory growth was marginal in all other regions. This could indicate that many thrifts in this region did not convert to commercial or savings banks. By examining the Figure 4 data for savings banks, one can view the regions where savings banks experienced institutional change.

Although savings bank involvement is strong in the New York and Northeast regions, growth of savings bank residential loan portfolios was not great. This reflects continued housing market weakness in these regions.

Commercial banks in the period covered by the study continued to increase their exposure to residential loans. Figure 5 indicates commercial banks in the Mountain and Lower Midwest regions significantly increased one- to four-family unit lending. Some of the growth in the Lower Midwest region can be attributed to thrift consolidation in this region resulting from commercial bank acquisitions of thrift institutions. Thrift loan growth was slow in all regions of the country, particularly in the Lower Midwest region.

Considering the institutional changes in the thrift industry, Figure 6 indicates that thrifts are continuing as active participants in building portfolios of residential loans. Credit union residential loan growth was strong in many regions including the Far West, Southeast, Lower Midwest, Mountain and Mid-Atlantic regions.

Although many credit unions do not offer residential loans, many of the largest are increasing their exposure to residential loans. In June 1994, 38.3 percent of the nation's credit unions offered fixed-rate mortgages and 15.9 percent offered adjustable-rate mortgages. This compares with 32.9 percent of credit unions offering fixed-rate and 13.17 percent offering adjustable-rate mortgages in 1991.

Another important aspect of financial institution residential loan inventory activity involves delinquent loans. Robert Clair found that loan growth and loan quality are related to a bank's equity position (Federal Reserve Bank of Dallas Economic Review, Third Quarter 1992). Bank equity improved considerably and loan portfolio delinquency rates decreased during this study.

Residential Loan Delinquencies as a Percentage of Total Loans:
1992-June 1994

 June 1994 1992 % Change

Commercial Banks .0710% .0946% -24.94
Savings Banks .1066 .2040 -47.74
Thrifts .0932 .1120 -16.78
Credit Unions .1056 .1370 -22.91

All numbers include 1-4 and 5 or more family unit residential

* Commercial Banks, Savings Banks and Thrifts-Residential loans
delinquent greater than 90 days.

* Credit Unions-Residential loans delinquent 2 months to 6 months.

Source: Sheshunoff Information Services Inc.

From 1992 to June 1994, residential loan delinquencies as a percentage of total loans declined substantially. Figure 7 shows delinquent residential loans as a percentage of total loans for the various financial institutions. The improvement in loan delinquencies noted across the board can be explained by the earlier write-off of problem loans, an improving economy during the period and widespread refinancing into lower-rate loans, thus reducing payment burdens.

The reported figures for savings banks show that these institutions experienced the largest decline in residential loan delinquencies. These numbers potentially reflect the shift of these institutions away from the traditional thrift business. The numbers also reflect that these, and the other institutions, worked hard at resolving problem loans.

A period of healthy change

Financial institutions have experienced considerable change during the past several years. These institutional changes appear to have been healthy for residential real estate loan portfolios. Financial institutions are increasing the percentage of one- to four-family and five-or-more family residential loans in their portfolios. However, the growth in five-or-more family unit loans was well below the growth in one-to four-family loans. This most likely reflects the move increasingly to securitization in the funding of multifamily mortgages as well as a growing role for nontraditional lenders.

The figures in this article regionally illustrate these institutional changes. Commercial banks continue to be well capitalized and healthy. Borrowers should benefit from this health. Well-capitalized financial institutions can continue to offer liquidity and a product mix that can benefit consumers.

Much of the consolidation in the thrift industry is apparent from the data shown in the figures. Thrifts remain an important source of residential portfolio lending. Credit unions are increasing their role in residential portfolio lending, but this role remains small compared with other institutions. Savings banks also are increasing their residential loan portfolios.

Given efficient markets, most residential mortgages originated today are potential paper for the secondary mortgage market. Indeed, securitization plays an increasingly dominant role in the funding of residential real estate. Nevertheless, financial institutions have preserved a powerful niche for themselves in today's mortgage market by virtue of the flexibility that comes from being able to put mortgages in portfolio.


Regions Used in the Analysis

* Far West-California, Hawaii, Alaska, Washington, Oregon.

* Mountain-Idaho, Montana, Utah, Arizona, New Mexico, Colorado, Wyoming, Nevada.

* Lower Midwest-Texas, Arkansas, Louisiana and Oklahoma.

* Upper Midwest-South Dakota, North Dakota, Minnesota, Illinois, Iowa, Kansas, Missouri and Wisconsin.

* Ohio Valley-Ohio, Indiana, Michigan, West Virginia, Pennsylvania and Kentucky.

* Southeast-Alabama, Florida, Georgia, Tennessee, North Carolina, South Carolina and Mississippi.

* Mid-Atlantic-Maryland, Delaware, District of Columbia and Virginia.

* New York-Connecticut, New Jersey and New York.

* Northeast-Massachusetts, Maine, New Hampshire, Rhode Island and Vermont.

Source: Terrill J. Keasler

Terrill R. Keasler is an associate professor in the Department of Finance, Insurance and Real Estate at Appalachian State University in Boone, North Carolina.
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Title Annotation:growth in home loan portfolios from 1991 to midyear 1994
Author:Keasler, Terrill R.
Publication:Mortgage Banking
Date:Sep 1, 1996
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