Fall 1983 – Issue 30 - Stanford Lawyer - Stanford University

of a whole variety of new mortgageinstruments, designed to adjust to orshift the risk of rate fluctuations.The legal issue thereby generated iswhether the terms of those instrumentswill be dictated more bymarket forces or by the regulatoryprocess in ways that impede theireffective use. The most sweepingargument for regulation of thedesign of alternative mortgage instrumentsis that lenders should notbe allowed to shift the risk of marketinterest rate increases to the borrower,who is less informed aboutsuch matters and less able to predicttheir future course. While it is nodoubt true that the average lender ismore sophisticated about financialmarkets than the average borrower,it is probably also true that theaverage mortgage borrower is betterhedged against inflation (through hissal~ry and real estate equity) thanthe typical S&L has been, and henceis the superior risk-bearer in thisinstance.The other arguments for regulationof mortgage instruments aremostly a familiar sort of consumerprotection rationale - a blend ofassumed consumer ignorance and afailure to recognize that the allocationof various risks in the contract isinevitably reflected in the priceterm. If the regulators were contentto place some sort of ceiling on theprepayment penalty, for example, itis hard to see how substantive regulationof the other areas of the contractcould be justified. But althoughflexibility in the design and evolutionof mortgage instruments is certainlydesirable, these issues probably donot impact institutional survival inany major way.The traditional S&L financed itsholding of a m.ortgage portfolio on abase of savings accounts, however,and here more problems are foreseeable.There is little specializedknowledge or skill needed to servicesavings accounts, and there arelarge-scale economies in storing theinformation and processing thetransactions. From the customer'sstandpoint, it is desirable to be ablequickly and cheaply to shift fundsamong different asset holdings andto access a secured line of creditwhenever needed. The broad-spectrumfinancial institution seems topossess substantial advantages overa savings specialist, at least for themore affluent customers who ownsecurities and write checks. But onlyabout 20 percent of adults ownstocks, and a significant fraction ofthe population still does not havechecking accounts. In competing forthe savings of this segment, broadspectrumofferings count for little.The savings specialist may still havea role, but it is a diminishing one.When the two functions of mortgagelending and savings receivingare combined in a single institution,additional difficulties emerge. Thedangers of short-term borrowingand long-term lending moved fromthe status of theoretical concerns toreal world nightmares in the 1970s,and of course adjustments weremade. New mortgage instruments ineffect shortened asset maturities,and new savings certificates lengthenedliability maturities. However, abalance has not yet been achieved.The thrifts have obtained constantlybroader lending and investment authority,which can also be used toproduce a shorter average maturityof assets. The Garn-St Germain Actof 1982 may have marked the culminationof that trend for the time being,with authority (albeit limited)for commercial as well as consumerlending, and for equipment leasing.But authorityis one thing, while itseffective exploitation is another. Asthrifts enter unfamiliar fields, whatcomparative advantages do theyhave over institutions already there?Are there production economies inadding general commercial lendingto real-estate lending, or a limitednumber of checking accounts to savingsaccounts? The answers are noteasy to discern.In short, the traditional savingsand loan association, with a mortgageportfolio supported by a savingsaccount base, does not seem agood candidate for survival. Even ifinflation stays down and mortgagerates decline toward what were onceconsidered normal levels, the competitivecircumstances of the pastwill not be restored.The Thrift Industryin the FutureIn what directions, then, may we expectthe thrift industry to evolve?There are a number of possibilities.Some institutions will join in the newfinancial conglomerates that areemerging. This process has beenunder way for some time, but it isnow accelerating: Citicorp, Sears,and Household International all ownsavings and loan associations. Someof the largest S&Ls may take thelead in making such combinationsand become nuclei to which otherservices are added. In either event,S&Ls have at present one great tacticaladvantage in the contest tocreate some nationwide financial institutions- they do not transformtheir parent companies into bankholding companies. That means theycan add other financial services,extend EFT networks (and evenbranches, if acquired in supervisorymergers) across state lines, largelyignore the Glass-Steagall Act byoffering securities services, and soon. This advantage is a legal artifactand may not be permanent, but it isof no small value while it lasts.What the geographic scale of thesenew financial conglomerates will beis not yet clear. Some will be nationalin scope, but others will probably beregional; the scale economies involvedare still being determined.But however much the IndependentBankers Association may pine forthe days of the local institution comfortablyprotected in its localmarket, the clock cannot be turnedback. That means that in the S&L14Stanford Lawyer Fall 1983