Mortgage loans are going global

If you get a home mortgage from Abington Community Bank in Jenkintown, chances are the money will come from deposits kept there by other residents of Philadelphia's northern suburbs.

The 140-year-old bank has been making loans this way for decades, and then keeping the loans on its books instead of selling them. "We are looking for the relationship with the customer," said Tom Wasekanes, vice president of originations.

While Abington has stayed with community-lending methods, the U.S. mortgage industry has transformed itself in a way that has opened conduits to global capital markets.

By turning mortgages into securities, many lenders have opened up vast distances between homeowners and their mortgage holders, who can be anywhere in the world. Investor appetite for mortgage-backed securities contributed to the explosive growth in recent years of subprime lending, and allowed credit standards to evolve to the point that 100 percent financing with no proof of income became acceptable.

But savings banks don't go there, leaving them playing an ever smaller role in the mortgage market. From 1996 through 2006, savings banks' share of U.S. mortgage holdings fell from 14 percent to 8.5 percent, according to Federal Reserve Board data.

Over the same period, the share of U.S. mortgage holdings funded by secondary capital markets through private securities issuers, finance companies, and real estate investment trusts soared from 7.7 percent to 24.7 percent.

The government-sponsored entities Fannie Mae, Freddie Mac and Ginnie Mae - which were founded to boost liquidity in the home-mortgage market by buying loans from banks and other lenders and selling them to investors - remain the largest participants in the secondary market, with a 37.5 percent share at the end of 2006.

"We've never been a big player in the secondary market as long as I can remember, because we treat mortgages as an investment, not as a product," said Ed Gormley, an Abington senior vice president with a 30-year history there.

Abington has a "very healthy attitude, but it's a very narrow and small attitude," said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Md. "You can be a mortgage broker originating mortgages out of the trunk of your car and do billions" of dollars more in mortgages than a community bank, he said.

That's possible because the mortgage broker does not lend money. The broker takes applications and shops around for a mortgage lender who will fund the loan. The lender turns the loan over to an investment bank, which pools the loan with thousands of others in a residential-mortgage-backed security.

That security is sliced and diced to isolate the key forms of risk in mortgage loans: interest-rate risk and credit risk. The process is called securitization; it enables investors, such as hedge funds, that want to take on a lot of risk to do just that. Insurance companies and other more conservative investors can pay more to take on less risk.

The lucrative business of securitization has boomed. Cecala said that almost 66 percent of mortgages were securitized last year, up from 41 percent in 2000.

"There's a lot of efficiency in this kind of system, bringing the external capital market into the mortgage market," said Ronel Elul, a senior economist at the Federal Reserve Bank of Philadelphia.

But loosening the connection between the borrower and the lender sometimes leaves the lender without a good idea of what is going on at the other end. "This is very typical of the markets. There's always an overzealousness in expanding . . . and an inevitable retrenchment," Elul said.

Abington, by contrast, is very limited because it makes loans only where it has branches. "We get to meet our customers, so we have a lot of confidence in the quality of our loans," Wasekanes said.

The bank also has a strong deposit base that helps it keep 30-year mortgages on its balance sheet at a time when many other savings banks are gravitating toward shorter-term residential loans that have less interest-rate risk and more profitable commercial loans.

In 2006, 57.6 percent of Abington's $652.9 million in loans were on residential properties, down just a few percentage points from 61.7 percent of $400.1 million in loans in 2002.

By comparison, the portion of residential loans at WSFS Financial in Wilmington has fallen to 23.5 percent of $2 billion in loans at the end of 2006 from 45.2 percent of $1.2 billion in 2002.

Stephen A. Fowle, WSFS's chief financial officer, attributed the decline to an increased emphasis on more profitable commercial lending. He also said the federal savings bank would like to sell more residential mortgages to free funds for corporate and small-business lending.

But even when it sells a loan, WSFS likes to continue collecting the payments, which is known as servicing a loan, to ensure its customers are treated in a certain way.

Haddon Savings Bank in Haddon Heights, by contrast, illustrates the limits of the community-bank model. "We haven't done any 30-year loans to speak of in the last three to four years," bank president Al McElfresh said.

"We can't afford to do it, because we hold everything in portfolio," and the risk of changing interest rates is too great for the small bank, he said.