An old idea is gaining new credence these days: financing residential mortgages from pension plan contributions.
President Reagan last December gave a public boost to a trend that has been growing for several years by announcing that the Department of Labor would ease existing rules discouraging certain investments in mortgages by private sector funds. The proposal is now out for comment. Sen. Orrin Hatch (R-Utah), at the urging of the housing industry, introduced a bill last fall that would, among other things, encourage investments in mortgages.
Meanwhile increasing numbers of states have been turning to this $700 billion wellspring as more traditional sources of long term capital dry up. The newcomers include Connecticut, New York, North Carolina and Kansas. They join Michigan, California, Alabama, Texas. Hawaii and Florida. South Carolina's program is in the planning stage. The idea is being talked up in the District, Virginia and Maryland, but it has little momentum thus far.
Pensions and mortgages are often looked upon as a "twofer": the combination protects retirement security and is also socially responsible in promoting housing. It receives wide support from the construction, savings and insurance industries but mixed reaction from the pension industry.
Implicit in the criticism of this "twofer" is the notion that both parties cannot benefit equally. Prof. Roy Schotland of Georgetown University Law School observed: "By definition such investments can meet market levels of return. (Yet) the whole point of the advocates of such investments is that there are worthy needs which cannot meet market tests and therefore should be subsidized by the deepest pocket available -- pension funds."
Thus far states' handling of the issue has been mixed. The New York City Retirement System, for example, last summer began purchasing $27 million in federally insured mortgages which earn market rates of return. The purpose was to supply funds for homes purchased mainly in the five New York buroughs. Just last week Harrison Goldin, the city's comptroller, proposed a plan to direct $500 million of the city's pension assets into housing.
However, the states of Connecticut and North Carolina and the city of Philadelphia have adopted a different approach. Connecticut, for instance, bought $40 million worth of conventional mortgage passthrough certificates yielding two percentage points under the market rate of 15 3/4 percent at the time. Philadelphia, the first city to make home loans with pension monies, also knocked off points to provide mortgage money for low- and middle-income buyers. Comptroller Thomas Leonard said the city is now sitting back to see where interest rates go before proceeding with the program.
At the time Philadelphia bought mortgages yielding 14.65 percent (about 2 percentage points below market rates), it seemed a good deal, given that the average yield that year on its employe pension fund, invested in mainly long-term securities, was 9.2 percent. Since then mortgage rates have risen to 17 percent.
Recalling the experience of the savings industry, which fell on hard times by carrying long-term, low yielding mortgages in its portfolios when interest rates rose, Karen Ferguson of the Pension Rights Center observed, "We are opposed to bailing out the housing industry at the expense of retirees." So while mortgages appear to be an attractive investment now, the pension funds could conceivably find themselves down the road in the same bind as the thrifts today. Moreover, there is no guarantee that the monies pension funds generate for savings institutions by buying their old mortgages will be pumped into additional housing. The experience of the All Savers Certificates, where many S&Ls invested their new funds in government securities rather than in new mortgages, is all too recent.
Notwithstanding, the use of pension funds for socially useful purposes -- whether saving New York City from bankruptcy, financing fledgling industries or providing affordable housing -- has definite political appeal whatever the long term consequences for beneficiaries.
In the District, City Council member Betty Ann Kane advocates using a portion of the city's $300 million in pension assets to provide mortgages for public employes. She pointed out that new recruits to the ranks of teachers, police and firefighters are now required by law to live within the city limits, despite the fact that their $15,000 to $18,000 starting pay makes finding suitable housing very difficult.
Frank Higgins, chairman of the D.C. Retirement Board, said investment of pension funds in housing, whether equity, mortgages or securities, is prohibited by law. Kane responded that she would speak to employe groups to try to get the law changed.
During his gubernatorial campaign last year, candidate Charles Robb stirred controversy by proposing that 20 percent of the $2 billion Virginia Supplemental Retirement Fund be invested in buying up seasoned (lower-yielding) home mortgages. Recently the governor's press secretary said the issue was still one of Robb's priorities. The fund's investment chief, John White, said the board has authorized a program of real estate mortgage purchases that it expects to unveil in about a month. White stressed that the fund would invest only a modest amount and would be interested only in "appropriate" investments. "We feel purchasing at this time is viable because interest rates will decline, but we can always liquidate the mortgages if necessary."
In Maryland, Seabrook developer Michael T. Rose has tried to interest both local and national legislators in such a program.