Key Congressmen May Force S&Ls; to Focus on Home Loans

Times Staff Writer

Key congressional leaders preparing the savings and loan rescue legislation said Tuesday that they want to force S&Ls; to concentrate more intensively on making home mortgages.

This would be a dramatic reversal of deregulation policies of the 1980s, when Congress, the Reagan Administration and state lawmakers in California and Texas allowed thrifts to expand into risky new businesses.

Wants Tougher Rule

Sen. Donald W. Riegle Jr., a Michigan Democrat and the Senate Banking Committee chairman, said a rule requiring 70% of S&Ls;’ assets to be invested in home loans or mortgage-backed securities would be “very reasonable and sound.”


On the House side, Rep. Frank Annunzio (D-Ill.), whose financial institutions subcommittee will write the industry rescue bill, wants an even tougher rule. He would require S&Ls; to put 80% of their investments in mortgages and insist that loans be made within 50 miles of an S&L;'s branch office.

“We want to return S&Ls; to the business Congress intended,” Annunzio said.

Many lawmakers blame the current industry crisis, with hundreds of insolvent thrifts, on the free-wheeling climate of the 1980s, when S&Ls; got into trouble by investing in shopping centers, office buildings and raw land whose value disappeared with the collapse of oil prices in Texas.

Disasters hit S&Ls; in California after the state Legislature allowed them virtually unlimited investment powers and thrifts entered risky businesses such as restaurants, windmills and horse-breeding farms.


Under current laws, S&Ls; theoretically should keep 60% of their investments in housing-related activities. But this definition has received liberal interpretation by regulators. S&Ls;, for example, are allowed to count investments in government securities and other financial instruments toward the 60% level.

But on Tuesday, Riegle, in a Banking Committee hearing, and Annunzio, in an interview, both made it clear they will work hard to redirect S&Ls; toward home mortgages.

Describing “the regional character of the disaster,” Riegle noted that big losses befell S&Ls; in Texas and California that ventured into businesses besides housing.

Sen. Richard H. Bryan (D-Nev.), supported Riegle’s view, saying S&Ls; that survived in good health “stuck to their knitting” by concentrating on home mortgages.

Annunzio, whose subcommittee begins hearings today on the S&L; legislation, said thrifts should restrict themselves to their original mission in housing: “We want investments to be as safe as a mother’s arms. The big flaw in the Bush plan is that a Republican Administration cannot disavow regulation. They can’t admit they made a mistake.”

Under Annunzio’s plan, 80% of investments would be in mortgages on single-family homes or units for not more than four families. To spur construction of “starter” homes, an S&L; also could invest in building and sales of houses priced at not more than 60% of the cost of a median-priced home in a local area.

The S&L; industry is expected to fight hard against any efforts to limit its ability to invest outside mortgage lending. S&Ls; feel they need extra powers to provide business opportunities when interest rates are high and the mortgage market dries up.

‘Shocked’ by Testimony


But the industry faces a challenge in Congress, where members are angry. The Senate Banking Committee greeted with scorn Tuesday a proposal by the U.S. League of Savings Institutions to merge the sick S&L; insurance fund with the healthy bank insurance fund.

“It seems to me you’ve already destroyed the industry,” Sen. Richard Shelby (D-Ala.) told U.S. League Chairman Barney Beeksma. “You have no credibility here today.”

Bryan observed: “I was frankly very shocked by the tone of the testimony. In effect, what I see is: ‘Don’t change anything. Let’s have business as usual.’ ”

But Treasury Secretary Nicholas F. Brady, in testimony before the Senate Appropriations Committee, defended the Bush Administration plan to spend $90 billion to close or sell insolvent thrifts.

He argued that it is better to exclude from the federal budget the bonds that would be used to raise much of that money because the industry itself is also making a big contribution.

Times Staff Writer Michael D. Shear in Washington contributed to this story.