>Posted on 16 Mar 1994 at 01:00:17 by Uriacc Mailer (002033)
>
>Who holds S&L Mortgages?
>
>Date: Tue, 15 Mar 1994 21:58:16 -0800
>Reply-To: [EMAIL PROTECTED]
>From: [EMAIL PROTECTED]
>
>Here's a question about S&L Balance Sheets:
>
>I was lecturing the other night to my adult-ed class at Baruch and
>was trying to talk about "disintermediation" and how all the nice
>homely local S&L's got stuck with 5% mortgages when interest rates
>skyed to 16% in the early 1980's. Now one of my student's insisted
>that in today's "financially innovative" environment S&L's would
>never get burned again because they can get rid of the
>inherent interest rate risk of home mortgages through "swap" and other
>hedging strategies. I responded that though they can diversify some
>of the risk, the asset base of the local S&L is still comprised mainly
>of home mortg's. Moreover, New York State banking laws restrict how
>active an S&L can manage their loan portfolio - otherwise they
>would all become arbitrageurs and leave their nice safe offices out
>in Queens and get a plush corner office on Wall street.
>
>So, who out there in Pen-L land can help me with a useful response to
>this nice student (yes, he is visting from mainland China, and yes
>we had an interesting discussion about planning) before next Monday's
>class?
>
>Thanks
>Jason Hecht
>
>
>------------------------------
>Jason Hecht
>[EMAIL PROTECTED]
>48 West 68th Street, Apt. 3A
>New York, New York 10023-6015
Well, I'm not sure what the student means by "swap", etc., but here goes.
Many housing lenders sell mortgages on secondary markets and only collect
fees for servicing the loans. This, however, is one-sided. S&L deposits
are liquid, and depositers can withdraw their funds on short notice.
Thus, if the rate paid on deposits fall below market rates, deposits are
withdrawn and new deposits are not made.
So, why can't the S&L simply invest in a portfolio with a higher rate of
return? Under old regulations, the simple answer was the bank is not
allowed to. With deregulation, S&L's have more freedom, but someone,
somewhere must be holding the original low-interest mortgages. Since
the latter are typically 30-year, fixed rate, they reflect an interest
rate gap between market rates and their own rates. To the extent that
a bank holds such paper in its portfolio, it can either sell below-market-rate
paper at a deep discount or continue to hold the paper. Either way,
the S&L's role of lending long and depositing short creates a precondition
for disintermediation.
The key point is not the S&L's increase liquidity under deregulation, but
rather its RELATIVE liquidity compared to other financial institutions.
With rapid inflation, it's like a game of musical chairs, with the institutions
having the lowest relative liquidity left holding the low-interest notes.
Marsh Feldman
Community Planning Phone: 401/792-2248
204 Rodman Hall FAX: 401/792-4395
University of Rhode Island Internet: [EMAIL PROTECTED]
Kingston, RI 02881-0815
