OTC Chief Urges Lenders to Prepare for Higher Interest Rates.(Office of Thrift Supervision director James Gilleran)

The Office of Thrift Supervision wants thrifts to prepare for rising interest rates and the agency plans to issue new guidance to the industry soon.

"We are closely monitoring how thrifts transition from the current intensive 'mortgage banking' mode to a more typical lending environment," OTS director James Gilleran told the Exchequer Club.

The past few years have been a "fool's paradise" for the thrift industry, he said, with record profits and mortgage volumes "we may never see again."

For the 12-month period ending Sept. 30, thrifts originated $586 billion in 1-4 family mortgages and sold $628 billion into the secondary market.

Interest rate risk is another concern and OTS is seeing an increasing number of institutions that exhibit IRR exposure levels that cause supervisory concern. But generally the industry is well positioned to withstand a 100 to 200 basis point rise in rates, the thrift regulator said.

He noted that the federal thrift charter is very attractive and he doesn't believe changes, such as raising the limit on business lending, are necessary.

Combined with OTS' power to pre-empt state predatory lending laws, the federal thrift charter makes it easy for mortgage lenders to operate nationwide, he said. OTS recently approved an application by J.P Morgan Chase & Co. to create a $1 billion thrift as a platform for originating mortgages outside of the New York, New Jersey and Connecticut.