The availability of residential mortgage credit in the future may be affected significantly by recent developments in the private secondary market, bankers meeting here this week were told.
Cited were the insurance of pass-through securities backed by mortgages and the formation of pools of loans from various institutions to supplement funds received through direct deposits.
The secondary market was the theme of a national real estate finance conference held here by the American Bankers Association. One speaker, Bill Ross, senior vice president for mortgage securities of the Mortgage Guaranty Insurance Corp. of Milwaukee, predicted that, within the next year to 18 months, the growth of pass-through and pools will mean an additional $5 billion a year pumped into the mortgage market. There is now less than $1 billion of these securities outstanding, according to Perry Russell, senior vice president of the First International Bank in Houston.
The prediction comes as mortgage interest rates are at their highest level since January 1975 and new deposits in savings and loan associations are at a four-year low. The number of mortgage loans in March rose 37 percent over the previous month and 14 percent over February 1977, according to the Federal Home Loan Bank Board.
The bank board also reported that, while S&L deposits increased last month to $2.6 billion from $2.07 billion the month before, new savings were still 29 percent below March 1977.
This past week, the Federal Reserve also decided to permit the automatic transfer of funds from customers' savings accounts to checking accounts. Because this would amount to interest on demand deposits, the S&Ls fear the new regulation would adversely affect their business and the availability of mortgage credit.
Savings and loans, which have enjoyed a huge growth in the past two decades, now make nearly four out of every five residential loans. The commercial banks' share of the market has been constant at about 20 percent over the years, though it rose to 23 percent last year. There are signs that banks will seek to expand their share of loan originations (at the expense of S&Ls) because they have found how profitable the conventional mortgage field is and how they can make more residential loans through increased participation in the private secondary market.
Gladstone Associates of Washington recently completed a survey of 991 banks, representing about one out of every 15 in the country. Only one-fifth of the respondents said they already were selling all or portions of their mortgage loans in the secondary market. Yet about two-thirds of those who answered whether they intended to do so in the future said yes. Moreover, 83 percent of the bankers responding said they preferred - or would prefer - to use private market channels rather than government-sponsored institutions such as the Federal National Mortgage Association, the Government National Mortgage Association and Federal Home Loan Mortgage Corp.
The reasons for their preference can be boiled down to two: better yield and less paperwork.
These government-sponsored institutions that the private market would now emulate have enjoyed remarkable growth in this decade after a slow start. For example, Ginnie Mae has issued $56.1 billion in pass-through securities backed by FHA/VA-insured mortgage loans and is now the third largest source of funds for single-family housing after thrift institutions and banks.
Freddie Mac bought $4.1 billion in conventional loans and participations last year. Before the Guaranteed Mortgage Certificate was introduced in 1975 to attract untraditional mortgage market investors, mortgage purchases averaged only $1.2 billion a year.
Last fall the Bank of America became the first private institution to make a public offering of mortgage-backed, pass-through securities. (A pass-through means the buyer receives payments of interest and principal as they are paid off by the homeowner in regular installments. The bank does not guarantee payment.)
Its $150 million offering was snapped up by investors in a flash. This spring it sold another $200 million. First Federal Savings and Loan of Chicago made a similar $75 million offering last October.
Since then, a number of small issues of pass-through securities have been privately placed by banks and thrift institutions. In the Washington area, the Home Builders Mortgage Corp. has made two placements for a total of $10 million. Standard Federal Savings and Loan of Gaithersburg sold $8.5 million of pass-through securities in March to Erie Savings Bank of Buffalo. Standard's issue was the first to be rated by Standard & Poor. It received an A.
A uniform rating system, Standardization of loans forms, and mortgage insurance, all now come into being, are three essential elements in the success of pass-through securities. The most important is undoubtedly a pool arrangement that will allow institutions with smaller loan portfolios than the giant Bank of America to participate.
MGIC and Salomon Brothers of New York are now working to form consortia that can put together enough loans to back $100 million offerings of securities. These would then be issued in the pool's name or the name of the lead bank. Ross estimates several pools may be ready to go before year-end.