Savings and Loan Associations

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SAVINGS AND LOAN ASSOCIATIONS (S&Ls) under various names were among the self-help organizations that so impressed Alexis de Tocqueville on his visits to the United States in the 1800s. Pioneered in the Northeast in the 1830s, which was also the era of "free banking," when bank charters were available for the asking, savings and loan associations spread through the country after the Civil War. Their dual purpose was to provide a safe place for a community's savings and a source of financing for the construction of houses. In most instances, their charters restricted S&Ls to loans secured by residential property. A symmetry emerged here as the American financial system developed, for until 1927 nationally chartered commercial banks and most state-chartered commercial banks were prohibited from making loans secured by real property.

S&Ls in most states were cooperatives or "mutuals." The significant exceptions were California, Texas, and Ohio. In theory and law, if not in reality, their depositors "owned" them, except that until 1966 the word "deposit" was wrong, as was the word "interest" as the reward for the deposit. By law, what the S&L "depositor" received was "shares" in an enterprise that paid "dividends" from interest earned on the mortgages in which the savings were invested. The boards of these institutions normally consisted of a builder, a real estate broker, a real estate lawyer, a real estate appraiser, a real estate insurer, and a real estate accountant who audited the books. Conflicts of interest were accommodated at all times. Self-dealing could be even worse in states that permitted for-profit operation of S&Ls by individual and corporate owners, especially in California, where the law permitted the payment of dividends beyond what the S&L actually earned.

Most charters for mutual S&Ls limited the institution's loans to residential real estate located within fifty miles of the office. California for-profit S&Ls could and did invest in other things, including corporate equity. Prior to the New Deal, these real estate loans were not "self-amortizing" mortgages. Typically, they ran for five years with a "balloon" payment at the end to be refinanced by the householder.

Until the 1970s these institutions did not offer third-party payment services, and they reserved the right to make "shareholders" wait as long as a year to get their money back. But participants expected that they could take their money out when they wanted it, and sometimes they could not. Mortgages on residential property could not be sold to get cash in times of trouble. The danger of a run was ever present, portrayed most memorably in the 1946 film It's a Wonderful Life. The earnings potential of a well-run S&L was limited by the need to keep substantial reserves in cash or U.S. government paper.

More than a third of the 16,000 such institutions in the United States at the end of the 1920s were sucked into the whirlpool of the Great Depression, stimulating the most long-lived of President Herbert Hoover's efforts to combat it. The Hoover administration created eleven geographically scattered Federal Home Loan Banks to be owned by the S&Ls of the district, as the Federal Reserve Banks are owned by the banks in their districts, but supervised by the Federal Home Loan Bank Board, as the Federal Reserve district banks are supervised by the board of governors of the Federal Reserve. Funded by the sale of notes in the money markets, these Home Loan Banks would make cash advances to the S&Ls in their jurisdiction, collateralized with mortgages.

The act also authorized the board to issue federal charters for mutual S&Ls and to establish the Federal Savings and Loan Insurance Corporation (FSLIC) to insure the par value of "shares" in S&Ls to the same $2,500 maximum the Federal Deposit Insurance Corporation (FDIC) would insure bank deposits. In 1974 the law was amended to permit corporate federal S&Ls. The Home Owners' Loan Corporation was formed to buy mortgages from S&Ls to liquefy the system, and the secretary of the treasury was encouraged to use public funds to purchase preferred stock in S&Ls that otherwise would be unable to write mortgages for their neighborhoods.

In 1934 the Federal Housing Administration (FHA) was created to insure mortgages on modest one-family homes, and after World War II the federal government subsidized Veterans Administration mortgages to reduce down payments on a home to 5 percent or less of the selling price. Government-insured mortgages were more likely to be sold to an insurance company or a bank, but S&Ls financed from a quarter to a third of the housing boom that changed the face of the country in the two decades after World War II and through the 1970s held more than two-fifths by face value of all home mortgages in the United States.

Precipitous Decline, Cushioned Fall

The legislation that created the FHA authorized a privately owned national mortgage administration to issue bonds for the purchase of mortgages. Nobody formed one, and in 1938 the government itself launched the Federal National Mortgage Administration (FNMA). Thirty years later, after the comptroller general required the Bureau of the Budget to count the purchase of these mortgages as a government expense, making the government deficit look worse, President Lyndon Johnson spun off Fannie Mae as a government-sponsored enterprise owned by shareholders with a small but symbolically important line of credit from the Treasury. FNMA, especially after it was privatized, was competition for the S&Ls. In response, the bank board in 1972 formed the Federal Home Loan Mortgage Corporation, known in the market as "Freddie Mac," which could buy mortgages from S&Ls and package them for sale to the markets.

These institutions eventually made S&Ls essentially obsolete. By the year 2000, they financed between them two-thirds of all home mortgages. Funding mortgages in the market through the agency of mortgage brokers was a lot cheaper than mobilizing deposits for the purpose, and fixed-rate mortgages were bad assets for the investment of deposits in a world of computer-driven, low-cost money markets. When interest rates fell, borrowers refinanced their mortgages, depriving the S&Ls of their higher-yielding assets. When interest rates rose, depositors demanded higher rates or dividends for their money, which could mean that an S&L had to pay more for funds than it was earning on its old mortgages.

The extent of the peril was first revealed in California in 1966, when one of the largest state-chartered S&Ls had to be rescued from insolvency. The FSLIC agreed to consider S&L shares as a kind of deposit and to provide immediate redemption of the shares in a failed institution. In return for the rescue and the FSLIC agreement, the S&Ls accepted the same sort of government controls over the interest they could pay that the Federal Reserve imposed on banks. The rates S&Ls could pay depositors were set usually a quarter of a point higher than the rates banks were permitted to pay as part of the government's policy to encourage housing.

In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act, which looked toward the complete elimination of controls on the interest rates banks and S&Ls could pay and authorized checking accounts at S&Ls, homogenizing what had been a divided banking industry. As the Federal Reserve drove rates ever higher in the fight against inflation in the early 1980s, the S&L industry with few exceptions became insolvent.

Nobody could think of an exit strategy other than a desperate effort for the S&Ls to "grow out of their problem" by acquiring high-yielding assets like junk bonds and real estate developments. Capital rules and accounting conventions were shattered by new regulations from the Home Loan Bank Board and by Congress in the 1982 Garn–St. Germain Act, which permitted S&Ls to avoid the recognition of losses in their portfolios and to expand their asset bases even when they were insolvent. Newcomers as well as established institutions were necessarily the beneficiaries of these changes, and the S&L industry drew a remarkable collection of crooks and Wall Street sharpies. Seen from their point of view, deposit insurance was a guarantee that, however worthless the asset they created with their loans, the government would buy it for its valuation on the books to make sure depositors were paid.

In 1987, Congress authorized the sale of $10.8 billion of special notes to cover the losses of the Federal Savings and Loan Insurance Corporation. The money was ludicrously too little. Finally, in 1989, the George H. W. Bush administration and Congress created the Financial Institutions Reform, Recovery, and Enforcement Act, which eliminated the bank board and awarded control of S&Ls to the Office of Thrift Supervision in the Treasury, made FSLIC a subsidiary of FDIC, and authorized about $125 billion of borrowings to keep FSLIC afloat as it spent good money for bad assets. The district Home Loan Banks were kept in existence partly to reinforce flows of money to housing and partly because they had committed $300 million a year to the Treasury to mitigate the drain of the S&L rescue, but they were made service institutions for all banks that invested in home mortgages, not just for S&Ls.

By 1999, the S&L industry no longer existed. Because nonfinancial companies could own holding companies built on S&Ls but not holding companies that included banks, the charter retained its value for entrepreneurs, but most thrifts decided to call themselves "banks" and were banks. In the fall of 1999, Congress, contemplating a world where commerce and finance would blend together in the great definitional mix of the law, passed the Gram-Leach-Bliley Act, which empowered all financial service holding companies to include securities underwriting and insurance subsidiaries. As the twenty-first century dawned, the S&L industry became the Cheshire Cat of finance, vanishing into the forest, smiling at its own disappearance.


Brumbaugh, R. Dan, Jr. Thrifts Under Siege: Restoring Order to American Banking. Cambridge, Mass.: Ballinger, 1988.

Carron, Andrew S. The Plight of the Thrift Institutions. Washington, D.C.: Brookings Institution, 1982.

Change in the Savings and Loan Industry: Proceedings of the Second Annual Conference, December 9–10, 1976, San Francisco, California. San Francisco: Federal Home Loan Bank of San Francisco, 1977.

Eichler, Ned. The Thrift Debacle. Berkeley: University of California Press, 1989.

Expanded Competitive Markets and the Thrift Industry: Proceedings of the Thirteenth Annual Conference, December 10–11, 1987, San Francisco, California. San Francisco: Federal Home Loan Bank of San Francisco, 1988.

Kane, Edward J. The Gathering Crisis in Federal Deposit Insurance. Cambridge, Mass.: MIT Press, 1985.

Marvell, Thomas B. The Federal Home Loan Bank Board. New York: Praeger, 1969.

Mayer, Martin. The Greatest-Ever Bank Robbery. New York: Scribner, 1990.

President's Commission on Housing. The Report of the President's Commission on Housing. Washington, D.C.: President's Commission on Housing, 1982.

Strunk, Norman, and Fred Case. Where Deregulation Went Wrong: A Look at the Causes Behind Savings and Loan Failuresin the 1980s. Chicago: U.S. League of Savings Institutions, 1988.


See alsoBanking: Bank Failures, Savings Banks, State Banks ; Federal Reserve System ; Financial Services Industry ; Home Owners' Loan Corporation ; Mortgage Relief Legislation .