RTC Seeking Approval to Pay Home Loan Banks with Notes

WASHINGTON - The Resolution Trust Corp. is asking Congress for authority to repay in notes, rather than in cash, Federal Home Loan Bank loans to failed thrifts.

The plan would enable the RTC to avoid hefty cash outlays in paying off the secured loans of thrifts that it seizes.

Thrifts in government conservatorship repaid $33 billion in Home Loan bank advances from February 1989 and through last month. In 1990, at least $5.6 billion was repaid directly from the RTC's working capital funds.

The RTC typically repays the borrowings of failed thrifts to free the high-quality mortgage loans that collateralize Home Loan bank advances.

An Aid to Asset Sales

The RTC says it can sell these assets sooner by giving the regional Home Loan banks notes instead of cash. That would enable the RTC to deploy its cash more efficiently - by paying off high-cost deposits, for instance.

It would also cost less, because the RTC would avoid prepayment fees on the advances. Last year, the RTC paid $151 million in penalties.

Furthermore, the plan would cushion the 12 Home Loan banks, which serve as liquidity sources for member institutions, from the shock of sudden cash windfalls. Prepayment of billions of dollars of loans have left the Home Loan Bank System awash in liquidity and with few lucrative reinvestment options.

RTC notes would ease uncertainty by guaranteeing the steady income stream the Home Loan banks anticipated when they loaned funds to thrifts. That, in turn, could ease pressure on Home Loan banks' earnings and could bolster the value of their stock, which makes up 30% of S&L industry capital.

RTC Chairman L. William Seidman requested the debt-conversion authority June 21 before the Senate Banking Committee. The request was in an appendix to testimony on streamlining the bureaucracy of the thrift-bailout agency.

By proposing to issue notes, the RTC could be stepping into a political minefield. In Congress, the proposal is likely to evoke memories of the Federal Savings and Loan Insurance Corp.

Directors of that bankrupt fund put taxpayers on the hook for $65 billion by handing out long-term guarantees to acquirers of failed thrifts in 1987 and 1988.

RTC officials say their proposal differs dramatically.

"We're not increasing the obligations of the taxpayers," said William H. Roelle, director of operations and resolutions at the RTC. "All we're doing is substituting our promise to pay, to get the asset out. When the note matures, we would just go ahead and pay it off."

Because their lending policies are conservative, the Home Loan banks have virtually risk-free portfolios. By law, they may accept only the best mortgage assets as collateral for advances.

They may require that an institution pledge assets equivalent to as much as 160% of borrowings, and they may demand additional collateral if the borrower's health declines. The 219 thrifts under RTC control as of April 30 had upward of $10 billion in assets tied up as security for $9.2 billion of Home Loan bank loans.

Cost of Collateralization

The extra collateralization cushions the Home Loan banks against losses, but it has a downside for the Resolution Trust Corp.'s efforts to dispose of assets.

"In many institutions where there's been heavy borrowing, everything is pledged" as collateral, Mr. Roelle said.

The Home Loan banks and their auditors would presumably want assurances that the commitments are guaranteed by the full faith and credit of the U.S. government. If they are, then the RTC's proposal has clear promise, said an official at the Federal Housing Finance Board, which oversees the Federal Home Loan banks.

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