WASHINGTON - The savings-and-loan bailout plan is
intended to restore that industry to health.
But in the process, the market for securities that are backed by
home mortgages may suffer some ill effects of its own.
The dramatic consolidation of savings institutions is causing a
wave of selling of those securities.
This kind of activity, mortgage experts say, could persist for
two years, though they are divided about the extent to which such
selling could drive down the prices of the securities, or even throw
the market into a slump.
Some analysts say the market has matured and has certain
strengths that will help it survive heavy selling.
Perhaps most important, there are some new players, including
commercial banks and big pension funds.
And Wall Street has come up with some new, more flexible
mortgage products to appeal to a broader array of investors.
But the bailout plan makes one thing certain: Both healthy and
insolvent savings units will be shedding assets to raise cash.
Some will need capital to bolster reserves and improve their
financial health, to meet the stricter guidelines of the new law.
Those that are closing will need capital to pay off depositors.
According to James R. Barth, chief economist for the Office of
Thrift Supervision - the former Federal Home Loan Bank Board - which
is overseeing the bailout, the assets most likely to be sold first
are mortgage-backed securities, which are among the most liquid
assets in the typical savings and loan's portfolio.
In fact, analysts are predicting that savings institutions may
eventually sell as much as $180 billion in mortgage-related
securities to Wall Street dealers in the next two years, about
one-quarter of the outstanding issues.
The securities generally consist of thousands of individual
homeowner mortgages bundled together in pools.
The Wall Street dealers, who act as intermediaries for the
securities, say they are becoming uneasy about the prospect of
finding investors for these securities for several reasons.
- Because mortgage rates have fallen in recent months,
increasing numbers of home buyers are seeking fixed-rate 30-year
loans, instead of adjustable-rate mortgages. The June survey by the
Federal National Mortgage Association, or Fannie Mae, showed that
the number of fixed-rate loan applications rose 34 percent over the
priormonth, three times the growth of adjustable-rate mortgages.
The mortgage securities market is predominantly for fixed-rate
mortgages, which are more liquid, and will have to absorb these new
- People already holding adjustable-rate mortgages are
expected to swap them for fixed-rate loans to lock in lower interest
rates, further swelling supply. Drexel Burnham Lambert Inc. reports
that this activity could add a net of $8 billion to $28 billion to
the mortgage marketplace over the next several months.
- As a result of the April 1987 bond market crash and the
October 1987 stock market crash, many brokerage firms that handle
mortgage-backed securities have cut their staffs and the risk
capital committed to dealing in the securities. The ability of the
mortgage market to handle unusual activity is thereby weakened, some
mortgage executives said.
Already, the sales of mortgage-backed securities by savings
institutions and the fears on Wall Street about the extra supply
have driven up mortgage yields by 30 to 50 basis points over
Treasury market yields since the beginning of the year.)
The yield spread between these two markets is a measure of how
well mortgage securities are performing.
When the yield on a mortgage security rises significantly faster
or falls significantly slower than yields on Treasury notes of
comparable maturity, it is a signal that investors are demanding
price discounts. …