S&Ls: a dying breed - New Mexico savings and loan associations - Financial institutions: the banking blues

New Mexico Business Journal, June, 1991 by Arlene Cinelli Odenwald

S&Ls: A dying breed?

Thrifts - whose asset portfolios comprise single family mortgages - may become relics of the past in New Mexico because of a market that no longer has a need for the kind of services they used to provide.

Today's market makes it nearly impossible for traditional thrifts to make a profit.

The spread between the interest they get on single family mortgage loans and the interest they have to pay out to attract depositors is too thin - sometimes non-existent.

"Market forces are driving thrifts down the tubes," says Robert Heyman, attorney with Sutin, Thayer and Browne.

To understand how and why this is occurring requires an understanding of the history of thrifts and the economic environment in which they thrived.

Traditionally, thrifts' sole business was making single family mortgage loans and making them with money they collected through savings deposits from more or less the same customers; except, of course, that thrifts made residential mortgage loans.

This system made sense in a stable economy where real estate values went up and interest rates were stable.

Even though S&Ls were locked into low-yielding, long-term mortgages, the market interest rate stayed the same over the same period of time. It was a very simple business, Heyman says.

But then things began to change.

Inflation drove up interest rates, and to compete, Congress made sure thrifts could offer a slightly higher interest rate than banks.

But what Congress does for one market environment does not always work for another one, Heyman asserts.

Soon banks and thrifts were besieged by another kind of money instrument: Money market funds.

Insurance companies and stockbrokers began offering consumers higher rates of interest on deposits than banks or thirfts could.

"Banks and thrifts are typical intermediaries. When I put my money in a bank, the bank invests it either in money market instruments or in a loan," says Heyman.

"But today, consumers can go straight to the treasury department and buy bonds," he adds.

By allowing banks and thrifts to pay market rate on deposits, Congress eliminated the advantage thrifts had had over banks. But thrifts were still faced with low-yielding, long-term mortgages.

Congress, therefore, allowed thrifts to issue variable interest rate loans. Congress gave thrifts the power to make the same investments as banks - commercial loans.

"They also gave thrifts additional rights. They allowed thrifts the right to invest in real estate," Heyman says.

Thrifts could then develop subdivisions and they could convert from mutual ownership to stock ownership to acquire more capital.

Suddenly thrifts had a lot of money. They were attracting depositors because they could offer market rates. To continue to pay consumers high market rates on their deposits, however, thrifts had to chase after higher-yielding investments - that is, riskier investments.

This led many thrifts into junk bond investments.

The problem with thrifts buying into the junk bond market is that they didn't have the manpower to assess whether a corporation was creditworthy or not. They relied on major stockbrokers to do this for them.

Because thrifts needed to get a higher return on their investments, they were driven to junk bonds.

But junk bonds depend on a booming economy; the only way junk bond people can repay their debt is to have a little inflation and lots of earnings.

The economy soured; the gamble didn't work. The sordid side of the story is that thrifts didn't risk their own money. Taxpayers got the bill.

Because of the enormity of the tab, Congress reacted by passing the Financial Reform, Recovery and Enforcement Act of 1989, which took away the liberal accounting practices and unrestrained investment allowances Congress had given the thrifts in the early '80s.

In fact, FIRREA has left many S&Ls, which had grown used to operating under the more lenient regulations, smarting. Some have even had to close under the new, more stringent regulations. Heyman believes that, through FIRREA, Congress is legislating thrifts out of existence.

The reason?

"It's a different market today," says Heyman.

It's no longer necessary to have thrifts making single family mortgage loans.

"So the market place is sort of eliminating the whole point of having a thrift industry as a single family mortgage industry at the same time that Congress is saying you can't do anything else," Heyman says.

"Congress is saying that the 1980 legislation that gave you an opportunity to survive was a bad experiment.

"The only thing we want you to do is single family mortgages, but the market is saying we don't want you to do these mortgages; we don't need you anymore," contends Heyman.

NM S&Ls: Chasing their tail

New Mexico thrifts are still suffering, primarily because they've spent the last couple of years chasing their own tails.

"New Mexico thrifts suffered basically because they had to chase investments out of state - Texas, Colorado, Arizona - because there weren't enough places in New Mexico to invest their funds," says Heyman.