BLOG VIEW: The OTS: Obsolete Or Omnipotent?


The Office of Thrift Supervision (OTS) is either past its prime or just about ready to really rule, depending on who is evaluating the situation. Less than two months after Treasury Secretary Henry Paulson called for the agency's abolishment, the OTS is now arguing for substantial expansion and greater power instead.

In a news briefing earlier this week, John Reich, director of the OTS, called for a provider of greater oversight for the bruised U.S. mortgage business – and pinpointed his agency as the perfect candidate, reported Bloomberg News.

‘There needs to be a federal supervisor of the entire mortgage industry,’ Reich said. ‘We have 1,000 people spread around the country. We know this business.’ The OTS is reportedly currently developing an official proposal to further its mortgage industry oversight ambitions.

Should this agency – whose regulations govern 831 firms, including the biggest names in the mortgage industry – be the ones in charge?

According to an official mission statement posted on the OTS' Web site, the agency's job is ‘To supervise savings associations and their holding companies in order to maintain their safety and soundness and compliance with consumer laws, and to encourage a competitive industry that meets America's financial services needs.’

Whether current market conditions justify a self-installation as a national supervisor in order for the agency to achieve its stated goals is, of course, open for debate – as is whether its professed knowledge of ‘this business’ sufficiently equips the OTS to simultaneously rule and rescue it.

Those questions would be irrelevant to adherents of the Paulson school of thought, which dictates that the OTS should no longer operate as an individual agency. The proposed change is part of Paulson's massive proposed overhaul of the U.S. financial framework, a plan referred to as the Blueprint.

‘In some cases, the market develops so quickly as to render parts of our regulatory structure relatively obsolete,’ explained Paulson in his March 31 remarks. ‘This is the case with the federal thrift charter and the Office of Thrift Supervision, the OTS. The thrift charter is no longer necessary to ensure sufficient residential mortgage loan availability for U.S. consumers.

‘In the Blueprint, we have concluded that the thrift charter has run its course and should be phased out. With the elimination of the federal thrift charter, the OTS would be closed and its operations would be assumed by the [Office of the Comptroller of the Currency],’ he continued.

Paulson's plan also calls for a federal commission to establish recommended minimum licensing standards for mortgage brokers, notes an Associated Press article.

Once again, Reich volunteered the OTS for the task instead in what might be seen as another effort to prove the agency's indispensability in the face of proposed elimination. In comparison to waiting for the development of a designated federal commission, ‘It would be easier for us to increase our resources in a short time,’ he argued.

Meanwhile, recently released figures from the OTS showed a $617 million loss for the thrift industry in the first quarter of this year – no surprise given the housing downturn. In more bad news, troubled assets, including noncurrent loans and repossessed assets, constituted 2.06% of thrifts' assets during the first quarter – an increase over a total of 1.66% in the previous quarter and 0.80% one year ago.

Thrifts have designed $16.6 billion in loan loss provisions over the past three quarters, according to the OTS, while first-quarter loan loss provisions were an all-time high of $7.6 billion.

Not to worry, Reich insists, as it's all part of the plan. ‘I have been urging managers of OTS-regulated thrift institutions to be aggressive in setting aside provisions for expected loan losses,’ he said. ‘This forceful response to the housing market crisis continues to depress industry earnings, but it also strengthens institutions to withstand future challenges.’

Jessica Lillian, Commercial Mortgage Insight

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