the physical condition of the structure, the probability that changes in the neighborhood will adversely affect value, and the likelihood that the general community will suffer economic decline or population loss. Further, risk in connection with home mortgages is not limited to the chances that the underlying value of the property will decline. Rather, it includes the financial risk to the association involved in creating and holding a fixed-term, fixed-interest asset the risk that unexpected changes in interest rates will reduce the value of the mortgage itself. This, of course, is precisely what happened during the past decade and the reason why the savings and loan industry is in a state of crisis. Thus, the Board's apparent assumptions about risk are both inadequate and misconceived. Third, the Proposed Rule is based on the assumption that direct investments will reduce the funds available for financing home purchases. Indeed, Professor Benston's study strongly suggests that direct investments actually increase the mortgage-making activities of associations. The relatively short-term nature of direct investments means that funds are continuously available for new mortgage investments. Finally, the undeniable fact is that savings and loans are specialists in home financing, with experience and skills that give them an important comparative advantage in doing business in the home financing market. It is highly unlikely that the industry, or any significant number of associations. would abandon home financing and surrender these competitive advantages. Moreover, the Board's apparent assumption that direct investments will reduce funds available for home mortgages is questionable for another reason. The single most significant change in the home financing market that has occurred in the past decade is the development and remarkable success of a secondary market in mortgages. Through the use of such instruments as mortgage-backed secunties. mortgages are now financed and held by a wide range of investors. The growth in this secondary market has been rapid. Since 1979 the value of home mortgages held by the secondary mortgage market has been growing much more rapidly than the value of home mortgages held by savings and loans associations: Thus, in 1982 and 1983 combined, while savings and loans saw a net decline of 5 billion in home mortgages heid, the secondary market increased its home mortgage holdings by approximately $135 billion. In percentages. the share of the net increase in home mortgages held by savings and loans dropped from 55% in 1976 to 22% in 1983 while the share held by the secondary market rose from 19% to 69% in the same years.* The significance of the new secondary market is obvious. Savings and loans are simply no longer the only or dominant source of funding for home financing, and they are no longer critical to mortgage organization. There is, indeed, no evidence to suggest that the savings and loan industry as now constituted - or the thrift industry in general — is necessary to maintain a viable home mortgage market. Consequently in terms of home mortgage financing, there is no rea son why savings and loans should not be permitted to make significant amounts of direct investments. In view of the powerful reasons why direct investments are necessary for the financial health of the savings and loan industry, only overwhelming evidence of imminent and acute risk from direct investments could rationally justify the Proposed Rule. Professor Benston's study, with which I concur, demonstrates that the Board's assumptions are apparently without foundation and that the Proposed Rule could seriously harm the savings and loan industry. -Thus, the Proposed Rule is, in my opinion, unsound in principle and unsupported by the evidence. I understand that Lincoln Savings and Loan Association has requested that the Board allow me to meet with it or its staff in order to discuss my view that the Proposed Rule is unwarranted and could prove harmful if put into effect. I hope that the Board will agree to such a meeting, and I am prepared to meet with the Board or its appropriate staff members in Washington at the earliest possible time. I appreciate this opportunity to express my opinion about the Proposed Rule. and I hope that the Board will give me the opportunity to discuss the issue with it further before it reaches a final decision in this matter. Very truly yours. Дайрей go Apparently the FHLB Bank of San Francisco leaked the closing of the Bass deal, the purchase of FCA in Stockton, California. So Bass has cancelled his preempted announcement. However, there will be private signing in Washington with Danny Wall on January 28 at the PHLBB. It will be closed to all except you and Congressman Lehman, if you want to attend. There will be a future public ceremony in Stockton. If you would like to put a statement in the press kit of the FHLBB, I'll have Murray contact Carl Hoyle at the PHLBB. Only you and Congressman Lehman will be permitted to have press statements in the Press Kit. Mr. Bass is available to meet with you anytime early next year to discuss thrift issues at your convenience. PS. (1) I talked to Goldsmith - suggested sure set up a meeting early next year with FSLe fohim. agreed and (2) I talked to Kelry Meek, Cony Sonyales (3) The Bass Group may do a public event SPECIAL COUNSE MEMORANDUM OF UNDERSTANDING BETWEEN LINCOLN SAVINGS AND LOAN ASSOCIATION गार This memorandum is dated as of February 1988, by and between the Federal Home Loan Bank Board ("FHLBB") and Lincoln Savings and Loan Association, Irvine, California ("Lincoln"). WHEREAS, the Federal Home Loan Bank of San Francisco ("FHLBank S.F.") commenced an examination of Lincoln on March 13, 1986, which resulted in a Report of Examination dated April 20, 1987; Lincoln filed a written response dated June 26, 1987; the Office of Enforcement of the FHLBB also began an investigation into certain practices and transactions at Lincoln in February 1987; and WHEREAS, Lincoln is in the process of applying with the FHLBB for the acquisition of another FSLIC-insured institution that is a member of the Federal Home Loan Bank of Seattle ("FHLBank - Seattle"), and in connection therewith, Lincoln is also applying to transfer its headquarters to the Twelfth FHLBank District and hence, transfer its membership |