BUILDING AND LOAN ASSOCIATIONS, U. S. A.
The Oxford Provident Building Association was organized in Philadelphia in 1831 for the purpose of enabling its members to become home owners. Membership was limited to those interested in home ownership. Trustees served without compensation. Through a system of fees, fines, and forfeitures, forced saving was adopted as an early characteristic of the program. It was in tended that the pooling of resources by continuous regular con tributions would enable the members, one by one, to buy or build homes. When this result was accomplished, the association would disband. Thus was started the first terminating building and loan association in the United States. This type is no longer used. With the spread of the movement, it soon became evident that the same association ,.could serve a series of incoming member groups, each constituting, in effect, a terminating association. From this recognition developed the idea of serial associations. Although this type is less common than formerly, there were, in many serial associations in existence. Experience also taught that some contributors would never exercise their borrow ing privilege for home purchase purposes. Instead of asking such members to withdraw, both borrowing and non-borrowing mem bers were welcomed. The former secured debt-free homes when their series matured. The latter were paid in cash the matured value of their shares.
The admission of non-borrowing, savings members resulted in the further change in the plan of operation of many associations into permanent financial institutions. Savings members were ad mitted at any time and individual accounts were opened in their names. Earnings were credited to these accounts. Gradually the idea of permanent investment rather than withdrawal at the time of maturity of a series resulted in the offering of types of shares not used by the serial and terminating associations.
Lump sum investments are made also in the form of full-paid income shares. At the time of the original investment in such shares the full par or maturity value is paid to the association. Thereafter dividends are paid in cash instead of being retained by the association and credited to the investor's account. At the ma turity of instalment thrift, optional savings, or prepaid shares, they are sometimes converted into full-paid income shares. There after they are continued as a more or less permanent investment.
Other forms of securities have been used in limited areas. In California investment certificates came into use about 189o. They are evidences of creditorship and bear a fixed rate of interest. A variety of certificates have been used, including full-paid, instal ment, accumulative or optional payment, prepaid, definite-term, and minimum term. The first four of these parallel the kinds of shares discussed above. Definite-term certificates run for the time specified in the contract. At their maturity it is expected that the funds will be withdrawn or reinvested. Minimum term certifi cates may not be presented for retirement until a date agreed upon in the contract. Thereafter they become regular full-paid certifi cates. In Ohio the system created a creditor obligation that carried a definite rate of interest and supposedly was repay able on demand at the option of the holder of the certificate of deposit or passbook. In effect this system operated in such fashion that, if few depositors wished to withdraw their funds at any time, they could probably obtain them without difficulty. In times of crises, however, deposit institutions froze up just as did those issuing only shares. The acceptance of deposits did not change the character of the assets in which the associations invested their funds.
Under this plan, the contract to repay the original amount of the loan and the regular interest payments were obligations of the borrower. The regular payments on the shares subscribed for were also of a fixed character. The earnings to be added to these pay ments in order to mature the shares and thereby effect a cancella tion of the mortgage were always indefinite. Any losses suffered by the association before the maturity of the borrower's shares cre ated additional hazards for him. Earnings credited one year might be recaptured in a subsequent year to absorb losses. The general uncertainty about the actual cost of a loan under the share account-sinking-fund plan has diminished its popularity.
With the acceptance of investing members who were not bor rowers, the building and loan associations began to consider loans to borrowers who were not investors. This led to the introduction of the direct reduction loan plan. Under this plan, from each payment is deducted the interest for one month. The balance is credited to the principal, reducing it month by month until the debt is completely amortized. While the monthly payments usually remain constant throughout the life of the loan, the inter est charges decrease constantly and the principal instalments in crease correspondingly. The definiteness of the direct-reduction plan and the absence of complicating hazards have caused it to grow in popularity. In order to maintain the legal appearance of mutuality, State-chartered associations that use this plan usually require the purchase by the borrower of a small amount of stock. Sometimes $1 is the amount invested for this purpose.
Between the share-account-sinking-fund loan and the direct-re duction plans are many modifications. One in common use is called the cancel-and-endorse plan. The borrower starts with a subscription to shares equivalent to the amount of his loan. Whenever his share payments amount to the maturity value of a share, one share is cancelled and its maturity value is endorsed on his note, reducing the unpaid principal by that amount. Those who favour the direct-reduction plan are not satisfied with the cancel and-endorse program as a substitute.
Associations operating under the permanent plan began to de part from the semi-philanthropic character of the serial and termi nating associations. Many of them opened offices, keeping regular business hours like any other financial institution. Salaried man agers and paid staffs were hired to conduct their business. Fre quently the secretary was given the job of management. In some sections of the country the chief executive is still called secretary. The modern tendency is to give him the title of president.
growing popularity of the building and loan plan of savings and home financing invited the organization, in the decade beginning in 1880, of a large number of national associations. For the most part they conducted a mail order and selling business. Sav ings were attracted by mail and by salesmen working on a fee basis. Even loans were made by mail on a national scale.
The promoters who managed such associations overlooked little opportunity to take full advantage of fees, fines, and forfeitures. Whatever benefit accrued to the investors and borrowers was fre quently incidental to the demands for profits to the management. The depression of the 188os put a damper upon the operation of the nationals. A flood of restrictive State legislation, induced by an aroused community of action by managers of local associations, helped to prevent the recovery of the nationals.
After the turn of the century only remnants of the once flourishing national movement remained. A few were still in existence in chastened considerably and made more respectable than their pred ecessors. The collapse of the nationals left an unsavoury flavour which retarded the development of local associations in some parts of the country for a great many years.
first reliable estimate of the importance of locally managed building and loan associations in the United States was made by the United States Commissioner of Labor in 1843. He reported 5,598 associations with 1,348,345 members, of whom 402,212 were borrowers. It was estimated that 3,600 of these associations had been organized in the decade between 1880 and 1890.
Recovering from the depression of the '9os, building and loan associ ations in most sections of the U.S. enjoyed a steady growth in both numbers and assets for two decades. In 1920 there were 8,633 associ ations with total assets in excess of $2,500,000,000. The membership had increased to 4,962,919. During the decade beginning in 1920 the number of associations increased to a high point of 12,804 in 1927 and declined to 11,777 in 1930; total assets increased each year to reach a peak of $8,828,611,925 in 1930; and membership grew steadily to 12,343,254 in 1930.
Nationalization of the Building and Loan Industry.— The United States Building and Loan League was organized in 1893, largely as a defensive move against the encroachment of the nationals. From that date to 1930 the league held annual conventions for the discussion of common problems. Other than at the time of these con ventions there was little contact among its members. Even before the crash of 1929, however, leaders of the industry were planning a more effective type of organization. Accordingly, in 1930, the constitution of the league was revised to produce a more active management. A salaried manager was employed. With him was associated a paid staff equipped to render a variety of services to the members of the league and to the industry which it represents. This marked the beginning of the nationalization of the building and loan industry.
The collapse of the thrift and home financing structure, following the crash of 1929, brought to light fundamental weaknesses in its foundation. Both necessity and fear caused unusual demands for withdrawal of funds invested in building and loan associations. Mean time, general unemployment reduced drastically payments to the associations from both borrowers and investors. As a consequence, most of the building and loan associations froze up. They ceased to serve either investors or borrowers in the time of their greatest need.
As fast as funds came into the associations they were used to meet insistent withdrawal demands. The number of associations that were taken over by supervising authorities for liquidation was not large. Being mutual associations they could carry on, after a fashion, without facing insolvency. Nevertheless, most of them were liquidating under their own power since their disbursements exceeded their receipts. Each year from 1931 to 1937 inclusive (the latest year for which complete information is available) the total assets of the industry decreased. From 1930 to 1937 the number of associations declined from 11,777 to 9,762 ; total assets decreased from $8,828,611,925 to $5,711,658,410.
This law provides for the appointment by the President of the United States of a bipartisan board of five members to be known as the Federal Home Loan Bank Board. This board was empowered to establish and supervise a system of regional banks whose stock may be owned by building and loan associations, savings banks, and life insurance companies, which wish to become members, and the United States. As of June 3o, 1939, the 12 banks in the system had member institutions, nearly all of which are of the building and loan type. In order to get the system established, the Government of the United States agreed to invest not to exceed $125,000,000 in the capital of the 12 banks. As of June 3o, 1939, the amount actually invested was The law provides the conditions under which this investment is to be retired. In addition, as of the same date, member institutions held stock in these banks amounting to $39,609,100. Modest dividends are paid on the stock of these banks.
In addition to the capital of the Federal Home Loan banks, which may be loaned to their members for either short periods of time or for terms up to ten years, the banks had outstanding on June 3o, 1939, $90,000,000 in consolidated debentures. They also had deposits from their members aggregating $32,291,600. Advances to members on the same date amounted to $168,962,000 and consolidated assets of the 12 banks amounted to $296,630,000.
Each bank is organized as a separate corporation, with a board of directors of 12 members. Eight are elected by the members and four are appointed by the Federal Home Loan Bank Board. While the management of each bank directs its own internal affairs, the limits of broad policies are set by law and by the regulations of the Federal Home Loan Bank Board. On many questions the system is operated on a basis of co-operation among all 12 banks.
This corporation has for its directors the five members of the Fed eral Home Loan Bank Board. Its original capital of $200,000,000 was subscribed by the Reconstruction Finance Corporation, a Government owned lending agency. The HOLC was authorized to issue bonds to an amount not to exceed $4,750,000,000. The principal and interest are guaranteed by the United States. The corporation was authorized to exchange its bonds for the mortgages of distressed home owners. Bonds to a total in excess of $3,0oo,000,000 were used to acquire mort gages on more than i,000,000 homes. The corporation ceased making new loans in June 1936.
The direct effects of the operations of this corporation are as follows. It gave distressed home owners an opportunity to work out their home financing problems under favourable conditions. It increased the liquidity and helped to maintain the solvency of untold numbers of home financing institutions by giving them readily marketable bonds in exchange for delinquent mortgages. And it helped to check the downward spiral of real estate values.
The indirect effects of this corporation's entrance into the home financing field are important. It substituted the monthly direct reduc tion loan for a wide variety of lending policies. Because of the broad scope of its operations, it has done more than any other agency to popularize the advantages of the direct reduction loan plan. It intro duced a common interest rate of 5% into a field of finance where rates were generally higher—in some sections of the country very much higher. The effects of this lower rate have already borne fruit in en couraging lower rates on loans by private institutions. Effective Sept. 16, 1939, the HOLC reduced its interest rate on mortgages to four and one-half percent. It introduced improved techniques in making loans, some of which have since been adopted by private agencies.
Those who drafted the bill which became the Home Owners Loan Act of 1933 provided for the chartering and supervision of Federal savings and loan associations by the Federal Home Loan Bank Board. The plan of organization and operation of the Federal associations is essentially a composite of the most effective practices followed by building and loan associations in various parts of the United States. In the main, it follows the outline of a model plan promulgated by a special committee of the United States Building and Loan League a few years before the Federal association was authorized. Some have called this type of institution the stream-lined building and loan associ ation because it represents the most modern type of thrift and home financing institution.
Federal charters are granted under either of two sets of conditions. Some associations have started with only a modest amount of cash subscribed by interested parties in any community. Others have been converted from State-chartered building and loan associations. In either event they are locally owned and locally managed thrift and home financing institutions operating under rules and regulations formulated by the Federal Home Loan Bank Board.
On the thrift side of their operations they resemble mutual savings banks. They offer savings and investment accounts to the investing public. Unlike the older types of building and loan associations, the tendency of the Federal associations is to say less and less about stock or shares. On the lending side, the Federals use the monthly direct reduction loan plan. Both investors and borrowers are members of Federal savings and loan associations, with the right to vote at all meetings of members.
In order to encourage private investment in Federal savings and loan associations, Congress placed at the disposal of the Federal Home Loan Bank Board in $50,000,000 to be invested by the United States Treasury in Federal associations. In 1935 Congress authorized the Home Owners Loan Corporation to invest an additional $300,000, 00o in Federal associations and in eligible State-chartered associations. All of the original $50,000,000 was invested in Federal associations. Up to June 3o, $219,150,000 had been invested by the Home Owners Loan Corporation ; about one-fourth in State-chartered associ ations and three-fourths in Federal associations. As of the same date, 636 new Federal savings and loan associations had been organized with total assets on that date of $397,239,000. Seven hundred and fifty State-chartered associations had been converted into Federal associa tions. Their total assets amounted to $1,044,830,000. As a class, the Federal associations represented the most active type of thrift and home financing institution in the United States in 1938 and 1939. The Federal associations have had a broader influence upon the industry than their numbers and financial resources would indicate. The pro gressive managers of many State-chartered associations have adapted to their own uses the basic features of the Federal plan of organization and operation. In some cases, State building and loan codes have been drastically revised to provide for the operation of associations under their jurisdiction in a manner to conform essentially to the Federal plan. The leadership of the Federal associations is bearing fruit throughout the entire industry.
Progress Toward of June 3o, 1939, the building and loan industry of the United States showed definite evidence of re covery from the prolonged depression of the previous decade. Partic ularly is this true of those associations which are taking advantage of the assistance provided for their use by the various agencies of the United States Government discussed above.
Bodfish and A. D. Theobald, Savings and Loan Principles (1938) ; Morton Bodfish, editor, History of Building and Loan in the United States (1931); Horace F. Clark and Frank A. Chase, Elements of Modern Building and Loan Associations (1925) ; Building and Loan Annals, published annually by the United States Building and Loan League; Annual Reports of the Federal Home Loan Bank Board, (1933 to date) ; Federal Home Loan Bank Review, a monthly by the Federal Home Loan Bank Board. (H. E. Ho.)