DECLINE IN NUMBER OF THRIFT INSTITUTIONS

Question: You saw some decline in the number of thrift institutions last year. I assume you are anticipating a further decline. Of what magnitude do you expect the decline to be in FY 82?

load?

Answer: We estimate a decrease of 130 institutions in FY 82.

Question: How do you expect this decline to affect your work

Answer: The decrease of 130 institutions amounts to a loss of little more than 3 percent of the Federal institutions. The estimated decrease in institutions is insignificant when compared to the problems faced by the S&L industry as a whole. The earnings squeeze and new powers given thrifts will cause an increase in our workload that will more than offset any decline due to a smaller number of institutions. In fact, to the extent supervisory mergers account for the decline, workload is increased.

LOW-YIELD MORTGAGES

Question: S&Ls are carrying a number of low-yield mortgages. Many of those mortgages were originally written for 30 years periods. Can you give us some indication of the volume of very low-yield mortgages being held and some indication of when the various low yield levels are likely to work their way out of the system?

Answer: At the end of 1980 S&Ls held approximately $66.4 billion in mortgage loans carrying interest rates below eight percent. These loans have an estimated initial maturity of 26 years. Of this total we estimated that some $5.9 billion in mortgage loans have rates below six percent and approximately five years remaining to maturity. Approximately $15.8 billion in mortgage loans have rates between 6.00 - 6.99 percent with an estimated 13 years to maturity, and approximately $44.7 billion in mortgage loans are at rates between 7.00 7.99 percent with an estimated 16 years to maturity.

HOW THRIFTS CAN INCREASE EARNINGS

Question: Thrift institutions, of course, finance long-term loans with short-term savings. During a period when savings are depressed, what steps can institutions practically take to increase their earnings and cover their commitments?

Answer: Normally, S&Ls do not have problems covering their loan commitments since they generally do not commit funds until they have them on hand. Three sources of funds for mortgage lending, other than savings flows, are mortgage payments from outstanding mortgages, advances from the Federal Home Loan Banks, and proceeds from sales of loans into the secondary mortgage market. As to increasing earnings, the options, particularly in the short term, are more limited. This is the basic problem now faced by S&Ls who are having to pay higher rates to obtain and retain savings deposits than they are earning from their mortgage portfolios. One step is increased use of adjustable rate mortgages which will alleviate the earning squeeze but will take time. For the present, lenders should do what they can to

encourage mortgagors to roll

over their outstanding loans. For example, S&Ls could offer to allow assumptions of outstanding lowrate loans at rates between the original and current market rates, or they could encourage mortgagors to pay off existing loans at a discount and refinance at higher rates.

FINANCING CURRENT COMMITMENTS

Question: What percentage of S&Ls are currently being forced to rely on assets (rather than savings) to finance current commitments?

Answer: As a rule, when an S&L faces problems it will decrease its loan commitment activity. It will not make commitments if funds are not available. In addition, current S&L liquidity ratios are well above the minimum requirements which indicates that S&Ls are staying liquid to invest in short-term high-yielding instruments instead of long-term fixed-rate instruments such as mortgages.

PROBLEM INSTITUTIONS

Question: Is there any pattern regarding the institutions encountering difficulties? Are smaller S&Ls for example, generally better or worse off than the larger ones today?

Answer: In general, the problems faced by the S&L industry are related more to regional factors than to size. Thus, S&Ls in New York, New England, Pennsylvania, and California seem to be in the worst shape. In the first three areas, the problems are the result of low mortgage demand, caused by stable populations, and low-interest long-term mortgages caused by state usury ceilings. The California institutions have been able to maintain mortgage lending activity but have a high cost of funds due to heavier reliance on jumbo CDs and reverse repurchase agreements.

RENEGOTIABLE RATE MORTGAGES

Question: Last year you were authorized to issue renegotiable rate mortgages. What has been the experience to date with this authority?

Answer: In June, 1980, the volume of RRMs was $900 million. By December, the figure had increased to $5.2 billion. Of the total increase in mortgages in the second half of 1980, about 20 percent was in RRMs. Two things should be kept in mind in trying to assess the impact of the RRM to date. One is that the concept is still a fairly new one to both lenders and borrowers. The second is that the RRM as it exists may not provide lenders with sufficient flexibility. In fact, we are aware that many S&Ls have stopped making RRMS altogether recently because they believe the instrument lacks the rate and payment flexibility they need and are awaiting the Bank Board's revision of the current RRM regulations.

EXAMINATION FREQUENCY

Question: How often do you examine/audit a generally healthy institution?

Answer: In mid-1980, OES adopted a variable examination scheduling system in order to focus the examiner staff on supervisory problems while, at the same time, reducing the cost and burden of examinations for relatively problem-free institutions. Under this system, examinations are scheduled on the basis of the rating of the association on the last examination. Current guidelines provide for examiners to begin examinations of institutions with no supervisory problems every 16 months and of institutions with minor supervisory problems every 15 months. For the first quarter of FY 1981, the actual average "cycle times" for these institutions was 15.3 months and 15.0 months respectively. OES is considering lengthening these cycle times once it implements a computer-based monthly monitoring system in all examination offices. OES will implement this on-line system in March 1981.

Question: What are the principal indications that an institution is encountering difficulty?

Answer: Principal financial indications that an institution is encountering difficulty include:

o negative net operating income and capital losses, particularly over several months and particularly for associations with less than 2-3% net worth as a percentage of assets;

o high interest and dividend costs for borrowed money and certificate accounts and/or a decreasing average maturity for these liabilities requiring more frequent rollover, particularly for associations with a low return on invested assets;

o in terms of lending, a loan portfolio with a high or increasing loan delinquency rate. Also, radical departures by an association from established lending policies or entrance into new types of lending (e.g., construction loans);

speculation in forward commitments;

o high or increasing operating expenses including overinvestment in office quarters;

o a change in accounting treatments to defer losses and recognize gains before earned.

Additionally, we would consider a number of non-financial items as indications of potential difficulty including major management changes or rapid turnover among key personnel, dissension among directors and use of the association by key officials for personal private enrichment.

Question: How often would you examine an institution that met these criteria?

Answer: Under the variable examination scheduling guidelines implemented in mid-1980, institutions with difficult supervisory problems are to be examined every 6 months. With respect to this category, examiners may substitute a full examination with a "special" limited focus examination in order to speed up the review and

preparation of the report.

However, they must conduct a full examination at least once a year. In addition, there is continuous monitoring of the financial operating condition of these institutions by district staff. The actual average "cycle times" for examinations of these institutions in the first quarter of FY 1981 was 10.0 months and 7.5 months respectively.

INSURANCE PREMIUM RATE SCHEDULE

Question: Please provide for the record a rate schedule for FSLIC insurance on savings accounts.

Answer: The premium rate is set by the National Housing Act at one-twelfth of one percent per annum of the total of all accounts of the insured depositors of each insured savings institution.

PREPARED STATEMENT

[CLERK'S NOTE.-The following statement was submitted by Senator Proxmire for the record.]

STATEMENT OF SENATOR PROXMIRE

As you know, the construction of the new Federal Home Loan Bank Board building has been the subject of a great deal of controversy over the past few years. The last Chairman of the Board under President Carter, Jay Janis, was extremely concerned over the way in which the construction of the building had been handled and was prepared to hire a private law firm to investigate certain allegations of improper procedures and practices in the awarding of contracts for the interior design and furnishing of the building. I felt that this would create an unnecessary expense and suggested that the General Accounting Office be asked to look into the matter. With Chairman Janis' concurrence, I wrote a letter to Comptroller General Staats on May 1, 1980, requesting an investigation of the way in which the interior design and furnishing of the building was handled. I also asked the GAO to look into the use of Bank Board automobiles.

Although the GAO report has not been published, committee staff has been briefed regarding the details of the GAO's findings and I would like to ask a few questions today to determine whether or not the abuses uncovered by the GAO could recur. I am particularly interested to know whether systems are in place to prevent such a

recurrence.

I want to say at the outset that the Board cooperated fully in the GAO study and if my questions seem critical, they are in no way meant to impugn the ability or dedication of those currently working for the Board.

QUESTIONS SUBMITTED BY SENATOR PROXMIRE

FHLBB - HUNTER/MILLER CONSULTATION SERVICES

Question: On March 3, 1975 the Board contracted with Hunter/ Miller and Associates to perform certain consultation work having to do with space planning, interior design and development of the new building. The total value of the contract was $615,826. On April 8, 1976 the Board terminated the Hunter/Miller contract and made a $300,000 termination payment to the firm on October 30, 1976. However, I understand that the Bank Board's Audit Office found that the Board should have paid only $30,000 to the firm. Is this correct?

Answer: I have been informed of an audit report, from which it can be concluded that the Bank Board should have settled the HunterMiller contract for $30,000. The report is dated March 10, 1978, but the files are silent as to what transpired after that date. Answering your question is made all the more difficult by the fact that the persons who may have acted on the report are no longer with the Bank Board. The report which only most recently came to our attention, was surfaced as part of the GAO review, which was jointly requested by the Chairman of the Bank Board and Senator Proxmire. Because we are uncertain as to what actions may have been taken in the past, our Office of General Counsel is reviewing the Bank Board's position, in light of the GAO findings, to determine whether legal action to affect recovery would be sustainable. You may be assured that we will move quickly to conclude this matter.

The Board is reviewing the entire matter and when the amount of overpayment is determined appropriate action will be taken.

Question: I also understand that the Bank Board did not refer the settlement proposal to its audit office before review until December of 1977, more than one year after the termination payment had been paid. This seems to be a clear violation of the Federal Procurement Regulations because the review should have been made before payment. Can you give us any idea of why the settlement review was delayed for so long a period of time and tell us whether procedures have been put in place to prevent a recurrence of this problem?

Answer: The settlement proposal on the Hunter/Miller contract termination was not forwarded to the Board's Audit Office until December 1977, more than one year after the termination payment had been made. This was contrary to 41 C.F.R. $ 1-8.207. The only explanation the Board can offer for this delay is that there was a mistake or oversignt. The Board's Internal Evaluation and Compliance Office is in the process of conducting a comprehensive review and audit of the Board's contracting procedures and practices. When this review and audit is completed, the Board intends to establish new procedures in the contracting and audit areas to ensure that none of the problems encountered in the Hunter/Miller termination oc

cur.

TATE ARCHITECTURAL PRODUCTS, INC.

Question: Apparently a good many procurement problems were uncovered in the course of the GAO's investigation of the way in which building construction was handled. For example the Board entered into a one-year contract with Tate Architectural Products on Sept.