Economic Report of the President

they once had and thus cannot continue to channel funds to housingat artificially low interest rates. Although changing competitive conditionsmay mean a somewhat higher and more variable cost of fundsfor thrifts, the new regulatory environment should help to stabilizetheir deposit flows and hence the supply of mortgage funds. Furthermore,the Federal Government has supported the expansion of secondarymortgage markets to attract additional capital into housing.The secondary market institutions—the Federal National MortgageAssociation (FNMA), the Federal Home Loan Mortgage Corporation(FHLMC), and the Government National Mortgage Association(GNMA)—have expanded the scope and volume of their activities.Market acceptance of new financial instruments like the mortgagebackedsecurities issued by these institutions has grown, thus cementingmore firmly the link between capital markets and mortgagecredit. GNMA securities alone have increased to more than $90 billionin the past 3 years. While these developments in financial marketsshould tend to increase the variability of mortgage interest rates,they should also tend to reduce the cyclical swings in mortgagemoney availability. It is too early to tell whether these changes willmean more or less cyclical variation in home sales and residentialconstruction.Depository InstitutionsBanks and thrift institutions now operate in a much more competitiveenvironment, and the risks associated with interest rate swingsare much greater. Partially offsetting these developments are thebroader range of financial instruments they can offer and their expandedlending powers.But legal and regulatory limitations still exist that, if liberalized,would allow further adjustment to new financial conditions. Currentlaw, for example, restricts banks and thrifts from expanding into naturalmarket areas. A recent Administration study concluded that aliberalization of Federal restrictions on geographic expansion bycommercial banks would increase banking competition in local marketsand result in more and lower priced services. Some tentativesteps toward the removal of the barriers to geographic expansionlikely will occur in coming years. There may also be a further looseningof the asset restrictions on thrifts and commercial banks—for instance,allowing thrift institutions more leeway to make businessloans or allowing both types of depository institutions broaderpowers to hold financial futures contracts and stocks, and to underwritebond issues and insurance.Even with changes like these, however, some institutions will find itdifficult to adjust. Since the government shaped the financial worldthat existed when these institutions were founded, it now faces the113