Plan Advanced for Problem Loans : Would Create Firm to Liquidate Assets of Closed S

A prestigious savings and loan advisory group has recommended that a quasi-private corporation be formed to liquidate the problem assets of S&Ls; that have been closed because of insolvency, The Times has learned.

The proposal calls for creation of a government-controlled but privately run company to assume the liquidation of a $2.3-billion loan portfolio that regulators have inherited at failed savings and loans. More than 500 federally insured savings and loan associations have failed since 1980.

The recommendation came in a recent letter to the Federal Home Loan Bank Board from the Federal Savings and Loan Advisory Council, a group of 24 influential real estate and lending experts who advise S&L; regulators on industry issues. The council chairman is Los Angeles lawyer William McKenna, a well-known figure in S&L; industry circles.

A bank board spokesman confirmed that the proposal had been received and said “the suggestion is now under active review.” He declined to elaborate.

The recommendation reflects the seriousness of the bad-asset problems plaguing the savings and loan industry today. In California alone in the past five months, banking regulators have taken control of six medium-sized S&Ls; without closing them.

The advisory-group proposal recalls the Depression-era Home Owners Loan Corp., an agency created by Congress to head off an avalanche of home foreclosures and instill public confidence in the nation’s badly shaken banking system. The HOLC, which went out of business in 1951, loaned money at low interest rates to tens of thousands of homeowners so that they could continue making their monthly mortgage payments.

Backers of the latest idea believe that a loan-liquidation agency would bolster public confidence in the Federal Savings and Loan Insurance Corp., the beleaguered government agency that liquidates bankrupt S&Ls; and provides deposit insurance up to $100,000 per account should an S&L; fail. Critics say the FSLIC, an arm of the bank board, is unable to do its job properly because it is badly under-funded, understaffed, disorganized and plagued by high turnover.

Long loan-liquidation delays, at best, increase industry insurance premiums, the advisory group warned, and “at worst, undermine the public confidence” in the FSLIC fund.

The justification for the new proposal is that experienced real estate entrepreneurs, working on a bonus system, will far outperform bureaucrats in getting the quickest and best value for real estate loans that have gone sour.

According to the proposal, the corporation would be initially funded from government sources and have a board of directors chosen by the FSLIC but mostly from the private sector. The new corporation would also have a date when it would go out of business “to assure it did not outlive its usefulness,” the proposal said.

The value of the FSLIC deposit insurance fund fell 7% in 1984 to $5.96 billion. As a result, its ratio of reserves to insured savings at the nation’s savings and loans was at its lowest level--0.82%--in 25 years by year-end, bank board figures show.