FIRST, DIRECT COMPETITION BETWEEN FINANCIAL INSTITUTIONS, INDEPENDENT BUILDERS, AND DEVELOPERS IS UNEQUAL AND UNFAIR. THE FINANCIAL INSTITUTIONS HAVE THE INHERENT ABILITY TO SECURE SITE FINANCING AT MORE FAVORABLE TERMS THAN ARE AVAILABLE TO INDEPENDENT COMPANIES. THE FINANCIAL INSTITUTIONS CAN EXTEND MORE FAVORABLE CONSTRUCTION AND MORTGAGE FINANCING TO THEIR PROJECTS. THEY CAN PROCESS THEIR OWN HOME BUYING CLIENTS FASTER. THEY DO NOT HAVE TO SHOW THE SAME PROFIT AS AN INDEPENDENT IN ORDER TO STAY IN BUSINESS BECAUSE THEY WILL NOT FORECLOSE ON THEIR OWN PROJECTS AND CAN SUBSIDIZE THEIR DEV ELPOPMENT OPERATIONS WHEN NECESSARY FROM THEIR PARENT OPERATIONS. A SECOND PROBLEM IS ANTI-COMPETITIVE PRACTICES BY FINANCIAL INSTITUTIONS. NORMALLY, THIS TAKES THE FORM OF PREFERENTIAL LENDING. THE FINANCIAL INSTITUTION OFFERS BELOW MARKET CONSTRUCTION AND MORTGAGE FINANCING ON PROJECTS IN WHICH IT HAS AN INTEREST. SOME S&L'S HAVE EVEN REFUSED TO EXTEND LOANS EXCEPT ON PROJECTS IN WHICH THEY HAVE AN INTEREST, EFFECTIVELY CUTTING THEIR BUILDING COMPETITORS OFF FROM THEIR TRADITIONAL SOURCE OF FINANCING. A FINAL ABUSE IS THE TYING ARRANGEMENT. A LOAN CUSTOMER MAY BE OBLIGED TO OBTAIN ANOTHER SERVICE SUCH AS A BUSINESS CHECKING ACCOUNT IN ORDER TO A THIRD PROBLEM IS THE LONG-TERM POSSIBILITY OF FINANCIAL INSTITUTIONS SETTING UP COMPANIES THAT CONTROL VIRTUALLY ALL ASPECTS OF THE REAL ESTATE DEVELOPMENT BUSINESS. THIS VERTICAL INTEGRATION WOULD INVOLVE THE SAME COMPANY BUYING LAND, DEVELOPING IT, BUILDING, MARKETING, FINANCING ACQUISITION BY ITS CUSTOMERS, AND INSURING MORTGAGES. IN ADDITION TO THEIR REAL ESTATE DEVELOPMENT POWERS, FEDERAL THRIFTS' SERVICE CORPORATIONS ALREADY CAN ACQUIRE AND RENT COMMERCIAL REAL ESTATE, RENOVATE COMMERCIAL REAL ESTATE, PROVIDE PROPERTY MANAGEMENT SERVICES, AND PROVIDE REAL ESTATE BROKERAGE SERVICE FOR THEIR OWN PROJECTS. THIS TREND WILL ELIMINATE COMPETITION AND CONCENTRATE CONTROL OF DEVELOPMENT IN FEWER, LARGER COMPANIES CONTROLLED BY BANKS AND THRIFTS. THOSE LARGE INSTITUTIONS WOULD THEN BE FREER TO RAISE PRICES AND TO DESTROY PRICE COMPETITION. TO PERMIT BANK HOLDING COMPANIES TO SET UP SUBSIDIARIES THAT CAN INVEST DIRECTLY IN REAL ESTATE IS A SHORT SIGHTED CHANGE THAT TRADES OFF THE LONGTERM INTEREST OF THE FREE MARKET SYSTEM FOR POSSIBLE SHORT-TERM BENEFITS TO FINANCIAL INSTITUTIONS AND VERY FEW CONSUMERS. USING FINANCIAL LEVERAGE, THE BANK HOLDING COMPANY WILL BE ABLE TO ARRANGE PREFERENTAIL FINANCING TO THE CUSTOMERS OF ITS DEVELOPMENT SUBSIDIARY. THEY CAN UNDERCUT THE SMALL BUILDER OR DEVELOPER WHO MUST OBTAIN CONSTRUCTION FINANCING AT MARKET RATES AND WHOSE CUSTOMERS MUST GET PERMANENT FINANCING AT MARKET RATES. WE VIEW LARGE BANKS AS A GREATER THREAT TO COMPETITION THAN THRIFTS BECAUSE OF THEIR PHENOMENAL ASSETS AND REMOTENESS FROM LOCAL COMMUNITIES. BANKS AND THRIFTS ENGAGING IN REAL ESTATE DEVELOPMENT WILL ACTUALLY HARM THE COMPETITIVE SYSTEM. THEIR SUCCESS WILL BE AT THE COST OF THE SMALL AND MEDIUM-SIZED BUILDER, THEY CANNOT BYPASS THE BANKS AND THRIFTS AS CAN THE LARGER BUILDERS. ESPECIALLY IN SMALL MARKETS, THE SMALLER BUILDER IS ALMOST WHOLLY DEPENDENT ON TRADITIONAL LENDERS. HE CANNOT COMPETE WITH THEM. THE SUBSIDIARY IS NOT AN ANSWER TO THE QUESTION OF RISK AND FAIR DEALING. RULES WRITTEN REQUIRING ARMS-LENGTH TRANSACTIONS WILL NOT IN FACT PRECLUDE PREFERENTIAL TREATMENT OF A SUBSIDIARY BY ITS PARENT CORPORATION OR AFFILIATES. THE RISK TO THE PARENT MAY BE REDUCED BUT WILL NOT BE ELIMINATED BY THE USE OF A SUBSIDIARY. THE DIVISION BETWEEN COMMERCE AND FINANCE SHOULD BE MAINTAINED IN THE CASE OF REAL ESTATE DEVELOPMENT. I WOULD URGE YOU TO FOCUS UPON INNOVATIVE APPROACHES OF PROVIDING HOME OWNERS WITH ACCESS TO MORTGAGE CAPITAL. YOUR LEADERSHIP IN PROMOTING LEGIS LATION TO EXPAND ACCESS FOR CONVENTIONAL MORTGAGE-BACKED SECURITIES IS APPRECIATED. BUILDERS ARE DEVELOPING INNOVATIVE FINANCING OF THEIR OWN SUCH AS BUILDER BONDS WHICH MUST BE RETAINED. PENSION FUND INVESTMENT IN MORTGAGES SHOULD BE ENCOURAGED, IN CONCLUSION, THE DEREGULATION LEGISLATION ACCELERATES THE TREND TOWARD A NATIONAL BANKING SYSTEM, INSTEAD OF LOCAL BANKS, THE LEGISLATION ENCOURAGES LARGE NATIONWIDE BANKING SYSTEMS. THESE NATIONWIDE BANKING SYSTEMS COULD VERY WELL CREATE A SYSTEM OF NATIONWIDE REAL ESTATE AND HOME BUILDING. THE SMALL INDIVIDUAL ENTREPRENEUR, WHO IS CHARACTERISTIC OF TODAY'S HOME BUILDING, COULD BECOME AN ENDANGERED SPECIES. THANK YOU FOR THE OPPORTUNITY TO TESTIFY. I WOULD BE HAPPY TO ANSWER ANY QUESTION WHICH YOU MAY HAVE. The CHAIRMAN. Thank you, Mr. Jacobsen. STATEMENT OF RUSSELL K. BOOTH, PRESIDENT, UTAH Mr. BOOTH. Mr. Chairman, my name is Russell K. Booth and I am the current president of the Utah Association of Realtors. I am here on behalf of the 4,200 members of the Utah Association of Realtors, who are involved in every facet of real estate. I would like to thank you for the opportunity to appear before the committee to comment on pending financial institutions deregulation legislation. Having been here all day I am aware of the amount of testimony you have received and I will abbreviate the written statement, knowing it will be in the final record. We believe in and accept the general philosophy of Government deregulation, and that it is generally a good practice to move as many decisions as possible closer to the marketplace. The three main points of our testimony are: One, foremost, we believe that it is necessary to promote the safety, soundness and competitiveness of federally insured banking institutions. Two, conflicts of interest need to be minimized, where they do exist. Situations or laws that foster such problems, should not be created. Three, we support prevention of the concentration of massive economic resources in the hands of a few. The potential danger of high-risk nonbanking activities such as real estate investment and development are relevant to the public's perception of the safety and soundness of the depository institution itself. FDIC USED AS A MEANS TO ATTRACT DEPOSITORS When a business needs capital, it must borrow these funds. Financial institutions borrow funds from depositors. These funds are in large part available because of Federal deposit insurance. A cursory review of current advertisements for the money market deposit accounts underscores the important advantage of Federal deposit insurance as a means of attracting depositors. Access to credit from Federal regulatory agencies such as advances from the Federal Home Loan Bank Board and the Federal Reserve's discount window provide financial institutions an important tool available in other businesses. These federally supported benefits for depository institutions are very important to assure this Nation of a stable and secure system of depository institutions. However, these benefits put them in a special class. Any changes which make these institutions competitors, rather than resources for the commerce of this Nation, should take into account these benefits and the likelihood that they would provide unequal and unfair competition. The tax treatment of federally chartered financial institutions also provides strong Federal tax support that regular businesses do not enjoy. These are enumerated in our written statement. The important objectivity and impartiality of lending institutions and their personnel in credit lending and real estate project lending will be seriously eroded or destroyed if the financial institution is a daily competitor of the developer or broker seeking their help. The lending institutions' integrity to their customers will be at risk. ADVANTAGES OF DEREGULATION OF DEPOSITORY INSTITUTION HOLDING COMPANIES The Utah Association of Realtors advises against the deregulation of depository institution holding companies with regard to authorizing new activities which would irrevocably change the marketplace. While some entities could possibly compete with subsidiaries of federally insured depository institutions, the brokerage of real estate and other real estate services could not. We are concerned about the ability of the small independent businessman to compete on the, often quoted today, level playing field. A depository institution holding company subsidiary decidedly has a clear competitive advantage over a local real estate broker, property manager, appraiser, developer or homebuilder that does not have a special relationship with a federally supported financial institution. Access to credit, after all, is the crux of our industry. For this reason alone, bank holding company subsidiaries and service corporations should be restricted from activities that could dominate. The Utah Association of Realtors does not agree with those who argue that the separate affiliate structure alleviates anticompetitive and safety and soundness concerns. Although legal separation of parts of the holding company may be desirable to assist appropriate functional regulation and to help contain the elements of risk, and conflicts of interest, it cannot prevent them. The national tendency will be toward the joint offering of a variety of products linked together in a significant way. The combination of banking and real estate brokerage in one holding company makes it more likely that these products will be puchased in the same place, and inducements to purchase one service packaged with another offered at an enticing price are natural. There can be no doubt that opportunities for tying, whether blatant or subtle, will continue to exist if depository institutions are permitted to offer real estate brokerage and other services together with conventional banking products. CASES FROM NEBRASKA AND IOWA PROVIDE FOUNDATION FOR OPPOSITION The potential for abuse is not limited to outright ownership. The National Association of Realtors has been writing the Federal Home Loan Bank Board about a Federal savings and loan in Lincoln, Nebr. that, without seeking prior FHLBB approval, entered into a contractual arrangement with a real estate brokerage firm. I have attached copies of Nebraska newspaper advertisements that will no doubt leave consumers in Nebraska with the distinct impression that First Federal Savings and Loan Lincoln has entered the third-party brokerage business. Further, these ads clearly imply that preferential lending rates are available for consumers doing business with their realtors affiliate if the consumer is interested in a package deal. Let us not forget that First Federal was able to acquire the funds that will be used to finance sales of the realtor affiliate through the use of its Federal Savings & Loan Insurance Corp. insurance sticker. That is, depositors chose to invest their funds with an entity that provides Federal Deposit Insurance. I would also like to provide some cases supplied to us by the Iowa Association of Realtors. Iowa's State institutions have been able to broker real estate for years, and these problems have arisen: A broker in a western Iowa metropolitan board made several visits to southwest Iowa to assist one of his salespersons in listing a property. The client wanted to list, but informed the salesperson that a banker in the community was also licensed, and the banker had informed the prospective client that financing would not be available if they listed with someone other than him. A salesperson with a firm in a western Iowa metropolitan board took a client into a savings and loan for a loan application. A vice president of the S&L called the buyer later in the same day and said that their trust department had some properties to show them. A Waterloo realtor had a house listed for several months. The sellers were several months behind in payments and could not come up with the money. While the listing was still in effect, the S&L who held the mortgage called on the sellers and said they were going to foreclose. However, they said they would give them an additional 3 months if they would list the property with them. The listing firm, not wanting to place the sellers in jeopardy, released them from the listing. The cases from Iowa and Nebraska provide a foundation for our opposition and we believe that they are indicative of the types of future problems that will be created by the entry into real estate brokerage activities by federally insured depository institutions. In Utah the Housing Finance Agency has issued submarket interest rate mortgage funds for low-income buyers of homes. The supply has been smaller than the demand. It is reported that lenders utilized a large amount of their allocated commitments nearly exclusively for their own, new home inventory and for their foreclosed property inventory, and gave preferential treatment to their own subsidiaries, joint venture partners, employees, and relatives. If this deregulation legislation were implemented, the potential for the above referenced abuses would be greatly magnified. A large local federally insured savings and loan recently competed with other buyers, and purchased a series of former service stations and have, one by one, developed them into, or sold them for, more profitable uses. They competed in the open marketplace, using the advantages of federally borrowed submarket interest rate |