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debt, but for our home-lending institutions, as well.
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.
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
of our deposits have been converted since the first of this
year to the immensely popular Money Market Deposit and Super
While the deposit inflows are welcome, we
recognize that this is high-cost, current market-rate,
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
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
55 percent of our mortgages on the books
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%.
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
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
in times of economic uncertainty.
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.
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.
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
rates, early pay-off activity may be relatively modest.
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
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.
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.
encourage this distinguished Subcommittee and the Congress to process this worthwhile improvement in our tax code as soon as
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 ASSOCI. ATION 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
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.