BANKING / FINANCE

Protection for S&L;: Guardian Savings & Loan in Huntington Beach, worried that it might lose $56 million in gains generated through accounting procedures, has arranged for First Interstate Bank to protect it against such a loss.

The agreement concerning Guardian’s $1-billion servicing portfolio is the first to protect a thrift or mortgage banker from losses that could occur when borrowers pay off home loans earlier than the institution estimated that they would, said Brian Cosgrove, an executive at First Interstate in Los Angeles.

Thrifts such as Guardian sell many of the loans they originate to investors, but the thrifts continue to service the loans, a low-risk operation that provides them fee income. In addition to recording the fee income, the institutions can also estimate how much they will earn in servicing fees over the lives of the loans, reduce that amount to its present value and record it as a gain.

But when interest rates fall and borrowers pay off their loans early by refinancing them, the thrifts must write off as a loss a portion of those gains they recorded.

The agreement between Guardian and First Interstate is designed to reimburse Guardian for any servicing loss it must take as a result of falling rates and early payments of mortgages. The bank insures against that loss through hedging, a strategy of trading in options on the bond market to offset investment risks.

First Interstate has a large options trading desk, Cosgrove said, that can handle hedging operations more efficiently than most S&Ls; or mortgage bankers.