Perpetual Federal Savings and Loan, in a move to pump an additional $150 million into the area's tight mortgage market, today becomes one of the first financial institutions in the country to issue unsecured notes.
Perpetual, the largest savings and loan in the city, is scheduled to issue $25 million in unsecured noted under a new procedure authorized last January by the Federal Home Loan Bank Board. Since then, 18 financial institutions have requested authority to issue the notes. Perpetual is the only Washington-area institution to request the issuance.
The notes are one of several new procedures for raising funds now being used by financially pressed lenders who previously relied on deposits and borrowings from the FHLBB and commercial banks.
With the continuing heavy drain on savings deposits and the 11 percent usury ceiling in the District, mortgage money has evaporated, causing 75 percent of the District's lenders to close the loan windows and others to restrict loans to their own customers.
Perpetual, which last week only offered mortgage loans to its customers, may now be able to offer loans to others, according to Ross Towne, the firm's treasurer and controller.
What Perpetual plans to do is issue the notes which will be bought by investors in denominations as small as $100,000. With the money generated from the sale, Perpetual will then originate mortgaged to homebuyers. The firms will then sell those mortgages in the secondary market and generate $25 million more for additional mortgage loans, Towne explained.
Theoretically, within two months or less, the loans would have been granted and sold to make way for new mortgages, Towne said. In this way, $25 million in loans could be generated every six to eight weeks.
All of the $25 million, however, will not be used for mortgages, although most of it will, Towne said. Some of the funds will go toward operating costs.
Although funds generated from the the notes would give the savings and loan more flexibility in granting mortgages, Towne said he does not expect Perpetual's 10.85 percent interest rate in the District to be reduced.
"If it was lower, we'd have more volume than we could possibly handle," Towne said.
Perpetual decided to issue the notes because "we don't have the savings flow coming in" and the firm didn't "want to incurr and more long-term debt" from borrowings, Towne said. The notes are also cheaper, he said, because the market interest rate for commercial paper is now 9.8 percent compared to 11.5 percent for borrowing from the FHLBB and between 11 and 11.5 percent at commerical banks.
"Savings and loans have been looking for new ways to attract funds for housing," said Trent Feldman, program analyst for the FHLBB's office of industry development. "They're always looking for more money. It's an economical way of borrowing."
Few savings and loans have requested permission to issue notes because with most innovations, "the biggest do it first," Feldman said. "Everybody's still learning."
Other new alternatives are mortgage-backed bonds, obligations in which mortgages are used as collateral, and "pass throughs" in which financial institutions pool about $20 million in mortgages and sell them to investors, Feldman said.
Perpetual, which also received Standard & Poor's and Moody's highest ratings, according to a spokesman, was the first local institution to exceed $1 billion in assets and last year made $941.2 million in mortgage loans.