RESCUING THE S&Ls; : The Changing Rules : Deregulation Haunting Home Buyers, Thrifts

President Bush’s proposal to strip federal savings and loan regulators of their independence is a vivid symbol of how government deregulation and inflation have ripped apart the once comfortable order of home mortgage lending in the past decade.

“In the old days, you had established financial institutions that took in money at low rates and lent it out at low rates,” said David Maxwell, chief executive of the Federal National Mortgage Assn. “And all of that has changed, and this is another step in that change.”

What Bush wants to do is place the Federal Home Loan Bank Board, the principal regulatory agency for the nation’s 3,000 federally insured thrifts, under the control of the U.S. Treasury as part of a $90-billion effort to clean up massive, expensive failures.

Stands for Problems

For several decades, the bank board has served as a symbol of the government’s commitment to housing. The U.S. agency was formed during the Depression to regulate and foster an industry that was to provide consumers a steady source of mortgage money.

Today, though, lax oversight by the bank board stands for much of the problems that now haunt the thrift industry. Though most thrifts do make money, several hundred are insolvent due to bad loans and must now be bailed out with taxpayer help.

Home ownership in the United States has long been an integral part of the American dream--a key symbol of family well-being, not to mention the generous deductions at tax time.

Under the bank board’s supervision, thrifts played a major role in financing the housing boom that followed World War II and transformed urban areas across the country. Thrifts in California grew to dominate the industry by financing huge housing booms in counties around Los Angeles and San Francisco.

Until the 1980s began, American homeowners were largely a pampered lot, accustomed to receiving cheap mortgage loans that were fairly easy to get and had fixed-payments over the life of the loan.

Thrifts had gained an all-American reputation from “It’s a Wonderful Life,” the 1946 Frank Capra classic in which Jimmy Stewart plays a squeaky-clean character who heads off a panic at his family’s savings and loan.

“Everything about this film gets the blood pumping in the right direction, straight to the heart,” said a review by Motion Picture Guide. “(The film) deals with middle-class values and around the edges of every problem, and joy is Capra’s personal stamp of sentimentality, or perhaps American sentimentality.”

Those days are long gone.

More typical today is an American public disgusted with the thought of having to bail out the industry. And homeowners today--those who can even afford to buy a house--pay market rates for home loans and often reel each time rising interest rates drive up the mortgage payments on their adjustable-rate loans.

Good Old Days Ended

How housing finance has changed so fast in just one decade is directly related to deregulation, much of which has been poorly timed and badly handled. As John Tuccillo, chief economist at the National Assn. of Realtors, put it: “People wanted deregulation in the worst way, and they got in in the worst way.”

The good old days of government succor for American housing really ended the day that Regulation Q was eliminated.

Regulation Q limited interest rates on savings accounts to 5.5% at thrifts and 5.25% at commercial banks--below-market rates that allowed financial institutions to make low-interest loans.

But on March 31, 1980, President Jimmy Carter signed a law that phased out Regulation Q, raised the maximum deposit insurance from $40,000 to $100,000 and expanded thrift investment powers. It was to be the first phase of federal and state deregulation legislation that was to badly disrupt the industry in the years ahead.

For consumers, the news was both good and bad--good because savers could earn higher interest rates on savings and bad because borrowers had to pay higher rates on home loans. Lenders had to boost loan rates to offset the rising deposit costs.

The rest is history.

As the decade wore on, the industry’s health was gradually undermined by a combination of factors, including the bank board’s lax supervision and poor-quality lending outside the area of home loans.

The present problems aside, many experts do not believe that housing needs special government attention any more, arguing that the huge demand for homes that followed World War II and continued for several decades has subsided.

“The demand for housing is not as great it used to be,” said Robert B. O’Brien Jr., chief executive of Carteret Savings Bank in Morristown, N.J. “I don’t know that we need a special housing finance industry anymore.”

Government figures show that housing construction fell from 2.02 million units at the end of 1978 to 1.62 million units at the end of 1987, the latest year for which annual figures were available.

Others argue that the old system of favoritism toward housing was simply unfair. “Since (former President Ronald) Reagan got in, there has been a feeling that housing is a spoiled brat that has gotten special attention for far too long,” said Sanford Goodkin, a real estate consultant in San Diego.

Today, the nation’s housing market is vast, complex and very much dominated by the competitive market forces. Lenders often sell their loans into the secondary market to quasi-government agencies such as the Federal National Mortgage Assn., and customers may go to commercial banks or mortgage bankers if they do not want to get a home loan from a thrift. Thrifts today make only about one-half the nation’s home loans.

At the same time, though, housing markets in urban areas such as Los Angeles and San Francisco have become all but unaffordable for most first-time home buyers because of rising interest rates and soaring real estate values.

What’s more, the problem is getting worse, not better, according to figures just published by the California Assn. of Realtors, an industry trade group.

At the end of last year, only 26% of the state’s households could afford a median priced home of $165,605. To qualify for that loan, the borrower would have to make more than $51,000 a year, the trade group said.

The outlook is worse in Southern California, where real estate values were white hot in 1988. In Orange County, it took a family income of $65,672 to afford a median priced home of $211,402, while it took an income of $55,942 to buy a median priced home of $180,081 in Los Angeles County.

Housing for the middle-class does exist, but it is far from the traditional city centers.