We really appreciate your efforts on this. It is my understanding that Representative Shannon is introducing a bill in the House that will do essentially the same sort of thing. We wish you well in your efforts.

Senator DANFORTH. Thank you very much, Mr. Willoughby.
[The prepared written statement of Mr. Willoughby follows:]

Statement

of the
National Association of Mutual Savings Banks

on
s. 1147, Mortgage Debt Forgiveness Tax Act of 1983

before the
Subcommittee on Taxation and Debt Management

of the
Committee on Finance
United States Senate

May 27, 1983

Summary of Principal Points

Although the savings bank industry is experiencing a modest recovery

in the present economic climate, it remains very vulnerable to increases in

interest rates.

The root cause of past problems and current concerns is the

industry's extensive holdings of low-yielding, fixed-rate mortgages.

Many institutions have embarked on programs designed to encourage borrowers to

prepay these older mortgages by providing the borrower with a "discount" for

paying off the loan prior to its scheduled due date.

Existing tax policy, however, imposes a serious penalty on the

borrowers participating in such programs and thus acts as a major disincertive

to consumer acceptance. The IRS has issued rules describing the income tax consequences of a typical situation where a homeowner prepays the mortgage in

exchange for a discount, and has ruled that the discount must be treated as

taxable income (Revenue Ruling 82-202).

s. 1147 would address this situation by overturning the IRS ruling

that the discounted amount is to be treated as income to the taxpayer.

The

savings bank industry strongly supports S. 1147 and similar legislation to

remove the Internal Revenue Code barriers to the successful operation of

programs to encourage the prepayment of low-yielding mortgages.

We believe that the preferable approach is to provide complete

forgiveness of the discounted amount of the prepayment.

This approach would

be simple for the lender to explain, the borrower to understand and the IRS to Statement

of the
Nacional Association of Mutual Savings Banks

on
s. 1147, Mortgage Debt Forgiveness Tax Act of 1983

before the
Subcommittee on Taxation and Debt Management

of the
Committee on Finance
United States Senate

May 27, 1983

Mr. Chairman, members of the Committee, my name is Keith Willoughby.

I am President of the Mutual Bank For Savings, Boston, Massachusetts, and am

appearing today on behalf of the National Association of Mutual Savings Banks

(NAMSB).

NAMSB is the trade association of the nation's savings bank industry.

Located primarily in the New England and Mid-Atlantic states, savings banks

are community-oriented financial institutions.

In the areas where they are

most heavily concentrated, savings banks are the largest holders of consumer

savings, as well as the dominant mortgage lenders among the various types of

depository institutions.

Later this year, NAMSB will be merging with the National Savings and

Loan League which represents a large number of savings and loan associations

located primarily in the Southern and Western states, and I would like to

point out that this statement also represents the views of the National

League. The total assets of institutions to be represented by NAMSB and the

National League are in excess of $350 billion.

We appreciate this opportunity to testify on s. 1147, the Mortgage

Debt Forgiveness Tax Act of 1983, and related bills dealing with the discharge

of mortgage indebtedness. Although the thrift industry is experiencing a

modest recovery in the current, more favorable, economic climate, it remains

very vulnerable to increases in interest rates.

The problems experienced by

the industry in the high interest rate environment of the recent. past and the

cause of our continued concern center on our extensive holdings of

low-yielding mortgages. The savings bank asset structure, for example,

remains heavily concentrated in long-term, fixed-rate mortgage loans acquired

in earlier years. Three-fourths of total savings bank residential mortgages

bear rates below 10 percent, and more than one-half of our loans have rates

below 9 percent.

Savings banks need a lengthy period of relatively low and

stable interest rates to work off low-yielding mortgages and thereby generate

the earnings needed to compete in a deregulated environment.

To augment this effort, many institutions have embarked on programs

designed to encourage borrowers to prepay these older, low-yielding mortgages.

Under such programs, the lender agrees to accept an amount less than the total

due on the mortgage loan if the borrower agrees to prepay the loan in full, or

to substantially increase the monthly payments (and thereby pay the loan back

sooner). In short, the borrower is given a "discount" for paying off his loan

prior to its scheduled due date.

To date, however, such programs have met with only mixed success. In

addition to tax considerations which I'll address in a moment, the great

disparity between open market rates and the mortgage portfolio yields that

existed during the 1980-82 period tended to discourage both lenders and

borrowers. Lenders--already hard pressed--could ill afford to offer the large discounts necessary to attract borrowers into prepayment programs. At the

same time, borrowers were enjoying an unprecedented rate of return on their

liquid assets and thus were reluctant to give up these yields to "buy out" the

principal amount of their mortgages even at a healthy discount.

While it is true that the "gap" between market rates and mortgage

portfolio rates has narrowed, this should in no way lessen the important role

which prepayment programs can play in enhancing the competitive posture of the

thrift industry. To the contrary, the narrower "gap" may well make such

programs more marketable, and it should be kept in mind that the restructuring

needs of the thrift industry call for eliminating not just low-yielding

mortgages, but also those fixed-rate loans that may be in the middle range of

investment returns. Thus, the introduction of S. 1147 and these hearings are

extremely timely.

These bills address a most critical component in making prepayment

programs feasible. It is obvious that in order for a program of this kind to

be a success, it must offer benefits to both parties. Existing tax law,

however, imposes a serious penalty on the borrower, and in turn, acts as a

major disincentive to consumer acceptance. Section 61(a)(12) of the Internal

Revenue Code states that the gross income of a taxpayer includes income from

the discharge of indebtedness.

Section 108 of the IRC provides certain

exceptions to this rule, but these do not cover the types of transactions we

are discussing this morning.

In fact, the IRS has issued rules describing the

income tax consequences of a typical situation where a homeowner prepays the

mortgage in exchange for a discount, and has ruled that the discount must be

treated as taxable income (Revenue Ruling 82-202).

s. 1147 would address this situation by providing an additional

exception to the general rule of IRS Section 61(a)(12) and, in effect,

overturn the IRS ruling. The savings bank industry strongly supports s. 1147

and similar legislation to remove the Internal Revenue Code barriers to the

successful operation of programs to encourage the prepayment of low-yielding

mortgages

Such a step not only represents a more logical tax policy, but

with banking deregulation proceeding apace, government policy should clearly

include maximum iacentives for asset restructuring by the thrift industry.