Chart III

Net New Deposits at Savings and Loans

The chart shows that net new deposits (deposits less withdrawals, not including interest credited) has declined dramatically at savings and loan associations. The data shows that the outflows in 1982 are expected to be in the vicinity of the record $25 billion outflow recorded in 1981.

fanfare, an innovative program to help lenders cut their losses. This program has been so successful in meeting lenders' needs that it has aggravated the corporation's capital problems.

The program I speak of is called the SWAP or Guarantor program. Simply put, it allows mortgage lenders to swap their unprofitable below mortgage rate mortgages for Mortgage Corporation Participation Certificates, also known as "PCs". Once these loans are exchanged for guaranteed Mortgage Corporation securities, lenders can borrow against them and thereby increase their liquidity.

Not surprisingly, the demand for this program is unprecedented. First offered to lenders in September 1981, the Mortgage Corporation has issued commitments of $17 billion as of May 31, 1982. Most of the corporation's $24 billion projected 1982 volume of commitments will occur in this program, which will assist in the financing of 400,000 homes and benefit all lenders: thrifts, commercial banks, mortgage bankers, and others. Nonetheless, without 'the capital needed to support additional swaps, this important liquidity tool will be lost to the housing finance industry.

Help for Lenders

In the short run, then, the Mortgage Corporation is making a significant contribution toward the survival of individual lenders by allowing these institutions to decrease their borrowing costs and increase their liquidity. Without additional capital, the Mortgage Corporation will have to reduce its volume of assistance to lenders

or raise fees, which will make more expensive the already prohibitive

cost of mortgage credit.

Failure to support this mechanism to swap old mortgages, as well as to maintain secondary market activity for continued lending, would only accelerate the decline of the housing and thrift industries. This decline, as you well know, has tremendous cost associated with

it.

In the long-run, thrift institutions can only continue to provide residential mortgages if they can be sure that they can sell those loans on the secondary market. As their deposit base has declined, savings institutions have declined dramatically as a supplier of credit. (See Chart 4.) Thrifts can continue to do what they do so well, the origination and servicing of mortgages. But lenders holding long-term fixed rate mortgages in their own portfolios will become increasingly rare.

Help for Thrifts

The Task Force representatives understood these harsh realities only too well. The Task Force also recognized that increased demand on the Mortgage Corporation must not result in increased demand on the Federal Home Loan Bank System, which has urgent needs to provide funds for its beleaguered members to meet mortgage lending and

withdrawal purposes now and for the future.

Chart IV

Suppliers of Domestic Credit Relative Shares

These pie charts show that deposit outflows at savings institutions have greatly reduced their ability to supply funds. Commercial banks now supply the U.S. credit markets with roughly four times the amount of funds being supplied by savings institutions. This is in sharp contrast to the situation five years ago when the two sources provided U.S. credit markets with roughly equivalent amounts of capital.