Thrift Institutions and Mortgages

Maria Ribaulo

Thrift Institutions started out as a place for the small saver to be rewarded for their efforts. There was a large division between these banks and large commercial banks that catered to businesses and large depositors. Today, there are fewer and fewer differences between the two as far as regulations are concerned. The type of services they provide are varied for both banks, but Savings Banks and S&L's have made a niche for themselves that will be an integral part in their survival in the intense competition of the banking industry and especially the mortgage market.

Thrifts initially used mortgages as a tool for providing their income and interest payments for small savers that were not able to use the services of commercial banks. As thrifts grew, they found that although the tax benefits of carrying at least 60% mortgage investments was lucrative, the interest risk of these long-term loans was too great and caused many thrifts to fail when interest rates rose in the 80's well beyond the fixed-rate mortgages they held. The troubles for these institutions also mounted when they found that their loosened credit standards were coming back to haunt them. With the significant inflation of that time, thrifts found that their default rate was much higher then anticipated because of the higher credit risk of their mortgage portfolios. The S&Ls that had this compound nightmare found themselves being bought, or being turned over to Federal Regulatory agencies for liquidation. Some trifts did learn their lesson from this troubled time.

Thrifts have been able to redefine and stengthen themselves by using a variety of service, marketing, and product tools. First, the thrifts had to show themselves as community banks for the average person. Maintaining and growing a customer base is key to an institution that typically has smaller depositors. Next, the thrifts had to find a niche by offering a different level of customer service then their large competitors even when the commercial bank may offer slightly higher interest rates. The average saver would gravitate towards the institution that caters to their needs and makes them feel just as important as the large depositors do at the commercial banks. In addition to marketing the differences and offering a level of service tailored to their customer base, thrifts diversified their banking product lines and offering incentives. By offering NOW accounts, adjustable and fixed rate mortgages, and certificates of deposit, the thrifts were better able to capture more funds from their existing customer base. These customers must feel enough loyalty to the thrift that they would not even consider going to another bank for their mortgage needs.

This mortgage need still exists today and will continue to exist. Although the thrift is not showing a large portion of mortgage holdings on its books and the tax advantages have disappeared, these institutions are still playing a larger role as mortgage bankers. Origination fees and servicing fees play a large part in the profit from making mortgages. Federal and private agency mortgage holdings that sell indivisible shares of mortgage lending are the holders but have not spent the time and effort on developing efficient servicing and origination skills. These smaller Savings Banks are best equipped for origination and have developed subsidiaries that have further refined the technology and process of servicing. Interest risk is combated by holding these for only a short period of time then turning them over to Fannie Mae, Freddie Mac and others. This trend will continue in the future as these institutions consider improving the technology of servicing and maintaining their profitability in the market despite the lower fees on older mortgages.

The basic premise of a capitalistic economy is that money flows to where it is best utilized. If the thrifts continue to improve the process of servicing mortgages and continue to provide home-buyers the service they expect and need when making this type of large, emotional purchase, they will succeed in filling the niche in the money market that they have carved out for themselves.