Financial institution that accepts savings from depositors and uses those funds primarily to make loans to home buyers. Savings and loan associations (S originated with 18thcentury British building societies, in which workmen banded together to finance the building of their homes. savings and loan was established in Philadelphia in 1831. S were initially cooperative institutions in which savers were shareholders in the association and received dividends in proportion to profits, but today are mutual organizations that offer a variety of savings plans. They are not obliged to rely on individual deposits for funds but are permitted to borrow from other financial institutions and to market mortgagebacked securities, moneymarket certificates, and stock. Because high inflation and rising interest rates in the 1970s made fixedrate mortgages unprofitable, regulations were altered to permit S to renegotiate mortgages. In the late 1980s, a growing number of S failed because inadequate regulation had allowed risky investments and fraud to flourish. The government was obliged to cover vast losses in excess of $200 billion, and the Federal Savings and Loan Insurance Corp. (FSLIC) became insolvent in 1989. Its insurance functions were taken over by a new organization supervised by the Federal Deposit Insurance Corp., and the Resolution Trust Corp.
depository financial institution, federally or state chartered, that obtains the bulk of its deposits from consumers and holds the majority of its assets as home mortgage loans. A few such specialized institutions were organized in the 19th century under state charters but with minimal regulation. Reacting to the crisis in the banking and home building industries precipitated by the Great Depression, Congress in 1932 passed the Federal Home Loan Bank Act, establishing the federal home loan bank system to supplement the lending resources of statechartered savings and loans (S The Home Owners’ Loan Act of 1933 created a system for the federal chartering of S under the supervision of the Federal Home Loan Bank Board. Deposits in federal S were insured with the formation of the Federal Savings and Loan Insurance Corporation in 1934. A second wave of restructuring occurred in the 1980s. The depository institutions deregulation and monetary control act of 1980 set a sixyear timetable for the removal of interest rate ceilings, including the S quarterpoint rate advantage over the commercial bank limit on personal savings accounts. The act also allowed S limited entry into some markets previously open only to commercial banks (commercial lending, nonmortgage consumer lending, trust services) and, in addition, permitted mutual associations to issue investment certificates. In actual effect, interest rate parity was achieved by the end of 1982. The GarnSt Germain Depository Institutions Act of 1982 accelerated the pace of deregulation and gave the Federal Home Loan Bank Board wide latitude in shoring up the capital positions of S weakened by the impact of recordhigh interest rates on portfolios of old, fixedrate mortgage loans. The 1982 act also encouraged the formation of stock savings and loans or the conversion of existing mutual (depositorowned) associations to the stock form, which gave the associations another way to tap the capital markets and thereby to bolster their net worth. In 1989, responding to a massive wave of insolvencies caused by mismanagement, corruption, and economic factors, Congress passed the financial institutions reform, recovery and enforcement act of 1989 (FIRREA) that revamped the regulatory structure of the industry under a newly created agency, the office of thrift supervision (OTS). Disbanding the federal savings and loan insurance corporation (FSLIC), it created the savings association insurance fund (SAIF), which later merged with the bank insurance fund (BIF) to form the deposit insurance fund (DIF) under the administration of the federal deposit insurance corporation (FDIC). It also created the resolution trust corporation (RTC) and resolution funding corporation (REFCORP) to deal with insolvent institutions and scheduled the consolidation of their activities with SAIF after 1996. The Federal Home Loan Bank Board was replaced by the Federal Housing Finance Board, which in 2008 was replaced by the federal housing finance agency (FHFA). See also Savings Bank.
Depository institutions that specialize in originating, servicing, and holding mortgage loans, primarily on owneroccupied residential property. Example: Traditionally, savings and loan associations were distinguished from commercial banks by their emphasis on longterm home mortgage loans, separate regulations and deposit insurance mechanisms, and their affiliation with the federal home loan bank system. Passage of firrea in 1990 destroyed most of these divisions. 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 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 statechartered commercial banks were prohibited from making loans secured by real property.
S 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 “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. Selfdealing could be even worse in states that permitted forprofit operation of S by individual and corporate owners, especially in California, where the law permitted the payment of dividends beyond what the S actually earned.
Most charters for mutual S limited the institution’s loans to residential real estate located within fifty miles of the office. California forprofit S could and did invest in other things, including corporate equity. Prior to the New Deal, these real estate loans were not “selfamortizing” 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 thirdparty 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. government paper. George Wilson Titans Jersey
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 longlived 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 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 in their jurisdiction, collateralized with mortgages. In 1974 the law was amended to permit corporate federal S The Home Owners’ Loan Corporation was formed to buy mortgages from S to liquefy the system, and the secretary of the treasury was encouraged to use public funds to purchase preferred stock in S 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 onefamily 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. Governmentinsured mortgages were more likely to be sold to an insurance company or a bank, but S 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 twofifths by face value of all home mortgages in the United States. 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 governmentsponsored 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 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 and package them for sale to the markets.
These institutions eventually made S essentially obsolete. By the year 2000, they financed between them twothirds 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 fixedrate mortgages were bad assets for the investment of deposits in a world of computerdriven, lowcost money markets. When interest rates fell, borrowers refinanced their mortgages, depriving the S of their higheryielding assets. When interest rates rose, depositors demanded higher rates or dividends for their money, which could mean that an S 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 statechartered S had to be rescued from insolvency. The FSLIC agreed to consider S 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 accepted the same sort of government controls over the interest they could pay that the Federal Reserve imposed on banks. The rates S 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. As the Federal Reserve drove rates ever higher in the fight against inflation in the early 1980s, the S industry with few exceptions became insolvent.
Nobody could think of an exit strategy other than a desperate effort for the S to “grow out of their problem” by acquiring highyielding 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 GarnSt. Germain Act, which permitted S 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 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. The money was ludicrously too little. Finally, in 1989, the George H. W. 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 rescue, but they were made service institutions for all banks that invested in home mortgages, not just for S 1999, the S industry no longer existed. Because nonfinancial companies could own holding companies built on S 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 GramLeachBliley Act, which empowered all financial service holding companies to include securities underwriting and insurance subsidiaries. Dan, Jr. Thrifts Under Siege: Restoring Order to American Banking. Cambridge, Mass.: Ballinger, 1988.
Carron, Andrew S. The Plight of the Thrift Institutions.
Change in the Savings and Loan Industry: Proceedings of the Second Annual Conference, December 910, 1976, San Francisco, California. San Francisco: Federal Home Loan Bank of San Francisco, 1977. Derrick Morgan Titans Jersey
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 1011, 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.
