Taxpayers will rejoice that the thrift industry will never be quite the same after the Bush bailout legislation takes effect.
But when they switch to their consumer hats, they may regret the passing of an era in which ”teaser rates” dominated the adjustable mortgage market and generous interest rates prevailed for brokered certificates of deposit.
”The industry has to earn a living in this new environment of more stringent rules,” said Jonathan Gray, a thrift analyst at Sanford Bernstein & Sons in New York. ”If the taxpayer isn`t going to be paying, then the consumer will have to.”
Here`s what analysts, industry executives and regulators predict will happen to the S&L business-and its primary customer, the single-family homeowner-in the wake of legislation emerging from a congressional conference committee in a much tougher form than anticipated.
First, the savings and loan association, as a separate financial entity, will survive.
”There is still a need for a home financing vehicle, and I think the fact that this legislation was given top priority is evidence of the industry`s importance,” said John Owens, senior partner at Ernst & Young.
But its relative impact even in the home mortgage market will no doubt shrink significantly.
”The new capital standards say that any institution that doesn`t meet the requirements will be limited in its ability to grow,” said Gray. ”The S& L mortgage business traditionally grows by about 10 percent a year-that`s $90 billion-and that growth could be restricted by as much as half in the next three years-under sunny conditions.”
Second, the homeowner is going to notice the difference.
”Mortgages are going to be harder to get, and they are going to cost more,” said William O`Connell, retired chairman of the U.S. League of Savings Institutions, the once powerful industry lobbying group.
”We make a billion dollars worth of mortgages a year,” said Theodore Roberts, chairman of Talman Home Federal Savings & Loan Association of Illinois, a profitable thrift that would not meet capital standards under the new law because of a change in the way tangible capital is counted.
”If our growth is restricted and we can`t get new deposits to make loans, somebody is not going to get a mortgage,” he said.
Commercial banks, pension funds and other sources of mortgage financing undoubtedly will be able to pick up the slack, but they will do so at higher mortgage rates and fees with a constrained thrift industry, most experts say. The survivors in the industry are going to have to turn to ”more rational” pricing, as well, said Leo Blaber, president of the Federal Home Loan Bank of Chicago. ”There is not going to be any capital for gimmicks like `loss leaders.` If you examine the terms of adjustable mortgages and compare them to two years ago, you can see that mortgages are already getting more expensive.”
According to Talman`s Roberts, there won`t be a crisis in the mortgage credit markets, ”but we will see reduced availability and increased costs for a while.”
But the news isn`t all bad for consumers.
”I think the legislation that is coming out will allow consumers to put behind them all their fears regarding the safety and soundness of deposits,” said Jay Stevenson, Illinois deputy commissioner of savings and loans. ”All the dollars put into the funds to protect them should end the quiet runs on S& Ls we`ve been seeing.”
”In one way, the depositor comes out a winner, because no one is questioning the need to honor insurance contracts,” Roberts added.
From the industry`s standpoint, the outlook is for far fewer S&Ls, changing demographics and hard times.
”There will have to be significant consolidations,” said Donald Crowley, an analyst in the San Francisco office of Keefe, Bruyette & Woods Inc.
He sees three major areas of acquisition activity: sick thrifts that will be acquired with government incentives once the law sorts out the procedures; acquisitions of healthy thrifts by banks and a ”substantial merger of equals among thrifts.”
Stevenson predicts that the consolidation will go across industries and state lines.
Blaber predicts that in 10 years only 1,200 of the 2,900 thrifts in operation today will remain independent, but he forecasts there will be no shutdowns.
He also said he expects to see a number of large networks of thrifts emerge but is more skeptical of seeing a lot of acquisitions by bank holding companies.
”I know banks are looking, but they are very careful about how they employ their resources,” he said. ”Over the years, we`ve talked to lots and lots of banks, but we`ve seen very few checks.”
Though he said he couldn`t predict how long it might take for such major changes in the industry to evolve, James Christian, chief economist for the U.S. League, speculated that the midsize thrift will largely disappear.
”We will probably see a fairly large number of institutions serving the small community and a smaller number of giants, with not much in the middle,” he said.
”But I doubt that we will be in a situation where we will see a community with no thrift in a 50-mile radius,” Stevenson added.
Those left, even the healthiest, will have to struggle through the next several years, and analysts warn that only the most well managed will survive with their names over the door.
Surviving thrifts will be hit by a combination of higher premiums for federal insurance, combined with smaller dividends from the Federal Home Loan Banks (part of the regional Home Loan Banks` profits, once paid back to member thrifts as dividends, will be diverted to pay some of the cost of the bailout under one form of the pending legislation).
”The burden on the remaining thrifts will be large and will give banks a competitive advantage,” said Roberts.
”Several hundred thrifts will probably choose the shrinkage option to meet higher capital standards,” said Christian. ”They will shrink their assets, drop the rates on their deposits to make them smaller and probably sell their mortgages as securities.”
”I think that clearly we are going to see the survivors going back to single-family dwellings in the local community as their major asset,” said Stevenson. ”We are going to see less activity in participation loans scattered around the country.
”Thrifts are going to have to absorb a lot of costs through efficiencies,” he added. ”Management is going to have to be much more astute than it has ever been in the past.”
