In the late 1970s, I worked for Los Angeles Federal Bank at One Wilshire in LA. The primary loan was a single-family fixed-rate loan with a 30-year term. Many of the loans had a prepayment feature. If you paid the loan off before a specified period, there would typically be a “penalty” of thousands of dollars.
Many of the residential loans made were not sold in the secondary market. (Freddie Mac, Fannie Mae, etc.) Accordingly, they were considered portfolio loans and the bank kept them. Apparently, it never occurred to the banking execs the possibility of rising mortgage rates. Rates didn’t just increase from the 5% levels they skyrocketed! Therefore, these portfolio loans were killing the bank’s profits. Homeowners weren’t moving because very few could afford the exorbitant mortgage rates. Many banks were merged out of existence.
I am a firm believer in learning from past mistakes, so imagine my surprise when I read in this week’s LA Times:
“Big banks awash in unused deposits have been making jumbo loans to keep on their books as investments…” Read the complete article here
Mortgage rates increased in the 80’s and they will rise again. These 30 year loans will once more be a financial drain. If you have stock in any banks keeping these low fixed rate loans on the books, I think your should sell!
