Savings and loan associations (S&Ls) - Business in United States of America

Definition: Federally charted firms that accept deposits from the public and make loans, chiefly for home mortgages
Significance: Savings and loan associations are similar to banks but offer a somewhat narrower range of services because of government restrictions and their traditional emphasis on saving and lending money. Much of their lending is in the form of home mortgages, helping to finance businesses involved in construction and real estate.
Early savings and loan associations (S&Ls) were commonly called building and loan (B&L) associations. The first B&L was established in 1831, with a group of households pooling their savings so that a few members of the group could borrow money, primarily to buy a house. Most B&Ls were owned by the members, who received the profits and determined the management.
With urbanization, the number of B&Ls grew rapidly, until by 1890, they were operating in every state. During the 1880’s, there was a boom in “national” B&Ls. These were for-profit organizations that offered high interest on savings, often by charging high fees and late-payment penalties. The depression of 1893 led to many failures among the “nationals,” and they faded away.
In 1900, saving and loan association assets totaled about $500 million, compared with $10 billion for commercial banks and $2.4 billion for mutual savings banks. There were about five thousand savings and loan associations, so their average size was about $100,000. Their mortgage loans were often made for periods of eight to twelve years—much longer than those from other lenders. S&L deposits (often called shares) might be payable on demand, but the institution could enforce a thirty-day waiting period.
In the boom conditions between 1900 and 1929, the middle class increasingly sought home ownership. By 1929, S&Ls held 22 percent of all home mortgages, and about 10 percent of the population were members of an saving and loan association. The number increased from 6,600 in 1914 to 11,800 in 1924. By 1929, S&Ls had more than 12 million members. However, the $7.4 billion of S&L assets in 1929 was only slightly over 10 percent as large as the holdings of commercial banks.

The Great Depression

Between 1929 and 1933, declining income and mass unemployment meant that many home buyers were unable to meet their mortgage obligations. Numerous savings and loan associations failed, and many more survived only by imposing severe restrictions on withdrawals. The flow of credit into new-home construction dried up.
The federal government moved gradually to provide relief. In July, 1932, Congress established the Federal Home Loan Banks to provide credit facilities for home-mortgage lenders. In June, 1933, Congress established the Home Owners Loan Corporation (HOLC). By the time the HOLC stopped lending in June, 1936, it had bought $768 million of mortgages from S&Ls. In June, 1934, Congress established the Federal Savings and Loan Insurance Corporation (FSLIC). Deposit accounts (“shares”) were insured up to $5,000 per deposit. In June, 1934, Congress also created the Federal Housing Administration, which insured long-term amortized home mortgages, protecting lenders against default by borrowers.
The end of World War II in 1945 unleashed a huge boom in residential construction and mortgage lending. S&Ls provided much of the financing, aided by their ability to pay higher interest rates to depositors than commercial banks. Between 1945 and 1952, savings and loan associations increased their assets from $9 billion to $23 billion, an expansion of more than 150 percent, while commercial banks expanded by only about 20 percent. By 1965, S&Ls accounted for 26 percent of household savings and provided 46 percent of single-family home loans. The number of S&Ls remained relatively constant from 1945 through 1965 at around six thousand, but many branches were added. Aggressive rate competition for savings led Congress in 1966 to impose rate ceilings on saving and loan association accounts. Despite problems from rising interest rates, during the 1970’s, total S&L assets continued to increase vigorously, rising from $176 billion in 1970 to $579 billion in 1979.

Number of FDIC-Insured Savings Institutions, United States and Other Areas, 1984-2007

Source: Data from the Federal Deposit Insurance Corporation.

The S&L Crisis

The abrupt rise in interest rates during the late 1970’s threatened the solvency of savings and loan associations, as assets declined in value, and depositors shifted funds to other savings media such as money market mutual funds. In response, Congress moved in 1980 to remove ceilings on deposit interest rates for banks and S&Ls. Then in 1982, the Garn-St. Germain Act increased the coverage of federal deposit insurance to $100,000 per account. (On October 3, 2008, this amount was increased to $250,000.) S&Ls were given greater discretion in types of savings media they could provide and greater latitude in lending. They were permitted to have up to 40 percent of their assets in commercial real estate loans, up to 30 percent in consumer lending, and up to 10 percent in commercial loans and leases.
Deregulation opened the way for savings and loan associations to take on greater risk in hopes of earning greater returns. Neither S&L management nor the regulatory authorities had enough experience to recognize signs of trouble. Because of decline in the market value of their mortgage assets, as many as half the S&Ls in the country were insolvent (had liabilities greater than assets) by the end of 1982.
In August, 1989, Congress undertook drastic measures toward the saving and loan association industry in the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The law abolished both the Home Loan Bank Board and FSLIC, which had failed in their responsibilities. Regulation of S&Ls was lodged in the Office of Thrift Supervision under the U.S. Treasury Department. Deposit insurance for savings and loan associations was moved to the Federal Deposit Insurance Corporation. FIRREA also created the Resolution Trust Corporation (RTC). The RTC took over the assets of about 750 S&Ls and managed their sale, closing operations at the end of 1995. The ultimate cost to the government and taxpayers was roughly $150 billion. Many of the rules liberalizing asset choices were reversed. Capital requirements for S&Ls were increased from3 to 8 percent.
The combined effect of deregulation and the crisis-bailout sequence greatly reduced the scale and scope of the S&L industry. By 2007, there were only about one thousand savings and loan associations, and their operations had become very similar to those of commercial banks.

Further Reading
Adams, James Ring. The Big Fix: Inside the S&L Scandal. New York: John Wiley & Sons, 1990. Emphasizes internal corruption, political ties, and fraud as the causes for S&L difficulties.
Barth, James R. The Great Savings and Loan Debacle. Washington, D.C.: American Enterprise Institute Press, 1991. Describes the problems that arose in the S&L industry and the personalities involved.
Black, William K. The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry. Austin: University of Texas Press, 2005. Account by the director of litigation for the Federal Home Loan Bank Board during the 1980’s describes how some executives used a weak regulatory environment to perpetrate accounting fraud. Links the S&L crisis to business failures of the early twenty-first century.
Ewalt, Josephine H. A Business Reborn: The Savings and Loan Story, 1930-1960. Chicago: American Savings and Loan Institute Press, 1962. Industry sponsored overview of its best years.
Mishkin, Frederic. The Economics of Money, Banking, and Financial Markets, 7th ed. New York: Pearson / Addison Wesley, 2007. All editions of this college text deal at length with the policy changes of the 1930’s and the S&L crisis of the 1980’s.
White, Lawrence J. The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. New York: Oxford University Press, 1991. Excellent scholarly study of S&L problems analyzes the portfolio changes in the industry, showing that commercial, consumer, and land loans, not junk bonds, caused the asset value to fall, while regulatory problems allowed the S&Ls to weaken.
See also: bank failures; construction industry; credit unions; Deregulation of financial institutions; financial crisis of 2008; Morris Plan banks; mortgage industry; Residential real estate industry; Supreme Court and banking law.

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