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STATEMENT ON . R. 5568, THE "HOME MORTGAGE CAPITAL STABILITY ACT" PRESENTED TO SUBCOMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES BY WILLIAM M. ISAAC, CHAIRMAN FEDERAL DEPOSIT INSURANCE CORPORATION MARCH 24, 1982 9:30 a .m . RAYBURN HOUSE OFFICE BUILDING ROOM 2128 Mr. Chairman, I appreciate this opportunity to present the views of the Federal embodied Deposit Insurance Corporation, in H. R. 5568, the Home Mortgage Capital The thrift difficulties. Stability Act. . industry currently is experiencing unprecedented Government policies, competitive factors in financial comings on the plan economic conditions, markets and management short- have all contributed to the difficulties. The problems -- whatever their origin -- are real, and we commend you for your efforts to address them. Assuming funds can be allocated to this endeavor without increasing upward pressures on interest rates, the FDIC could accept a wel 1 - structured program of temporary assistance to distressed- financial such a measure, however, high interest rates a r e a financial institutions. In considering we should recognize that persistent basic cause of widespread economic troubles and a major cause of the problems of thrift institutions. A program of financial assistance for depository institutions, if not approached within the context of an overall that exerts downward pressure on interest strategy rates, is, likely to be self-defeating. Morever, we believe a program of financial assistance ought to be accompanied by other measures that, together, form a well- rounded program for the revitalization of our depository 12-| institutions. Very briefly, we believe that program should include: 1. enactment of the Regulators' Bill; 2. provision of new asset powers 3. federal for thrift institutions; legislation to preempt state usury statutes and prohibitions on enforcement of due-on-sale clauses; 4. comparatively swift deregulation of liabilities with emphasis on a short-term instrument that can compete with money-market 5. instruments; and possibly some soundly-conceived changes in accounting practices -- a matter we are currently working on. Given such a program, stronger thrifts could begin to diversify their asset structure and return to profitability. Within that context, vide the means Without a program of financial for many institutions to weather the transition. a comprehensive program, however, we are simply gambling that economic conditions will considered assistance could pro return to what has always been "normal" and that thrifts will then be able to profitably return to the old ways of doing business. We believe such a course would be imprudent. The m a r k e t place has served periodic notice over the past 20 years that our system of mandatory rate controls, specialization, accompanied is no longer viable. heed to those warnings thrifts by rigid interest We have not paid adequate and, as a result, the problems of our have grown steadily worse. If we have learned anything from the present plight of the thrift industry, it is that private financial institutions -3cannot afford to subsidize willing to do so. housing finance and savers are not If we wish to provide a special housing finance, it ought to come from general paid to any lender as an inducement to make subsidy for revenues and be housing loans at below market rates or directly to home buyers to permit them to better afford the market rate. Having said that, program of financial our ideas about let me turn to the question at hand -- a assistance. 'First, we would like to offer how such a program should be structured. Our first tenet is that the assistance should be available only on a selective basis. Inept management should not be subsidized with funds intended to provide temporary relief to victims of unexpected and unprecedented When the Regulators' Bill was before this Committee you thought we were too restrictive our authority to provide financial of our Act. economic conditions. last year, in our request to redefine assistance under Sec. 13(c) As a result, you broadened that authority we have endorsed your language -- but you were careful us discretion to distinguish between those institutions could really benefit from assistance and those -- and to leave that for which it would be a waste of money. Second, we believe an assistance program should be structured to be economically sound and to create options and incentives for the recipients to correct of the difficulties, the underlying causes principally the interest rate mismatch -4between assets and liabilities.* Even within the existing framework of law, there is room for some of this, but we cannot overemphasize the need for broader asset powers and deposit deregulation to enable thrift institutions to grow out of their current difficulties by competing effectively and increasing earni n g s . We must be frank and tell you that nothing concerns us more than the bill's requirement that 50 percent be invested in one-to-four family mortgages of net new deposits for first time home buyers at an interest rate 1 percent above the institutions' average cost of funds. Much of the present thrift dilemma is attributable to the mismatch between and short-term, long-term, high rate liabilities. fixed-rate assets The bill's provisos would perpetuate and even compound these problems. Without a short-term deposit instrument to allow depository institutions to compete effectively in current markets, certain there will not be much we feel in the way of net new deposits. Even assuming such an instrument is authorized and new funds are attracted at current market current average costs. rates, their costs could be well Under the bill's provision above requiring that loans be made at 1 percent over average costs, the result could be to lock the institutions into a continuing loss position. * It is essential that a limitation-- providing that no ext r a ordinary gains or losses shall be included for purposes of qualification for the program or for quarterly payments -- be imposed to keep the program from becoming a buyout for all the unprofitable assets on the institutions' books. Moreover, any advances under the program should be required to be paid back with interest out of future earnings. -5Unless the assisted institutions were able to invest the other 50 percent of their net new deposits at very high returns, it seems highly unlikely that any institution could strengthen its situation under this scenario. Third, there should be some discipline over management and management practices exacted as a price for financial On previous occasions this Committee assistance. has enacted financial assistance programs for Lockheed, New York City and'Chrysler Corporation. In each instance disciplines as a price for the taxpayers' for such requirements support. have been imposed There is no less reason in the measure now before you. We would urge that any bill grant the regulators clear authority and direction to impose sanctions against management. We have in mind authority to enforce a decrease or prohibit any increase in the compensation of officers, trustees, or directors so long as assistance funds remain outstanding and the authority to require management changes in assisted institutions when believed necessary to achieve operating improvements. We believe the bill should also grant the regulators authority and direction to place operating controls on the activities of assisted institutions while the assistance remains outstanding. We do not believe that an institution should receive taxpayer funds and then simply continue to do business as usual. There should also be clear authority and direction for the regulators to terminate payments to those institutions which are clearly on the path to failure. It makes little - 6- economic-sense to dissipate the taxpayers' payments to institutions despite the federal The bill money by continued that continue on a down hill path assistance. does not address one serious problem we wish to call to your attention. Some states and localities, most particularly the States of New York and Massachusetts and the City of New York, levy a franchise tax on mutual savings banks. The tax is based on the volume of deposits without whether a bank is making or losing money. if you were to enact this bill regard to The result is that a large percentage of the assistance payments would flow directly through the troubled institutions to the local burdensome tax. should include imposing this unjust and We believe this is undesirable and that you in the legislation a proviso which would require that any state or local to waive governments government with such a tax would have it for institutions being assisted under the Act until repayment is effected. Mr. Chairman, we understand that it is the Subcommittee's intention to make major modifications to H. R. 5568. reason we we feel have confined our comments to the general principles should be considered in your ultimate package. be happy to answer any questions render whatever technical For this I would and our staff is available to assistance you may desire.
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