Rising Interest Rates Risky for S&Ls;, Regulator Says

Savings and loan associations, despite a post-stock crash reprieve from rising interest rates, face significant risk if rates begin climbing again, a federal regulator said Monday.

S&Ls; are much better positioned to withstand a rate run-up than they were in the early 1980s, when many were stuck with low-interest, long-term mortgages at a time of soaring rates.

However, Federal Deposit Insurance Corp. Chairman L. William Seidman warned the U.S. League of Savings Institutions that “data we have seen indicate your industry remains significantly exposed to interest rate increases.”

He urged S&Ls; to take advantage of rates, which dipped after the Federal Reserve Board pumped liquidity into the banking system in response to the Oct. 19 stock plunge, to restructure their loans and deposits to withstand any future rate run-up.

“Rates are moving lower now--Black Monday’s gift to your industry--but they were rising just a few short weeks ago. Preview your situation. Take advantage of this opportunity to readjust when you can,” he said.

James W. Christian, chief economist of the U.S. League, is predicting that fixed-rate mortgages will average 10.2% this year and 10.9% next year. But, he said, volatile swings around those averages are likely.

More than 6,500 people have gathered for the 95th annual convention of the U.S. League, which represents 3,400 thrift institutions.

Most are insured by the Federal Savings and Loan Insurance Corp. About 150 savings banks are insured by Seidman’s agency, in addition to more than 13,000 commercial banks.

Like Seidman, outgoing U.S. League Chairman Joe C. Morris sees a “silver lining” from the interest rate drop after the stock crash.

It “provides us with some optimism that most of the business will stay profitable over the first half of next year,” he said.

But he warned that a recession flowing from the stock plunge could make life difficult for thrift institutions in depressed regions. About 460 institutions, most in the oil and farm belts, are losing money.

“Even a mild recession would aggravate problems of well-run institutions in depressed areas,” said Morris, who finishes his one-year term as head of the largest thrift trade group this week.

Morris, who is chairman of the Columbia Savings Assn. in Emporia, Kan., said that it is not clear if mortgage lending will pick up because of the interest rate dip.

“There could be a very positive effect on mortgage originations, but in this world of uncertainty, you don’t really know if the customer will retrench,” he said.

Donald M. Kaplan, managing director of a Washington-based consulting firm, predicted that thrift industry earnings will continue to slide even if interest rates remain stable in 1988.

He said 2,700 healthy S&Ls; would likely post a return on assets of 0.42% this year, about the industry average of the last 20 years. That would be down from a 0.74% return in 1986. The return likely will slip by about 20% to 0.34% in 1988.