Federal Savings and Loan Insurance Corporation (FSLIC)

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FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION (FSLIC)

The Federal Savings and Loan Insurance Corporation (FSLIC) was created by the federal government on June 27, 1934, to secure the stability of the savings and loan industry. The main purpose of savings and loans, also known as S&Ls, was to receive deposits from individuals and institutions and reinvest those funds in residential mortgages. During the banking crisis of the late 1920s and early 1930s, many savings and loans collapsed. If a bank or savings and loan failed, depositors who had not withdrawn their money lost everything. After the onset of the Great Depression many unemployed workers could not repay their loans and nearly onequarter of all home mortgages went into default. Between 1930 and 1935 nearly one thousand savings and loans collapsed, wiping out almost $300 million in assets.

In 1934 Congress moved to boost both the savings and loan and the residential construction industries with the National Housing Act. One provision created the Federal Housing Administration (FHA) that encouraged banks and savings and loans to make loans for building homes, farm buildings, and small business establishments. The FHA insured the loans so that if the debtor defaulted, the FHA would reimburse the creditor. Because of the reduced risk, creditors demanded lower down payments and extended the length of mortgages. More people were able to manage these new loans and buy their own homes. Title IV of the National Housing Act created the FSLIC to insure deposits in savings and loans up to $5,000. Depositors knew that if their savings and loan failed the FSLIC would reimburse them for the amount in their account up to a $5,000 limit. Federally chartered savings and loans had to pay a mandatory fee for coverage, while those with state charters could voluntarily insure their deposits with the FSLIC by paying the fee. The FSLIC, modeled after the Federal Deposit Insurance Corporation (FDIC) created the previous year, revived public confidence in the stability of the industry. As a result, people returned their deposits to savings and loans and the frequency of runs was diminished. Smaller savings and loans were more able to compete with larger institutions because they also held the confidence of the public. Savings and loans were able to loan more money for housing purchases and construction and consequently contributed to the recovery of the residential real-estate market.

The housing policies of the New Deal that created the FSLIC, FHA, Home Owners Loan Corporation, and Federal National Mortgage Association (Fannie Mae) stimulated private home building and individual homeownership by coordinating private and public institutions. Before the New Deal only two out of five Americans owned their homes. The New Deal built a system of home building finance that allowed private money to fund the construction of postwar suburbia. By the 1970s two out of three Americans lived in owner-occupied houses.

Along with insurance for the industry came regulation. In 1934 Congress established the Federal Home Loan Bank Board to maintain the stability of savings and loans by restricting their financial practices. The New Deal housing and banking policies ultimately demonstrated, however, that the expansion of the state did not result in the reduction of private power and flexibility. In fact historian David M. Kennedy argues in Freedom from Fear (1999) that these reforms actually liberated capital. Government regulations made people secure about depositing their money in banks and savings and loans. As a result, banks and S&Ls had a reliable cash reserve which freed them to make loans and invest in mortgages.

Traditionally most savings and loans were mutuals or community-based institutions owned by the depositors themselves. But in the 1980s the federal government initiated deregulatory measures, which transformed the savings and loan industry. Speculators were allowed to convert savings and loans into stock corporations. This freedom enabled savings and loans to raise more capital but the new owners were less concerned with the local community and more interested in quick profit. The Depository Institutions Deregulation and Monetary Control Act of 1980 raised the deposit insurance from $40,000 to $100,000. This change, along with higher interest rates, doubled the amount of money deposited in the savings and loans and as a result increased the taxpayers' burden when savings and loans failed in great numbers at the end of the decade. As more money was deposited, savings and loans were forced to meet rising interest rate payments to depositors. Congress freed them to engage in commercial lending and non-mortgage consumer lending to help them meet the new commitments. Many critics contend the increase in coverage emboldened savings and loans to provide riskier loans than they might have otherwise. The 1984 Depository Institutions Act permitted developers to own savings and loans and allowed owners of these institutions to lend to themselves. Savings and loans quickly took advantage of the new rules to engage in high-risk speculation, particularly in commercial real estate. When these deals failed so did many savings and loans. Over five hundred savings and loans collapsed during the 1980s and created a crisis that forced the FSLIC into insolvency in 1989. Responsibility for FSLIC's insurance obligations fell to the FDIC. The U.S. government expects taxpayers will have to pay more than $500 billion over thirty years to bail out the failed savings and loan associations.