Pilot home loan program for beleaguered S&Ls

The nation's beleaguered thrift institutions are hurt by a lack of liquidity in their loan portfolios. Homeowners are hurt by energy costs that can total more than their mortgages.

Happily, aggressive marketing of a pilot home-improvement loan program for energy conservation may help both groups.

Actually a number of thrifts (particularly savings and loans) have pioneered their own energy conservation loan programs. But the Federal Home Loan Mortgage Corporation's (Freddie Mac) pilot home improvement Loan (HIL) is the first national secondary market for energy loans. In other words, Freddie Mac buys the loans from the thrifts, enabling the thrifts to make more loans with the money thus obtained.

According to Joseph Brancucci, director of the $11.6 million program, the impetus for HIL was a realization that the home-improvement business is eclipsing the home-mortgage business. Mr. Brancucci predicts the home-improvement business will reach a volume of $74 billion by 1984, made possible in part by over $960 billion in available equity which homeowners have accrued. The new program was authorized by Congress in 1978 as part of the omnibus Energy Conservation Policy Act.

Any thrifts that are members of a Federal Home Loan Bank (including federal savings and loans, cooperative banks, some state chartered S&Ls, and mutual savings banks) can participate in the loan program by using uniform applications and standardized terms of 5, 10, and 15 years (20 years if over $30,000). This allows simplified processing. The banks then sell 80 percent participation in the loans to Freddie Mac.

FHLMC then packages the loans it has bought from across the nation into offerings of $100 million or more and sells these packages as securities on the secondary market.

Here's an illustration of the benefits to an institution. A thrift institution sells FHLMC 80 percent of a million-dollar loan portfolio on which it charges homeowners 13 percent. It pays 12 percent on the $800,000 Freddie Mac participation. But the thrift would still receive $34,000 in loan income (13 percent on the other $200,000, plus the 1 percent interest remaining on the $800 ,000).

The liquidity possible through the program is even more important to loan managers saddled with large portfolios of low interest, long-term loans. FHLMC returns the $800,000 once the securities are sold, and the bank is then free to reinvest this money. Combining all of these transactions the effective yield for the bank on the 13 percent loan is increased to 13.8 percent.

As attractive as the packages may be, FHLMC's doors haven't been battered down by eager bankers.

One reason has been that its required net yield reached 191/4 percent in recent months. So the banks would have had to charge interest rates in excess of some state usury ceilings to profit from HILs. But, dropping interest rates now allow many banks to participate.

David Elliott, a vice-president of the Boston Federal Home Loan Board, cites another reason: many savings and loans and other thrift institutions were traditionally ''ma and pa'' institutions that until recently thrived solely because of convenience. Mr. Elliott says many of these institutions still don't know how to aggressively market programs such as home improvement loans (HILs) which could help solve their problems.

One bank that does market them is the tiny River City Bank of Sacramento, Calif. According to Mr. Brancucci, River City is both one of the smallest banks to participate in the program and the second largest originator of HILs in the entire nation.

Clinton Cook, who oversees HILs as an assistant vice-president of River City, says that the ability to leverage large amounts of loans through HIL is a boon for small banks. ''We'd be constantly in and out of the home-improvement loan market if we had to depend on our own resources,'' Mr. Cook says. ''HIL allows us to be in consistently. For a small bank the liquidity it allows is everything.'' River City has now written a total of nearly $3 million in HIL loans.

Increased interest and liquidity make sense for banks, but why should a homeowner be attracted to a home-improvement loan at double-digit interest rates?

According to a recent study by the Massachusetts Executive Office of Energy Resources (EOER), the reason is that even when interest is as high as 18 percent , utility-bill savings possible through energy efficiency improvements, combined with the 15 percent federal energy tax credits, actually result in an immediate positive cash flow for the borrower.