Home Loan Bank System Awash in Cash

RTC Mortgage Prepayments Slash Demand; Thrifts May Be Hurt

WASHINGTON -- The Federal Home Loan Bank System has billions of dollars to lend to banks and S&Ls for new mortgages, but very few takers.

As a result, the capacity to generate strong earnings in the near future may be jeopardized. That in turn could hurt the income statements of S&Ls, which count stock in the banks as about 30% of their capital and rely on hefty dividends for about 25% of their income.

An aggressive push by the Resolution Trust Corp. to slash the debt burden of failed thrifts by prepaying their loans caught the Federal Home Loan Bank System off guard in the first half of 1991 -- and left it awash in cash and with few lucrative investment options.

Prepayment Fees

The Home Loan banks booked $163.1 million in prepayment fees from January through June -- 46 times the $3.5 million they expected to collect, according to a budget analysis prepared by the bank system's regulator, the Federal Housing Finance Board. A copy was obtained by the American Banker.

The windfall profits pumped up the bank system's income to $649.7 million for the half year, 10% above projections. But at the same time, the unexpected bounty deflated the bank system's prospects of generating strong earnings soon.

Because their members have little appetite for new loans, the Home Loan banks have had to reinvest the proceeds in lower-yielding assets, such as mortgage-backed securities and Treasuries. "The short term looks great, but the long term is not so good," said Martin A. Regalia, chief economist and executive vice president of the National Council of Savings Institutions.

Extending Advances

Keeping loans in the hands of borrowers is the name of the game for the 12 Federal Home Loan banks, which earn money chiefly by extending advances to thrifts, banks, and other mortgage lenders. The banks were established during the Depression to provide liquidity to thrifts. There was no secondary market for mortgages at the time.

At the end of June, $54 billion of the bank system's $152.4 billion assets -- more than one-third -- were investments other than advances. Historically, they've had 80% to 85% of their money in advances.

The banks haven't embraced another option -- simply shrinking -- because doing so might jeopardize their ability to contribute $300 million yearly to the thrift, as Congress requires, Mr. Regalia said.

The amount of advances outstanding peaked at $165.6 billion in April 1989, and has been slipping steadily ever since. By June 30, advances outstanding dipped to $94.7 billion -- 12% shy of the $107.7 billion projected. By July 31, they fell further, to $91.5 billion.

Though the problem has been building for some time, it accelerated rapidly this year, when the RTC shifted into high gear.

Between February 1989 and June 1991, the Resolution Trust Corp. paid off $33 billion in advances on behalf of thrifts that have failed. The RTC typically repays the borrowings to free -- and sell -- the high-quality mortgage loans that collateralize advances of the Home Loan banks. Its aim is to pump cash into the conservatorship.

Five Home Loan banks have been especially hard hit; they are in regions where the RTC is most active or where many thrifts are shrinking to boost capital. The five, which took in 94% of the prepayment fees collected in the first half of 1991, are: San Francisco (it collected $80 million); New York ($27.2 million); Dallas ($17.7 million); Atlanta ($15.4 million); and Topeka ($12.4 million).

Taken by Surprise

A bank system regulator said the Home Loan banks appeared to be too optimistic when they estimated the volume of advances that they expected to hold onto in the first half of 1991. But he maintained that they could not have predicted that the RTC would spend so aggressively to pay off the loans. He added that the prepayments are worrisome because they are forcing the Home Loan banks to shrink faster than expected.

The Finance Board has been pressing Congress and the Treasury to ease the earnings pressure by allowing the banks to contribute a percentage of income to the bailout, rather than the fixed $300 million; and by further loosening membership rules to encourage more commercial banks to join and borrow from the system.

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