Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Wed, Mar 11 1992 Date: Wed, 11 Mar 92 05:46:04 EST Message-ID: 03-11 0000 BONUS: S&L future looks dark USA TODAY Update March 11, 1992 Source: USA TODAY:Gannett National Information Network Looted by crooks, shaken by swings in interest rates, burned by risky loans, the savings-and-loan industry could use a little good news. Tuesday, it got some: The USA's 2,096 S&Ls made money last year, the first time since 1986, the Office of Thrift Supervision said. The industry earned $2 billion last year, vs. 1990's $2.9 billion loss. The improvement is cause for relief, not celebration. From 1987 through 1990, thrifts lost $43 billion. More than 1,000 have failed since 1980, sticking taxpayers with a $200 billion tab, plus interest, to pay off depositors. ARE S&LS' TROUBLES OVER? No. Last year's profit was created largely by falling interest rates, which won't last forever, and the government's shutting down 145 ailing thrifts - taking their losses out of the industry's results. Many analysts say the future looks bleak. "The central fact about the future of the savings-and-loan industry is this: It will be short," Robert Litan of the Brookings Institution wrote last year. "The industry - the whole industry, not just the weakest institutions - is doomed." IS THE INDUSTRY REALLY DOOMED? Others don't go that far, but most agree the industry will continue to shrink. Since 1980, the number of S&Ls has dropped from 4,005. Another 1,000 likely will disappear by 2000, erased by mergers and failures. Many survivors will shed their traditional role - financing mortgages - to provide other financial services. Eventually, thrifts seem sure to lose their separate identity as the key financial provider of the American Dream of home ownership. They may become indistinguishable from the companies they now compete with - commercial banks, insurers and other big lenders such as Ford Motor Credit. HOW DID S&LS RISE TO PROMINENCE? S&Ls sprang up in the 1800s to fill a niche that banks wouldn't bother with: Making long-term mortgages and holding them until they were paid off. But S&Ls had an Achilles' heel: The long-term, fixed-rate mortgage loans they made were financed by deposits that could be withdrawn any time. So depositors could pull money out of an S&L if they weren't happy with the interest they were earning. But if S&Ls offered higher rates to keep deposits, they could lose money because their earnings came from old, low-rate mortgages. WHEN DID S&LS START TO FALL APART? For years, the threat didn't surface. Interest rates were stable. The S&L business was simple, guided by the "3-6-3" formula: Pay depositors 3%, charge home buyers 6% - and hit the golf course by 3 p.m. When inflation surged in the 1970s, everything changed. Interest rates rose rapidly outside the S&L industry, whose deposit rates had been capped by Congress in 1966. Savers seeking higher returns pulled money from S&Ls and stashed it in new, higher-yielding money-market funds. Congress had a choice: Deregulate deposit rates and let S&Ls compete for savers' money or allow withdrawals to bleed them dry. THEN WHAT HAPPENED? Congress removed the lid on deposit rates in 1980. The next year, 85% of thrifts, stuck with low-rate mortgages while the cost of deposits took off, reported losses. Hundreds of S&Ls were damaged beyond repair. Regulators should have closed them right away. Instead, they let sick S&Ls use accounting gimmicks to hide losses. And Congress let S&Ls chase risky but potentially profitable ventures - like buying junk bonds. HOW DID IT GET WORSE? Opportunists and crooks flocked to the industry. They realized they'd make big money if the risks paid off, while the government's deposit-insurance fund would eat their losses. When oil prices plunged, burying the Southwest's economy, hundreds of S&Ls there went under. In 1989, the Bush administration and Congress gave regulators the money to put hopeless thrifts out of their misery. And the government has closed more than 600 thrifts the past 2 1:2 years. HOW ARE S&LS GETTING BACK ON THEIR FEET? As failed thrifts are buried, their losses are removed from industry earnings, boosting overall results and helping restore industry profits. Interest rates have cooperated, too. As short-term rates plunged the past year, thrifts cut rates they paid depositors faster than rates they charged borrowers, creating a wider profit margin on loans. Thrifts also have taken advantage of falling rates to sell government bonds and other securities at a healthy profit. HAVE S&LS LEARNED THEIR LESSON? Experts now worry that S&Ls have forgotten the lessons of the early 1980s. Some S&Ls are loading up on 30-year, fixed-rate mortgages to take advantage of the huge gap between short- and long-term interest rates. If short-term rates soar, those thrifts would be squeezed again - as they were a decade ago. "A lot of these thrifts are not protected. They're going to have their lunch eaten," says consultant Bill Carden of Waco, Texas. HAS S&LS' ROLE CHANGED? S&Ls' traditional role - holding long-term mortgage loans - is vanishing, replaced by a thriving secondary market in mortgages. Government-backed companies such as the Federal National Mortgage Association buy mortgages from S&Ls and other lenders, insure them against default, package them into securities and sell them to investors - like bonds. The secondary market has made mortgages less risky. Lenders now can easily sell mortgages to Fannie Mae if they need to raise money. SINCE IT'S SAFE TO INVEST IN MORTGAGES, WHAT WILL HAPPEN TO S&LS? Many thrifts will find a role. "Each of us sees our future in a different way," says Herbert Sandler, chairman of Golden West Financial Corp. in Oakland, Calif. Some will specialize in making mortgage loans, selling them in the secondary market, then collecting payments for the investors who hold them. Those thrifts will live off mortgage-origination and servicing fees. Others will make and hold mostly adjustable-rate mortgages, which protect them from swings in rates. But profit margins in those businesses are razor-thin. Only thrifts that can control costs will be able to compete. ARE ANY THRIFTS DOING EXCEPTIONALLY WELL? Golden West - owner of World S&L - is considered a model. By investing wisely in technology and guarding against waste, it's limited administrative expenses to about 1% of assets, half the industry average. Some S&Ls will become like banks, offering more consumer loans, for instance. Others will move away from lending and offer financial services to customers for a fee. "They will be selling mutual funds, annuities and insurance," predicts consultant Edward Furash of Furash & Co. in Washington, D.C. WHO WILL SURVIVE? Whatever they try, only the most efficient will survive. Competition is fierce and getting fiercer - as technology allows new players to offer financial services. Many companies simply won't be able to survive the tough new environment. "It's a rough world out there," says analyst Frank Anderson of Stephens Inc. in Little Rock. "Only the strong will survive." Bonus Editor: Michele Coleman. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM