Savings and loan association (S&L)

3 key takeaways

• Savings and loan associations specialize in accepting savings deposits and providing mortgage loans to individuals.
• S&Ls played a crucial role in the U.S. housing market by making homeownership more accessible to the middle class.
• The industry faced significant challenges in the 1980s, leading to regulatory changes and a reduction in the number of S&Ls.

What is a savings and loan association (S&L)?

A savings and loan association (S&L), also known as a thrift institution or simply a “savings and loan,” is a financial institution that focuses on accepting savings deposits from the public and using those funds to make mortgage loans. The primary mission of S&Ls is to promote homeownership by providing affordable mortgage financing to individuals.

S&Ls differ from commercial banks in that they traditionally emphasized residential mortgage lending over other types of loans and financial services. They were originally established to encourage savings and provide an accessible source of mortgage credit to the general public, particularly the middle class.

History and evolution of S&Ls

The history of savings and loan associations dates back to the early 19th century. They were created to address the need for affordable housing finance and to promote thrift among the working population.

Early beginnings

S&Ls originated in the early 1800s in the United Kingdom and later spread to the United States. The first S&L in the U.S. was established in 1831 in Pennsylvania. These institutions were initially mutual organizations, meaning they were owned by their depositors and borrowers.

Post-World War II expansion

After World War II, S&Ls experienced significant growth as they played a vital role in financing the post-war housing boom. Government policies and programs, such as the G.I. Bill, supported this growth by providing favorable conditions for home loans and encouraging homeownership.

Challenges in the 1980s

The savings and loan industry faced major challenges in the 1980s, leading to a crisis that had widespread implications. Several factors contributed to the crisis, including high interest rates, deregulation, and risky lending practices. Many S&Ls became insolvent, leading to significant financial losses and the eventual bailout by the federal government.

The crisis prompted substantial regulatory changes aimed at stabilizing the industry and preventing future failures. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 was enacted to address the problems and introduce stricter oversight and capital requirements for S&Ls.

How do S&Ls operate?

Savings and loan associations operate by accepting savings deposits from individuals and using those funds to provide mortgage loans. They generate revenue primarily through the interest earned on these loans.

Mortgage lending

The primary function of S&Ls is to provide mortgage loans to individuals looking to purchase or refinance homes. These loans are typically long-term and come with fixed or adjustable interest rates. By focusing on residential mortgages, S&Ls help promote homeownership and support the housing market.

Savings accounts

S&Ls offer savings accounts to the public, encouraging individuals to save money. These accounts often come with interest, providing a safe place for individuals to store their funds while earning a return.

Benefits and challenges of S&Ls

Understanding the benefits and challenges of savings and loan associations helps in evaluating their role in the financial system.

Benefits

• Promoting homeownership: S&Ls have historically made homeownership more accessible by providing affordable mortgage financing.
• Community focus: Many S&Ls are community-oriented, focusing on serving the financial needs of local residents.
• Encouraging savings: By offering savings accounts, S&Ls promote the habit of saving among individuals, contributing to financial stability.

Challenges

• Regulatory compliance: S&Ls must adhere to stringent regulatory requirements, which can be challenging and costly.
• Interest rate risk: Changes in interest rates can impact the profitability of S&Ls, especially if they have a large portfolio of fixed-rate mortgages.
• Market competition: S&Ls face competition from commercial banks, credit unions, and other financial institutions, which can affect their market share and profitability.

Examples of S&Ls in practice

To better understand the role of savings and loan associations, consider these practical examples that highlight their operations and contributions to the financial system.

Residential mortgage lending

An individual looking to buy a home might approach an S&L for a mortgage loan. The S&L evaluates the borrower’s creditworthiness and, if approved, provides a loan with terms suited to the borrower’s financial situation. This process helps facilitate homeownership and supports the housing market.

Community development

Many S&Ls are actively involved in community development projects. For example, an S&L might provide financing for the construction of affordable housing or support local businesses through small business loans. These activities contribute to the economic growth and development of the community.

Understanding savings and loan associations and their operations is essential for appreciating their role in promoting homeownership and supporting the financial system. If you’re interested in learning more about related topics, you might want to read about mortgage lending, financial regulation, and credit unions.