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TESTIMONY OF
ANDREW C. HOVE
ACTING CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
APPROPRIATIONS TO COVER THE GUARANTEES AND
OBLIGATIONS OF THE FORMER FEDERAL SAVINGS
AND LOAN INSURANCE CORPORATION
BEFORE THE
SUBCOMMITTEE ON VA, HUD AND INDEPENDENT AGENCIES
COMMITTEE ON APPROPRIATIONS
UNITED STATES SENATE
10:00 AM
APRIL 2, 1993
138 DIRKSEN SENATE OFFICE BUILDING
Madam Chair and members of the Subcommittee, I am pleased to have
the opportunity to address the fiscal year 1994 appropriation
request of $1,326 billion to meet the continuing obligations of
the former Federal Savings and Loan Insurance Corporation
(FSLIC).
In addition, I will briefly highlight the progress the
Resolution Trust Corporation has made toward realizing savings
from expenditure of prior years' appropriations.
I also will
touch on aspects of the Federal Deposit Insurance Corporation
Improvement Act that are subject to appropriation.
OVERVIEW
In order to manage the savings and loan crisis, the Financial
Institutions Reform, Recovery, and Enforcement Act (FIRREA),
among many things, established the Resolution Trust Corporation
(RTC), the FSLIC Resolution Fund (FRF) and the Savings
Association Insurance Fund (SAIF).
All assets and liabilities of
the former FSLIC were transferred to the FSLIC Resolution Fund.
This includes all liabilities arising under the financial
assistance agreements and all FSLIC related litigation.
The government's obligation for future savings association
failures was transferred to the RTC until September 30, 1993 and
the RTC must terminate its operations on or before December 31,
1996.
The SAIF was created to replace the FSLIC and will be
2
available to protect depositors in savings associations that fail
after September 30, 1993.
The FSLIC Resolution Fund was established to cover the net
liabilities of the old FSLIC.
The appropriations we request are
made solely to ensure that the obligations of the Federal
Government, obligations that are now several years old, are met
as they come due.
Operationally, the relationship of the FSLIC Resolution Fund to
the Federal Deposit Insurance Corporation is unusual and complex.
Under the law, the FDIC has responsibility for the fund but the
Resolution Trust Corporation has the authority for renegotiating
assistance agreements and notes that have come to be known as the
”1988 deals."
All assistance agreements were entered into by the former FSLIC
under Section 406(f) of the National Housing Act and were
approved by the former Federal Home Loan Bank Board.
Assistance
transactions were done to facilitate the acquisition of failed or
failing thrifts.
The impetus for the Bank Board's use of
assisted transactions was the lack of liquidity in the FSLIC
insurance fund.
In sum, an assistance agreement is a contract between the FSLIC
Resolution Fund, as successor to the FSLIC, and an acquirer which
3
specifies procedures and actions the acquirer must take prior to
incurring major expenses or losses that are to be reimbursed by
the FSLIC Resolution Fund.
Typically, these agreements would
include some, but not all, of the following provisions:
o
Payment in cash, or with a note, to cover all or a negotiated
amount of the negative net worth of the failed institution(s);
o
Capital loss coverage which provides payment for the
difference between book value and net sales proceeds on
"covered assets."
The amount and nature of covered assets is
identified in each agreement;
o
Yield subsidies, which ensure a defined level of return on
covered assets;
o
Indemnifications to the acquirer for legal expenses in
connection with lawsuits against the failed institution or
other contingencies;
o
Loss-sharing arrangements in which the acquirer bears a
percentage of loss upon disposition of covered assets;
o
Gain-sharing arrangements, in which a percentage of gain
realized on the sale of covered assets above some benchmark,
4
are provided as an incentive to the acquirer to obtain the
maximum price for covered assets;
o
Tax benefit sharing provisions that arise from the acquirers'
use of preacquisition net operating losses (NOLs) as veil as
other tax features of the agreements.
o
Buy out options under which the FDIC may elect to purchase
covered assets;
o
Warrants which entitle the FSLIC Resolution Fund to share in
any increase in value in the assisted thrift.
In some
instances, this also may include sharing in earnings;
o
Mark-to-market coverage which may reimburse the acquirer for
the difference between book and fair market value of remaining
covered assets when the agreement terminates or for goodwill
established for assets that are not covered.
Under FIRREA, the physical assets acquired by FSLIC from the
closure of failed thrifts were assigned to the FDIC for
collection.
In addition, the FDIC was assigned responsibility
for the administration of 202 assistance agreements with
operating institutions.
The responsibility for administering the
agreements was delegated by the FDIC to the Resolution Trust
Corporation between January 1991 and October 1992 since the RTC
5
was required by law to renegotiate many of these transactions.
With the virtual conclusion of the RTC's renegotiation efforts,
the management of these functions was reassigned to the FDIC
Division of Resolutions.
Considerable progress has been made in winding up the obligations
and liquidating the assets inherited from the FSLIC.
When we
acquired responsibility for these assistance agreements in late
1989, there were 202 assistance agreements outstanding with FSLIC
notes totalling nearly $20 billion and covered assets totalling
about $58 billion.
At fiscal year end 1992, 101 agreements
remained with only 47 of these considered active.
Within the 47
active cases, only $9.3 billion of covered assets remained as of
September 30, 1992.
Through December 31, 1992, another $1
billion in covered assets have been disposed of bringing the
balance down to $8.3 billion.
During calendar year 1993, another
21 active agreements will be terminating according to their
contractual terms.
The remaining 54 inactive cases involve
contractually required coverage of certain indemnifications
(primarily litigation) provided in the original agreements.
ASSETS IN LIQUIDATION
The FDIC acquired from FSLIC roughly $14 billion in assets
resulting from failed savings and loans.
The volume of FSLIC
Resolution Fund assets held by the FDIC has been reduced from $14
6
billion to about $5.2 billion as of December 31, 1992.
We
estimate that approximately $3 billion in cash generated by the
sale of these assets will serve to reduce the amount of future
appropriations.
ASSISTANCE AGREEMENTS WITH OPERATING INSTITUTIONS
In prior year's testimony, the RTC outlined several steps that
could be taken in our efforts to lower the overall cost of the
assistance agreements:
(1) prepayment of FSLIC promissory notes;
(2) renegotiation of the largest agreements where possible;
(3) repurchase of covered assets and the placement of these
assets with other managers where cost effective; (4) buyout of
smaller agreements to save administrative costs; and (5) further
note prepayments and covered asset write-downs with any remaining
appropriated funds.
Through the appropriation of additional funds in fiscal years
1991 through 1993, the RTC implemented the cost-savings plan.
We
are pleased to report that the RTC has essentially completed its
renegotiation efforts.
During fiscal years 1991 and 1992 and
through February 28 of fiscal year 1993, the RTC, on behalf of
the FSLIC Resolution Fund, took the following cost-saving steps:
1) prepaid notes aggregating $18.4 billion; 2) continued to
prepay the New West/American Savings Bank intercompany note at
7
the earliest contractual opportunity; and 3) directed the write
down of $5.1 billion in covered assets.
In addition, the RTC made significant progress in renegotiating
the 96 separate 1988 FSLIC assistance agreements for which the
FSLIC Resolution Fund had a continuing obligation.
Renegotiations have been completed on all but one 1988 agreement.
Attached is a schedule which shows the outlays expended in these
activities through January 31, 1993 together with estimates of
the present value savings achieved to date.
These savings range
from roughly $1.4 billion to the government as a whole before tax
benefits, to $3.1 billion, assuming full use of tax benefits in
the period generated.
Current efforts to reduce the cost of these assistance agreements
include: facilitating terminations, resolving disputes with
assisted institutions, effecting the final resolution of
outstanding obligations of the inactive agreements, and
continuing to monitor and meet the obligations of the remaining
agreements at a minimum cost to the taxpayer.
As the FRF
obligations decline, so too does the cost associated with the
FDIC's administrative responsibilities as they relate to this
fund.
Therefore, we anticipate reduced FRF administrative costs
in the future.
8
REMAINING FISCAL YEAR 1993 APPROPRIATION
For fiscal year 1993, the FSLIC Resolution Fund anticipates gross
cash disbursements of about $5 billion.
This will consist of
fiscal year 1993 appropriations of $2,622 billion and the
collection proceeds from receivership assets and miscellaneous
receipts of approximately $966 billion, in addition to a
carryover of about $1.4 billion in obligated appropriations from
fiscal year 1992.
FISCAL YEAR 1994 APPROPRIATION
Appropriations for the FSLIC Resolution Fund, unlike most, are
not composed of specific line items subject to separate analysis
and funding decisions.
Rather, the request calls for a single
line item driven by economic estimates, and a pace of doing
business by, and with, holders of major assistance agreements.
The required funding is the difference between other FSLIC
Resolution Fund funding sources, principally collections from the
sale of the Fund's assets, and the obligations due for payment
during the fiscal year.
Because the renegotiation process will be completed before fiscal
1994, the timing of the remaining contractual obligations of FRF
should not significantly change.
There are however, variables
within assistance agreements that may cause future payments to
9
vary from present estimates.
The amount of payments may vary as
the result of interest rates changes, the loss on covered assets
and other similar variables that impact the liability of the FRF.
In addition, the outcome in 1993 of the remaining renegotiation
may impact the amount and timing of the payments on FRF's present
obligations.
Based on our current estimates, FRF will need fiscal year 1994
appropriations of $1,326 billion.
This is down considerably from
our 1992 and 1993 appropriation requests of $15.9 and $2.6
billion respectively.
We anticipate total cash needs of
approximately $2.3 billion for fiscal year 1994.
This will be
covered by cash receipts of approximately $776 million from the
liquidation of assets and other sources in fiscal year 1994, our
appropriation request $1,326 billion and the carry over of
obligations of about $300 million from fiscal 1993
appropriations.
In our fiscal year 1993 appropriation hearings, we indicated that
FRF could be close to self funding in fiscal year 1994.
However,
we also indicated that our analysis depended on factors that are
not totally within our control —
such as the strength of the
economy and the market value and liquidity of FSLIC Resolution
Fund receivership assets.
In addition, that premise was built on
the basis of our appropriation request of $15.9 billion for
fiscal year 1992 and a request of $6.7 billion for fiscal year
10
1993.
These requests were based on the expected timing of
certain large FRF obligations.
In fiscal year 1992, we had hoped
to be able to prepay the "New West Note" and had requested $6.5
billion for that purpose.
Negotiations were protracted and
extended beyond fiscal year 1992.
Instead of prepaying the New
West note, the RTC was able to pay off three smaller notes.
These notes did not require the full $6.5 billion that was
planned and as a result $1.6 billion of our fiscal year 1992
appropriations lapsed.
The New West negotiations are continuing and were again planned
for in fiscal year 1993.
At the time, after the maximum payments
allowed under the note were made, the anticipated funding
necessary to prepay was about $4 billion.
Negotiations did not
result in accelerated prepayment rights subsequent to our
testimony last year and our actual 1993 appropriation was reduced
to $2.6 billion.
The New West obligation must still be paid in
subsequent years, giving rise to our modest appropriations
request for fiscal year 1994.
PROVISIONS OF THE FDIC IMPROVEMENT ACT
We will comment briefly on the FDIC's progress in implementing
two programs created by the House Banking Committee and
authorized by the Federal Deposit Insurance Corporation
11
Improvement Act of 1991.
Both programs are subject to
appropriations.
FDIC AFFORDABLE HOUSING
As you are aware, the FDIC Improvement Act of 1991 required the
Corporation to implement an Affordable Housing Program upon
appropriation of funds by Congress.
This legislation authorized
appropriations of up to $30 million to reimburse the FDIC for
losses on properties with additional funds available for any
additional administrative expenses associated with running the
program.
For fiscal year 1993, $5 million was appropriated.
In spite of limited funding, we have made a substantial effort to
comply with the letter and spirit of the law and accommodate low—
and moderate-income purchasers of our properties.
Over the last
year, we have succeeded in implementing a nationwide program and
have worked effectively with state and federal agencies, non
profits and financing sources such as banks.
Notably, the FDIC
worked with a consortium of New England banks, coordinated by the
Massachusetts Banking Association, to conduct three affordable
housing auctions.
The consortium banks provided financing on
many FDIC sales.
The success of the program was, in large part, made possible by
the Congress allowing the FDIC to modify the statutory program to
12
allow a more cost-effective administration of the program.
Without this discretion, the FDIC had projected administrative
costs for the program to run as high as $6.5 million.
Under the
current program, only $2 million is anticipated to be spent on
administration of this nationwide program.
Prior to receiving the fiscal year 1993 appropriation, the FDIC
voluntarily implemented a limited program on March 31, 1992,
restricting the sale of eligible single-family and condominium
property for 180 days to households with incomes less than 115%
of the area's median income as adjusted for family size.
Non
profits and government agencies were also eligible to purchase
these properties if they would use the purchased properties as
affordable housing.
Since no funds were appropriated, the
program was run on a cost neutral basis. In calendar year 1992,
under the voluntary program, the FDIC sold 705 housing units to
qualified purchasers for $20.8 million.
In October 1992, Congress appropriated $5 million for losses and
administrative expenses associated with the program.
Because the
funding was less than originally anticipated, the funding
legislation allowed the FDIC to modify the program in a manner
which would best utilize the limited amount of funds.
The
modified program is, in most respects, similar to the voluntary
program implemented in March.
The primary difference in the
appropriated program is that the FDIC provides rebates or
13
discounts in an amount of up to ten percent of the sales price as
assistance to qualified purchasers.
a number of ways:
This subsidy can be used in
(l) two-to-one matching of down payment money
(e.g., a buyer who can contribute $1,500 would be eligible for an
additional $3,000 from the FDIC to be applied to the down
payment.); (2) to cover necessary rehabilitation; (3) to buy down
mortgage points and to cover closing cost; (4) to cover costs for
any required buyer counseling; or (5) for direct discounts on
purchases.
As of February 29, 1993, under the appropriated program, the FDIC
has sold an additional 468 housing units to qualified purchasers
consisting of 268 1-4 family residences and 200 units in a single
room occupancy facility.
$1.1 million in rebates and discounts
are committed for these sales.
Given these results, we
anticipate that the FDIC can provide assistance on the sale of
over 700 housing units, representing sales of about $30 million,
during fiscal year 1993.
The FDIC can effectively utilize any funds, up to the authorized
$30 million, appropriated for the upcoming 1994 fiscal year.
Additional money could be used for sales of multi-family
properties which cannot be supported under current appropriations
levels.
The discounts associated with a multi-family program
could easily meet or exceed the $30 million authorized for the
program.
Also, additional subsidies could be used to provide
14
more assistance to low-and moderate-income purchasers of single
family properties.
Assuming that the FDIC can retain the
flexibility to modify the program, any level of funding up to the
authorized amount could be used effectively.
BANK ENTERPRISE ACT
Section 231 of the FDIC Improvement Act of 1991, termed the "Bank
Enterprise Act”, is designed to encourage insured depository
institutions to provide deposit and loan services to economically
disadvantaged borrowers and communities through reductions in
FDIC insurance premiums.
(1)
The specific programs authorized are:
reduced assessment rates for insured depository institutions
offering "lifeline" accounts; and, (2)
community enterprise
assessment credits ("CEACs") towards deposit insurance premiums
for insured depository institutions making loans and taking
deposits in distressed communities.
The FDIC does not have sufficient data to permit a precise
estimate of the costs of these programs because the cost would
vary depending on the response by consumers and depository
institutions to these programs.
To illustrate this,
approximately $3.2 trillion is held in domestic deposits at FDICinsured institutions, including both commercial banks and thrift
institutions.
For each one percent of deposits attributed to
lifeline accounts, the assessments amount to $74 million per
15
year, based on a deposit insurance premium of 23 basis points.
With a 50 percent assessment credit, the cost of each one percent
deposit share amounts to $37 million per year.
Consumer use of
lifeline accounts will depend on how the accounts are defined and
whether the reduced assessment is sufficient to make offering
such accounts cost effective.
Community Enterprise Assessment Credits are generated from
increases in loans made to distressed communities.
Furthermore,
institutions with branches in distressed communities can earn
credits for increases in any deposits taken, and any loans or
other investments made within distressed communities by those
branches.
The amount of this credit varies depending on whether
an institution meets the criteria to qualify as a community
development organization.
Without such qualification, the
assessment credit can be as high as 5 percent of the increase in
loans made plus the increase in deposits taken, except deposits
that exceed the volume of loans made are not counted.
The credit
can be as high as 15 percent for institutions that qualify as
community development organizations.
The total credit for an
institution is subject to a cap of 20 percent of total
assessments or 50 percent of total assessments for a qualified
community development organization.
For example, a bank that qualified as a community development
organization could receive a $15,000 credit for each $100,000
16
increase in qualifying loans.
If the bank also increased
qualifying deposits by the same amount it could receive an
additional credit of another $15,000.
The impact of these
incentives could be substantial with the limits imposed on total
assessment credits being the binding constraint.
On October 6, 1992, Congress provided $1 million in
appropriations to cover fiscal year 1993 costs incurred by the
FDIC and other designated government agencies for beginning
preliminary study, design and development for programs authorized
by the Bank Enterprise Act (BEA).
Specifically, the funding was to cover estimated administrative
expenses for issuing minimum requirements and guidelines for the
two BEA programs.
The appropriation did not provide funding to
offset assessment credits to depository institutions offering
lifeline accounts or increased lending to distressed communities.
The funds were provided to the FDIC only because the CEAC Board
had not been organized and the FDIC along with the Federal
Reserve Board are responsible for developing the lifeline account
concept.
In the interim, the FDIC has established a billing system to
capture BEA-related costs incurred by staff at thè FDIC and other
Federal agencies who are identifying and studying relevant
17
issues.
Reimbursement will be limited to $1 million in fiscal
year 1993.
However, no funds have been disbursed yet.
The BEA established the CEAC Board and charged it with issuing
guidelines that would permit the prompt commencement of program
operations should Congress provide funding in future years for
reduced deposit insurance assessments and assessment credits.
The CEAC Board is to be comprised of the Secretary of the
Department of Housing and Urban Development and the Chairman of
the FDIC, plus two Presidential appointees representing community
organizations, and chaired by the Secretary of the Treasury.
The
FDIC has written to the Secretary of the Treasury to request the
expeditious organization of the CEAC Board.
However, the
Presidential appointments have not yet been made.
In the meantime, the FDIC established an interagency working
group to discuss and identify issues which could be affected by
the legislation.
The group met with Congressional staff on
several occasions to correct deficiencies in the original
language and discussed going ahead with working on related
projects to the extent it could without a CEAC Board.
However,
action on assessment credits for qualifying activities relating
to distressed communities cannot go forward until the CEAC Board
is established and functioning.
18
The definition, guidelines and policies with regard to lifeline
accounts are being formulated now and should be ready for Federal
Reserve System and FDIC Board review by early Hay.
A 60-day
comment period is proposed before finalizing the requirements.
Madam Chair, this concludes my prepared statement.
happy to respond to any questions that you may have.
I would be
M onthly Activity Report
1 9 8 8 -8 9 FSLIC Assistance Agreem ents
Sum m ary of Cash Expended and Savings Achieved
((M illio n s)
Report Date:
MONTHLY ACTIVITY
Acjjpn.Taken
gggLgygteY
FSLIC Note Prepayments
Investor-Owned
Government-Controlled
Covered Asset Write-downs
Investor-Owned
Government-Controlled
Covered Asset Purchases
Investor-Owned
Government-Controlled
Renegotiations
Investor-Owned
Government-Controlled
193.9
0.0
January 3 1 , 1993
FY91, FY 92 and YTP FY 93 ACTIVITY
Present Value
Estimated Cost Savings
Minimum * Maximum M
15.7
N/A
Exhibit 1.
Cash Outlay
Present Value
Estimated Cost Savings
Minimum * Maximum • •
25.7
N/A
7.297.0
4,363.6
519.5
N/A
1,083.6
N/A
4,874.4
249.4
280.5
N/A
501.1
N/A
0.0
0.0
0.0
0.0
N/A
N/A
0.0
0.0
0.0
0.0
N/A
N/A
0.0
0.0
0.0
0.0
N/A
N/A
10.0
N/A
10.0
N/A
6,490.9
0.0
0.0
133.8
N/A
848.4
N/A
20.7
N/A
29.7
N/A
534.0
N/A
2,996.8
N/A
357.5
Settlements
Investor-Owned
Government-Controlled
Other Activities
Investor-Owned
Government-Controlled
0.0
0.0
0.0
0.7
N/A
N/A
461.7
4,813.7
0.0
0.0
0.0
0.0
2,251.6
N/A
N/A
0.0
424.5
N/A
Totals
Investor-Owned
Government-Controlled
551.3
0.7
25.7
N/A
35.7
N/A
21,375.5
9,426.7
1,379.0
N/A
Minimum Cost Savings is Ihe present value cost savings to the Federal Government, as a whole, assuming no tax benefits utilized.
**
Maximum Cost Savings is the present value cost savings to the Federal'Government, as a whole, assuming full use of tax
benefits in the period generated.
@FedFRASER