The thrift-reform law of 1989, viewed from a five-year perspective, succeeded in clearing the industry's wreckage, restoring public confidence, and raising performance standards and overall soundness.

Equally encouraging, the thrifts that survived have shown great resilience - adapting to tougher regulatory, capital, and community service guidelines while boosting profitability and credit quality.

The Downside

But these developments do not assure that the home loan industry's steady contraction will be halted, or that thrifts will maintain a separate charter, regulator, and insurance fund.

The Financial Institutions Reform, Recovery, and Enforcement Act, signed on Aug. 9, 1989, by President Bush, placed thrifts at a competitive disadvantage against other government-sponsored enterprises, such as the Federal National Mortgage Association. In turn, a flourishing secondary mortgage market has sharply reduced the need for deposit-funded residential lenders.

The law botched the recapitalization of the savings and loan deposit insurance fund, leaving the industry vulnerable in the event of further crises. Larger insurance costs are now levied on fewer thrifts.

And the cost for S&L insurance will likely be higher than for rival commercial banks, leaving thrifts at a competitive disadvantage.

The distinction between banks and thrifts is blurring, as banks make huge inroads into home lending and thrifts eye banks' retail businesses.

Thus, the 1989 reform act ultimately may prove but a cleansing precursor to the extinction of a narrowly defined industry.

"Residential lenders by no means are doomed. But in my view, there no longer is a reason to have a distinct and separate thrift industry," said Charles R. Rinehart, chairman and chief executive of Los Angelesbased H.F. Ahmanson & Co. the nation's largest thrift.

To be sure market forces are a huge factor in the thrift industry's recovery and future. Experts say that falling interest rates. firming realty values. and frenzied refinancing unquestionably aided the disposition of dead thrifts and the rebound of survivors.

And by virtue of their patronage, consumers will have a large say over the fate of the more than 2,000 surviving thrifts and Federal Deposit Insurance Corp.-insured savings banks, which control $1 trillion of assets.

Epochal Legislation

But that takes nothing away from the towering influence of the 1989 legislation.

The Resolution Trust Corp., the taxpayer-funded agency created under the law, has resolved the cases of 733 failed institutions. It has overseen $367 billion of asset sales and collections. And it has shielded the holders of 24.3 million deposit accounts from losses.

Excluding interest, the cleanup is expected to cost roughly $150 billion, most of which will come from taxpayers. (See related article that began on page 1.)

Prodded by the reform law, surviving thrifts sharply boosted capital, improved operations, and got back to the basics of residential lending.

As recently as-December 1990, the Office of Thrift Supervision was riding herd on 450 "problem thrifts" controlling $235 billion of assets. As of March 1994, that had dwindled to 83 thrifts and $74 billion of assets - with most expected to recover.

"I think we are virtually done with the cleanup," said Jonathan L. Fiechter, acting director of the OTS.

Aside from removing an aura of crisis, the cleanup detoxified the market. No longer are cashstarved thrifts ladling out exorbitant rates for deposits. And the population of aggressive lenders has been thinned.

"All the disappearances have helped the value of the thrift charter," said Charles B. Stuzin, chairman and president of CSF Holdings Inc., a Miami-based thrift holding company.

At the same time, the reform law placed thrifts at a disadvantage with other governmentsponsored enterprises, which do not labor under the bailout law's funding and capital strictures.

While Mr. Rinehart's Home Savings of America is carrying a 5% ratio of tangible common equity to total assets, for example, Fannie Mae has a 3.62% ratio.

At any given margin, said Mr. Rinehart, Fannie Mae can post a higher return on equity than Home Savings. Conversely, he said, for any given return on equity, Fannie can reach it with a lower margin than Home Savings.

And Mr. Fiechter notes that the liabilities issued by Fannie Mac though implicitly guaranteed by the federal government. carry no insurance surcharge and can be issued in denominations above the $100,000 ceiling on deposits.

These disparities are accelerating the contraction of the thrift industry, experts say. According to the Department of Housing and Urban Development, thrifts accounted for 21.7% of all home loan originations in 1993, down from 42.3% in 1988.

"A lot of the shrinkage is reflected in the growth of Fannie Mae and Freddie Mac," said Stuart Greenbaum, director of banking research at Northwestern University, Evanston, Ill.

On top of this, commercial banks are invading the mortgage market. They are furiously originating and selling home loans, and avidly piling them on balance sheets.

From yearend 1989 through yearend 1993, commercial banks recorded a 47.7% increase in home loans, to $443 billion. while thrifts saw their total drop by 12.2%, to $355 billion, according to Sheshunoff Information Services.

Given the favored status of other federally backed mortgage lenders, and the incursion of commercial banks, "I think the thrift industry is in for continued shrinkage," said James Marks, an analyst with Sutro & Co., San Francisco.

Mr. Marks said survivors will be the ones that muster spartan efficiency, find protected geographic niches, and develop flourishing retail operations. Many stragglers will be absorbed by commercial banks and the already-strong trend of banks buying thrifts - "will continue to accelerate," he said.

Ironically, against this backdrop of crisis-driven restructuring and competitive assault, the thrift reform law has thus far failed on the crucial mission of rebuilding the thrift deposit insurance fund. That compounds the challenges.

Along with the obligation of rebuilding a deposit insurance fund, thrifts were saddled with an $800 million annual bill for expenses incurred under a partial cleanup enacted in 1987.

"It is now five years after the enactment of FIRREA, and the Savings Association insurance Fund is less than one-fourth of the way towards its target, and I am troubled by that," said Mr. Fiechter. Officials say the fund will remain underfunded for up to a decade.

Aside from leaving regulators potentially cash poor in a crisis, the shortfall probably means thrifts will remain stuck with high insurance premium costs long after such costs fall in the banking industry. That is one more competitive disparity.

"Should further difficulties surface later in the decade, I as head of the OTS will be facing a woefully underfunded insurance pool and an industry that, by virtue of the comparatively higher premiums it must pay, may have trouble raising capital," warned Mr. Fiechter,

These issues notwithstanding, the thrift industry certainly will not vanish overnight.

Although a 1980s-style rate shock would jolt thrifts afresh, it is deemed unlikely. And many strengths are in place including a thick capital cushion, a focused regulatory system, accounting safeguards, and seasoned executives who have weathered a cataclysm.

"The fact is. for the foreseeable future there will be thousands of financial institutions functioning primarily as residential lenders," said Paul A. Schosberg, president of Savings and Community Bankers of America, the thrift industry trade group. "No charter has been more strenuously tested."

Looking longer term, many observers agree that thrifts and banks eventually will converge under some sort of universal depository charter governed by a single regulator and insured by a single fund, although serious transition issues have yet to be resolved.

"There are active discussions all the time about merging the thrift regulator and insurer with their banking counterparts, reflecting the transitional status of the thrift industry," said Northwestern's Mr. Greenbaum.

But largely thanks to the bailout law, at least the thrift industry's future can be decided at a deliberative pace.

"We have certainly been through an exciting period," said Henry Peltz, a former Keefe, Bruyette & Woods Inc. thrift analyst who is retired. "Hopefully, it will not be as exciting again."

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