The federal government threw open the floodgates on home financing by pension funds this year--but only a trickle of new funds came through.
Now, Housing and Urban Development Department officials, as well as the housing industry, are actively working to promote the idea of mortgage investments to the managers of private pension funds, particularly of the largest corporations, trying to overcome their inertia and doubts through friendly persuasion.
Anyone planning to buy or sell a home has a stake in these efforts, because they could be important in determining just how much money is available for financing houses.
The power and potential of the pension money is indeed massive, with an estimated $700 billion now in public and private funds. The funds ballooned to this level from around $20 billion in 1950, and are expected to nearly double to $1.2 trillion by 1990.
As a result, the housing industry has been casting a covetous eye in their direction and, in fact, some put their entire faith in pension funds as the only possible savior of a sector facing severe capital shortages.
"It is clear that if we are to finance housing in this country, it is going to have to come from the pension funds," Julio Laguarta, president of the National Association of Realtors flatly stated at last week's annual convention of the Maryland Association of Realtors.
Some would go even further: The pensions are "the only viable source of financing," and they should be forced by law to put more of their assets into residential mortgages, said Michael J. Amenta of Laventhol & Horwath, an accounting firm, earlier this year in an article written for Housing magazine. Sen. Dennis DeConcini (D-Ariz.) has introduced a bill to require that 5 percent of all pension fund assets be put into mortgages, but that proposal does not look likely to go anywhere.
The savings and loan industry, which traditionally financed home mortgages, has been devastated by holding low-yield, fixed-rate portfolios at a time of skyrocketing interest rates. The S&Ls want more authorities to do other things, and housing experts see traditional lenders pulling away from their former commitment to housing.
HUD Secretary Samuel R. Pierce Jr. has said that pension funds soon are likely to be the single most important source of mortgage money in the United States. But the administration opposes efforts to force pensions to put money into home loans.
Pierce instead describes his role as one of "persuasion" and information designed to convince the funds that direct or indirect investment in mortgages makes good economic sense.
Pension funds generally have invested in stocks and bonds and Treasury notes, with only about 2 or 3 percent of their assets going into housing in recent years.
The reasons for this lie partly in the fact that rules, until recently, inhibited mortgage investments by private pensions. Starting with one step in December and another last month, the Department of Labor has liberalized the regulations under the Employee Retirement Income Security Act (ERISA) to make it easier for the funds to buy mortgages and mortgage-backed securities--if they chose to.
But the funds did not immediately start pouring money into these mortgages.
"By and large, we haven't seen any corporations looking at mortgages," said Charles Salisbury, vice president and portfolio manager at T. Price Rowe Associates Inc. in Baltimore, which manages more than 300 private and public pension funds nationwide. "Many corporations look at the problems of thrifts and are saying, 'Why should we emulate them?' " by investing in mortgages.
A recent random sampling of some of the larger private pension funds in the Washington area also showed few involved in mortgage investing. Officials at Woodward & Lothrop, Giant Foods, Martin Marietta and PRC, for example, said that none of their assets is in mortgages. This apparently was not a result of some recent careful analysis, however, but of inertia.
"Frankly, I haven't given it any thought," said Robert Mulligan, vice chairman of Woodies, in a representative comment, when asked if any of the company's pension fund money might start going into mortgage investments. Currently the company's guidelines do not permit it, he said.
Despite the timid start by the funds, some housing financing experts and investment advisers are predicting that the degree of participation will rise rapidly once pension fund managers become more familiar with mortgage investments and learn about their comparative value on yield and security and liquidity.
One such analyst is J. Donald Klink, senior vice president for mortgage securities and negotiated transactions at the Federal National Mortgage Association, or Fannie Mae.
Klink makes an "educated guess" that, five years from now, 25 percent of all pension fund assets will be invested in mortgages, typically through mortgage-backed securities. If this proved true, pension fund investment would rise from some $18 billion now to a whopping $250 billion by rough estimates in the five-year period.
Fannie Mae last year fashioned a new security designed to attract pension fund money--and it apparently has. So far about 50 percent of $500 million in the new instrument has been bought at public offerings by private and public pension funds, Klink said, and another $500 million in private offerings has gone almost entirely to pension funds.
HUD also is looking at making changes in securities issued by the Government National Mortgage Association (Ginnie Mae) to gear them to pensions, HUD officials said. Ginnie Maes already have been the favored form of investing in mortgages for those pension funds that have done this so far, securities experts say.
In the meantime, Pierce has held two conferences in Washington to bring the managers of the largest private pension funds together with Wall Street advisers in an effort to show that mortgages are safe and stable with yields comparable to other investments they could make.
Some comments of fund managers at one conference show that their concerns on mortgages would be much like those of the traditional thrift institutions--and that the mortgages they would be willing to provide would be generally the same type the S&Ls are going to now.
The pension fund, for example, would want to be assured that due-on-sales clauses on mortgages could be enforced so they could call loans when a home is sold, and they also would find adjustable-rate mortgages more acceptable than the old type of fixed-rate loans, pension experts said.
Moreover, if yields on the mortgages are high enough to lure pension fund investment, it might necessitate mortgage rates too high for homebuyers--the same dilemma faced by all the traditional mortgage lenders.
Public pension funds--those of state and local governments, which were not subject to the ERISA rules that regulate the private plans--began a marked increase in their mortgage investments over the past few years. The state of California employes' plan, for example, is the largest holder of both Ginnie Maes and the new Fannie Mae securities, said Klink.
The state of Maryland was the first to put pension fund monies into a program to provide below-market-rate mortgages, through Loyola Federal Savings and Loan Association, in conjunction with Fannie Mae. Prince George's County has put money into this type of residential mortgage program for property in the county. Fannie Mae also is talking with seven other states, including Virginia, about starting a program using Fannie Mae securities, Klink said.
Pension funds of the construction and building trades unions have been the exception among the private plans, plunging wholeheartedly into the mortgage lending arena, largely in an effort to create more jobs for their members, investment experts said.
Some labor union leaders also would like to see pension funds allowed to provide below-market-rate mortgages, as another boost to their industries. ERISA rules now prevent that type of activity, because it is regarded as a non-economic investment decision and the fund managers are responsible for ensuring the best performance possible of the pension fund portfolio. Labor Department officials have said they do not plan to change those ERISA rules.
But managers also pointed out that large pension funds generally are managed by banks or insurance companies, which make the major decisions on where to put the funds' assets, with company managers serving in an overseer capacity.
And some of the largest fund managers already have put significant amounts of pension fund money into real estate. According to a recent survey by Questor Associates, real estate analysts, Prudential Insurance Co. of America was far and away the leader of these, having put about $4.5 billion into real estate investments through its PRISA funds.
Robert Angelica, manager of the investment management division at American Telephone & Telegraph Co., which has the country's largest private pension fund, said about 6 or 7 percent of AT&T's pension fund assets are in mortgages, invested through professional management organizations. Angelica attended one of the HUD pension conferences in February, but said there has been no change in company policy as a result.
"We were already convinced of the attractiveness of that instrument mortgage-backed securities ," he added, however.
Other fund managers also warn that they must be convinced of comparative value of mortgage investments, that they will not put their money into mortgages simply out of a desire to do social good by helping home buyers or the housing industry.
The housing industries and investment brokers are in the process of educating themselves on how to sell the idea of mortgages to the pension funds. And the Mortgage Bankers Association is getting involved by producing what it says is the first comprehensive handbook for its members to explain how the pension funds work and how mortgages might fit into their portfolios.
James Connolly, vice president of Salomon Brothers investment brokers, provides a good case for these investments, saying that mortgage-backed securities generally are comparable or better than corporate bonds or Treasury notes in terms of yield, safety and liquidity.
Salomon Brothers did a comparison on rate of return, including price performance, of three types of investments--Ginnie Mae securities, high-grade corporate bonds and long-term Treasuries--from January 1977 to April 1982. During that time, Ginnie Maes had an 11 percent return, while bonds had a negative 2.7 percent and long-term Treasuries a negative 6.6 percent, Connolly said.
Connolly and others indicated that some pension funds had not wanted to go into new types of mortgage investing until the value of various mortgage instruments were proved and some administrative difficulties were overcome. Mortgages are not destined to replace other types of pension fund investments, and the goal instead should be to make them acceptable alternatives, Connolly said.
"We should get to where mortgage securities are acceptable to a broad range of pensions, so they will get their feet wet. Then at least they will be willing to sell corporate bonds or Treasuries and go to mortgage securities when they are attractive."