Comptroller Weighs Investment Ban on Unregistered Mortgage Securities

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WASHINGTON -- The Comptroller of the Currency is considering a ban on investments by national banks in mortgage-backed securities unless they are registered under the Securities Act of 1933 or rated by a nationally recognized rating agency, Deputy Comptroller Michael Patriarca said Tuesday.

"We're questioning now whether national banks can safely and soundly purchase an unrated and unregistered security," said Mr. Patriarca at a hearing called by the general oversight and investigations subcommittee of the House Banking, Housing and Urban Affairs Committee.

"While such investments may be appropriate for some investors," Mr. Patriarca said, "We doubt that they meet the standard of prudence expected of those institutions holding federal deposit insurance."

The subcommittee hearings, designed to explore the scope of problems in the mortgage securities market, were prompted in large part by BankAmerica Corp.'s $95 million fourth-quarter writeoff from losses in connection with mortgage securities deals.

For the most part, witnesses from both government and the private sector said, however, that BankAmerica's problems were largely of its own making, and not the result of inherent flaws in the secondary mortgage marketplace.

Said A. David Meadows, associate director, division of bank supervision for the Federal Deposit Insurance Corp., "The problems in the secondary market appear to be the fault of the people dealing in the market, not the market, per se."

Still, witnesses suggested that better vigilance by the management of banks and thrifts investing in mortgage securities, improved underwriting standards and more careful scrutiny by insurers of what they're insuring would help make the market safer.

The secondary mortgage market has grown phenomenally during the past decade, doubling in size from 1979-1982 alone. The market's size now stands at nearly $370 billion, according to Laurence D. Fink, managing director of First Boston Corp., an investment bank that's very active in the market.

Only a small portion -- estimated to be perhaps no more than 5% -- of the market consists of unregistered or unrated securities. But these pose the biggest dangers for banks because it is much more difficult to obtain the full range of information necessary to make proper credit evaluations, said Mr. Patriarca.

With unrated and unregistered securities, he said, "investors are left to their own devices in amassing information and making judgments concerning properties, appraisers, issuers, insurers, trustees and others that may be located diversely and remotely from the investor." As a result, investors often rely only on the representations of the issuers, leaving them open to some nasty surprises. …