debt, but for our home-lending institutions, as well. The Subcommittee is familiar I'm sure, with the extreme financial difficulties faced by thrift institutions in recent years. One-fourth of the net worth of savings and loan associations accumulated over half a century disappeared in just two years; industry-wide, our associations lost $4.6 billion in 1981, and despite improving conditions in the fourth quarter, another negative $4.3 billion in 1982. Over 800 institutions either closed their doors or were merged out of existence in the course of the thrift crisis.

If interest rates remain relatively stable at today's levels for the remainder of 1983, our researchers forecast a "break-even" first-half with a slightly positive, perhaps $700 million, result for the year. We remain apprehensive about the particularly since nearly one-fourth

interest-rate outlook

of our deposits have been converted since the first of this year to the immensely popular Money Market Deposit and Super NOW accounts. While the deposit inflows are welcome, we

recognize that this is high-cost, current market-rate,

potentially-volatile, money. It is, in effect, day-in day-out money, which could leave in pursuit of other investment

opportunities if Wall Street rates should start to climb again dramatically.

Though we now have the deposit products to compete with the money markets, we remain handicapped by the legacy of

portfolios filled with low-yielding mortgage loans.

Eventually, with the broader asset powers provided by the last

Congress in the Garn-St Germain Depository Institutions Act of 1982 and increasing acceptance of adjustable-rate mortgage loans, we should be able to restructure these portfolios. at the present time, we must continue to live with some very sobering statistics: 55 percent of our mortgages on the books

But,

earn less than 10%, and 30 percent are under 9%. Many of these loans have 20 or 25 years left until maturity. Only 19% of our portfolio mortgage loans are above the current market, which is

about 12.5% nationwide.

Overall, our portfolio yield today is 10.6%. At the

present time our cost of money is a little over 9.6%, giving us an operating "spread" of less than 1%. While this is a vast improvement over the negative spread of 1.1% at this time a year ago, this is not enough to compete effectively and rebuild net worth. It is far below the historical 1.75% spread between yield on investments and cost of funds under which our

institutions operated successfully for decades.

One approach to our low-yielding loan problem, of course, is to package and sell loans to investors. This is not easy to do, especially in periods of rapidly- rising interest rates. And, just as our customers are attracted today by the highly-liquid short-term Money Market Deposit Accounts, investors generally prefer liquid short-term investments long-term mortgages in times of economic uncertainty.

-

not

Another approach is a "self-help" program where thrift

institutions make it attractive for existing long-term

borrowers to pay off their loans before maturity, so that they

might own their home "free and clear" of debt. Since

homeowners recognize that they can invest their disposable income in many other ways, our institutions must offer substantial "discounts" to appeal to those interested in fulfilling their loan obligations early. The loss of the mortgage interest deduction for the taxpayer is also a consideration in the calculation. In periods of high market interest rates the discount must, of course, be proportionately larger to induce the borrower to relinquish the mortgage.

From the point of view of the lender and the housing market, early pay-off has another important benefit. It provides fresh funds for lending to other home buyers. This is particularly important in the periods of rapidly rising rates generally, when deposit flows to traditional hometown institutions are in jeopardy.

Funds generated by early

retirement of mortgage debt of existing borrowers can be an important factor in keeping a local mortgage market functioning. The position taken by the IRS in Revenue Ruling 82-202 is a new barrier to encouraging early pay-off of mortgage debt by existing borrowers, particularly those with older, low-yielding mortgages. At the present time it has effectively halted discount programs by lenders. S. 1147 would reopen these opportunities for both lending institutions and their existing

borrowers.

In this period of declining and stable mortgage interest rates, early pay-off activity may be relatively modest. But, when rates skyrocket in the future, this legislation could

provide important benefits for home borrowers, mortgage lending institutions, and the entire housing sector of our nation's

economy.

Before concluding, I would like to make one observation about the revenue impact of this legislation. While we are not

aware at this writing of the Treasury's views, we would remind the Subcommittee that encouraging pay-off of mortgage debt involves some compensating revenue gain for the tax collector. The Treasury will gain some revenue through mortgage interest deductions no longer claimed by these home borrowers. That will moderate the revenue sacrificed uner S. 1147 if ordinary income is not immediately recognized on discounts as it would be under a strict application of Revenue Ruling 82-202.

Mr. Chairman, the U.S. League wholeheartedly supports S. 1147, the Mortgage Debt Forgiveness Tax Act of 1983. We encourage this distinguished Subcommittee and the Congress to process this worthwhile improvement in our tax code as soon as possible.

I have appreciated this opportunity to present the views of the U.S. League and look forward to your questions.

###

STATEMENT OF KEITH G. WILLOUGHBY, PRESIDENT, MUTUAL BANK FOR SAVINGS, ON BEHALF OF THE NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS, NEW YORK, N.Y.

Mr. WILLOUGHBY. Mr. Chairman, my name is Keith Willoughby. I am president of the Mutual Bank in Boston, Mass. I am here this morning representing the National Association of Mutual Savings Banks. We, too, greatly appreciate the initiative by you and Senator Tsongas in introducing S. 1147. We hope it will be successful. We would, however, propose that a more effective approach than the adjusted tax basis of the property would be one of complete forgiveness. I speak from some experience inasmuch as the institution I represent-that is, the Mutual Bank-did take advantage of Dave Cramer's program and we did have some of the reactions that he expressed.

We feel that no matter how conjectural or how far in the future that taxability of the discount may be, it still is going to be an impediment to those who are seeking to prepay their mortgages. Many of these people are middle aged, and for them the possible sale of their home is close at hand rather than far in the future. For anyone, as Mr. Pitt pointed out, there is a sacrifice of flexibility in terms of the future monthly payments that they would have to make, as well as giving up control of their funds. Consequently, the discount has to be greater in terms of its current value than what they believe they might earn at some point in the future. In the case of my institution, in order to get a response that was better than average I think it turned out to be the second best, Nation-wide, of the clients of Dave Cramer's organization-we had to offer a 13 percent effective rate to those who were prepaying their mortgages. This was at a time when our customers could not have put their money to work at a rate of 13 percent. In spite of that, the conversion rate that we had was only 11 percent of our mortgagors. That simply is not enough to have a meaningful impact on our assets structure.

Beyond that, to the extent that the cost of a program of this sort can be minimized in light of the already depleted capital positions in the industry as a whole, the impact on our capital position is reduced. This means that the day in which we might recover fully is hastened.

The Treasury's position on this, as I understand it, is one of just deferring the tax. We submit that this is an instance where subjecting the discount to the tax in effect shrinks the revenue base almost to the point of disappearing. In other words, it is the ultimate Laffer curve. If the discounts are tax free, it is not going to have any material impact on the Treasury's revenues in any case. In fact, I think the Treasury concedes that for most people the $125,000 exclusion for those over 55 means that even at some point in the future they won't be taxable.

Beyond that, as Mr. Cramer pointed out, this will reduce a major tax expenditure-the mortgage interest deduction—and in future years will thereby increase the Treasury's revenues. Finally, it will help to put our industry back into a fully taxable position at some point in the relatively near future, and will provide funds for housing that would not otherwise be available.

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