Building and Loan Associations

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BUILDING AND LOAN ASSOCIATIONS. Prior to the New Deal reforms of the early 1930s, most home mortgages were for five years, after which time they had to be repaid in one lump-sum payment. Building and loan associations, first organized in Pennsylvania in 1831, developed in response to this situation, which effectively limited home ownership to the wealthy. Workers pooled their savings and then chose, often by lottery, who would be able to finance a home.

Upon this foundation the New Deal built an institutional structure that allowed over two-thirds of American households to own a home. The Federal Home Loan Bank Board was established to regulate the building and loan associations; the Federal Savings and Loan Insurance Corporation (FSLIC) was established to insure their deposits, and interest rate ceilings were implemented to keep banks from bidding away their deposits.

The 1950s were the halcyon days of the building and loan associations' 3-6-3 policy. Their senior officers paid 3 percent for deposits, made 6 percent on thirty-year mortgages with monthly amortization payments, and played golf every day at three o'clock. The 3-6-3 policy was possible because banks met new-loan demand by selling the government bonds they had purchased to finance World War II. It began to unravel in the early 1960s, when banks had reduced their bond portfolios to the minimum required to meet pledging requirements against public deposits, and began to obtain the funds needed to meet new-loan demand by issuing three-month negotiable certificates of deposit (CDs). The Federal Reserve accommodated the banks by increasing, then eliminating, the interest rate ceiling on CDs. Consequently, people shifted their savings from the building and loan associations to the banks' higher-yielding CDs.

The building and loan associations tried to compete with the banks by raising rates on both deposits and new mortgages. As a result, by the late 1970s, with balance sheets weighed down by the 6 percent thirty-year mortgages issued in the 1950s, their average cost of funds was greater than the average return on their outstanding mortgages. They were bankrupt.

The government's initial response, the 1980 Garn-St. Germain Act, was to allow the building and loan associations to purchase assets other than mortgages, while leaving in place the insurance that insulated depositors from the riskiness of those assets. The result was a speculative mania, with investment bankers at Drexel, Burnham and Lambert in particular cold-calling the presidents of building and loan associations to peddle fantasies of greater than 15 percent returns on junk bonds, which justified raising funds by offering more than 10 percent for deposits.

The October 1987 stock market crash also devastated the junk bond market and thus the building and loan associations. In a $200 billion taxpayer-financed bailout, the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) established the Resolution Trust Corporation to strip the building and loan associations of their worthless assets and sell off the remainder to the banks. FIRREA also abolished the FSLIC. In its place, it established the Savings Association Insurance Fund as a part of the Federal Deposit Insurance Corporation (which insures bank deposits).


Isenberg, Dorene, and Vince Valvano. "No Expense Too Great: A History of the Savings and Loan Bailout." In Real World Banking. Edited by Marc Breslow, et al. 4th ed. Somerville, Mass.: Dollars and Sense, 2001.

Keith, Nathaniel S. Politics and the Housing Crisis Since 1930. New York: Universe Books, 1973.


See alsoBanks, Savings ; Savings and Loan Associations .

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Building and Loan Associations

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