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Building and Loan Association
Building and loan association is a state-chartered financial organization that makes use of customer subscriptions and deposits to invest in the member’s residential mortgage loans. They do this to ensure that they increase homeownership in the building and loan association.
How a Building and Loan Association Worked
This plan has been there between the 1830s to the early 1930s. People guided by the spirit of mutual self-help put their money together within a small or regional building and loan associations.
Participants were required to pay a membership fee and then subscribe to a given number of shares that consisted of a predetermined value of maturity. The members were then required to pay a given amount of money on a monthly basis until their shares reached maturity value. This plan qualified them to access dividends as well as taking out mortgages.
However, because of limitations in the amount of money available, members were forced to take turns in accessing dividends and mortgage loans. For those that owed money on their shares, they were supposed to continue paying them off until the cancelation of the note.
Federal Savings vs. Loan Associations
In the mid-1930s, moving forward, building and loan association underwent federal regulation following the Great Depression. It, therefore, changed to become what we refer to today as federal savings and loan associations. It has a charter from the United States government and relies on federal deposit insurance for its operations.
Federally chartered banks are mandated to take in customer deposits for checking and savings accounts as well as offering home mortgages. Savings and loan associations are smaller than other banks, and they focus more on offering services to local communities.
Because savings and loan associations have a better understanding of the local market, acquiring a loan with them is sometimes much easier, though not always. They get most of their funds from the savings accounts of their customers. They also have easy access to Federal Home Mortgage Banks loans. Another name for savings and loan associations is thrifts, and they operate under the Office of Thrift Supervision.
Reference for “Building and Loan Association”
Academics research on “Building and Loan Association”
- The transition from Building and Loan to Savings and Loan, 1890-1940, Snowden, K. A. (2003). The transition from Building and Loan to Savings and Loan, 1890-1940. Finance, intermediaries and economic development, 157-208.
- [PDF] Marketing and Financing Home Ownership: Mortgage Lending and Public Policy, Weiss, M. A. (1989). Marketing and Financing Home Ownership: Mortgage Lending and Public Policy. In Business and Economic History: Papers Presented at the… Annual Meeting of the Business History Conference (Vol. 18, p. 109). Bureau of Economic and Business Research, College of Commerce and Business Administration, University of Illinois.
- Deposit insurance, regulation, and moral hazard in the thrift industry: evidence from the 1930’s, Grossman, R. S. (1992). Deposit insurance, regulation, and moral hazard in the thrift industry: evidence from the 1930’s. The American Economic Review, 800-821. This paper compares risk-taking of insured and uninsured thrifts operating under strict and less-strict regulatory regimes during the 1930’s. Analysis of balance-sheet data indicates that while newly insured thrifts undertook less risk than their uninsured counterparts, possibly because of screening by deposit-insurance authorities, moral hazard emerged gradually. Insured institutions operating under relatively permissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts. Given the current system of deposit insurance, the results suggest that effective regulation and supervision will play a key role in maintaining thrift stability in the 1990’s.
- Structuring a theory of moral sentiments: Institutional and organizational coevolution in the early thrift industry, Haveman, H. A., & Rao, H. (1997). Structuring a theory of moral sentiments: Institutional and organizational coevolution in the early thrift industry. American journal of sociology, 102(6), 1606-1651. The authors investigate the coevolution of organizations and institu‐tions—they study how institutional definitions, rules, and expectations unfold in tandem with the organizational structures and processes that embody those institutions. The research site is the early thrift industry. Changes in thrifts’ technical environment (the rise of a transient and heterogeneous population) and institutional environment (the rise of Progressivism) propelled this coevolutionary process. The coevolution of thrift organizations and institutions proceeded primarily through selection. Adaptation was constrained by both institutional factors (it was difficult to adopt a novel institutional logic) and technical factors (early thrifts were generally small, so entry and exit were easy).
- A case study of organizational form and risk shifting in the savings and loan industry, Esty, B. C. (1997). A case study of organizational form and risk shifting in the savings and loan industry. Journal of Financial Economics, 44(1), 57-76. I analyze the investment and funding strategies of two thrifts, one stock owned and one mutually owned, from 1983 to 1988. Despite their similarities prior to 1983, the stock thrift implemented a riskier financial strategy and did so only after converting to stock ownership. Although this strategy ultimately led to its failure, the stock thrift still made significant payouts to its controlling shareholders. This case study illustrates in stark terms the relation between organizational form and risk shifting in the thrift industry.