Danger Is Seen In Tough Rules on Thrift Conversion

WASHINGTON - Robert E. Litan, the Brookings Institution's expert on banking, said Tuesday that the government should relax rules barring savings and loans from converting to banks.

Mr. Litan, a senior fellow at the Washington think tank, said the move is necessary to avoid another bailout of a deposit insurance fund. S&Ls continue to pose a "substantial risk" to taxpayers because they have about $900 billion in fixed-rate mortgages on their books. A big spike in interest rates would sink hundreds more S&Ls, he warned.

"The earthquake could happen again," said Mr. Litan, who spoke at a press conference sponsored by a new political policy magazine, Domestic Affairs. Mr. Litan wrote an article for the magazine titled "The End of the Savings and Loan Industry."

Mr. Litan said the government should make S&Ls more attractive to investors by taking steps such as relaxing deposit-insurance entrance and exit fees for thrifts that want to convert to banks and easing the qualified thrift lender test, which requires S&Ls to keep at least 70% of their assets in mortgages or related instruments. (Congress already is moving in the latter direction.)

Mr. Litan predicted that out of the 2,232 thrifts in private hands today, only 1,000 will be operating in the next five to 10 years.

The thrift industry's demise is being driven by securitization and selling of loans in the secondary market, which has eliminated the spreads thrifts made on fixed-rate mortgages, Mr. Litan said.

"You don't have to be a genius to find out that locking people into mortgages that are fixed-rate is a recipe for disaster," Mr. Litan said.

As for banks, Mr. Litan said he does not foresee a taxpayer bailout in at least the next three years. He anticipates that the $25 billion infusion sought by the government will be enough to bolster the Bank Insurance Fund.

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