Say goodbye to the All Savers Certificate.
This 15-month experiment in targeted investment, which is due to expire at the end of December, has been singularly ineffective in achieving its goal of aiding the beleaguered housing industry. The most that can be said is that it provided a one-time break for taxpayers above the 32 percent bracket.
Treasury Secretary Donald T. Regan recognized this as early as last February when he said, "There is no need to continue the All Savers program ; it has not served the purpose it was designed to do."
In a paper prepared this summer to support extension of a modified All Savers program, James W. Christian, chief economist of the U.S. League of Savings Associations, stated, "There has been no directly discernible effect of the ASC All Savers Certificate on home mortgage lending." He blamed its poor performance on external events as well as its design.
The All Savers Certificate was created by Congress under pressure from the troubled savings industry and over the objections of the Reagan administration. Individuals buying the certificates are allowed to exclude $1,000 in earned interest from their income taxes; couples filing jointly may exclude $2,000. The one-year certificates pay 70 percent of the yield on one-year Treasury notes.
The savings industry sought the All Savers Certificate to recover some of the billions of dollars that money market mutual funds were siphoning off. In an effort to justify the anticipated drain on the Treasury caused by the tax exemption, Congress -- at the insistence of the real estate and construction industries -- required lenders to put 75 percent of the All Savers funds into housing-related or agricultural investments.
The U.S. League optimistically predicted sales of All Savers Certificates would reach $230 billion in 15 months. The Treasury estimated $120 billion, and the Joint Committee on Taxation predicted $65 billion.
It looks as though even the lowest estimate was too high. In the first 11 months after All Savers went on sale Oct. 1, 1981, $54.6 billion was collected by the nation's commercial banks, savings banks, savings and loans associations and credit unions.
The bulk, $33.6 billion, was deposited in the first month, when the tax-free yield was over 12 percent. As the rate declined, so did sales.
The National Association of Home Builders predicted in 1981 that All Savers sales would help finance construction of 400,000 to 450,000 new houses during fiscal 1982 and 1983, a 40 percent increase over the number then being built. As it turned out, the number built in the 11 months after the program began was down 26.55 percent from the same period in the preceding year.
The amount of mortgage loans on new and existing residences closed by savings and loan associations in that year dropped to $37.3 billion, off 32 percent from the previous year, according to the Federal Home Loan Bank Board.
All Savers Certificates also failed to stop the drain on deposits from savings institutions, although the outflow did begin to slow.
An additional 5 million households were supposed to be able to qualify for mortgages. In his analysis, Christian said the All Savers funds, in conjunction with expected lower pricing of adjustable rate mortgages, were expected to lower the average mortgage rate by a full 2 percentage points. In fact, it did just that, lowering it from the approximately 18.8 percent investors got in the secondary market in September 1981 to 16 percent. But at those stratospheric rates, it made no difference anyway.
It is true that the FHA/VA mortgage interest rate fell from a peak of 17.5 percent in September 1981 to 12.5 percent a year later. However, most of that dip has come very recently as a result of cuts in market rates, not All Savers funds.
There are many reasons why All Savers Certificates failed to achieve their objectives. One was in the language of the enabling legislation. Three out of every four new dollars were to go into housing-related investments. Since many people switched money from their passbook accounts to All Savers, not much "new" money was collected. The investments were not required to be made until the spring of 1982 and could be in securities such as Ginnie Maes [Government National Mortgage Association funds] rather than actual mortgages. Few wise lenders could be expected to make 30-year loans with one-year funds.
Expanded home mortgage lending was at the end of a chain of hoped-for events, Christian noted. The All Savers Certificate was supposed to lower the cost of funds for lenders so they could offer loans at a rate that would spur demand.
"That the All Savers fell short of achieving this objective speaks not only to an aspect of its performance, but also to the advisability of legislatively crafting one instrument to achieve multiple objectives," he said. Contributing equally to the All Savers' failure, he added, was the lifting of the interest rate ceiling on 30-month certificates, making them more attractive than All Savers.
Also to blame, he said, were such factors as the administration's inability to instill confidence in the financial markets and the failure of monetary policy to reduce the volatility of interest rates.