Banks, Lenders,
Secondary Mortgage
Market...
Savings and loan
associations are the
single most
important source of
home financing money for
residential real
estate.
Historically, they
can be traced
back to early
building societies
in England and
Germany. These were
cooperative lending
associations whose
members pooled their
money to make home
loans to each other.
Regulation and
Deposit Insurance
A savings and
loan association may
be either state or
federally chartered.
In the later case,
the word
"Federal"
appears in its
name. A charter is
an association's
permit to operate.
Federal charters are
issued by the
Federal Home Loan
Bank Board (FHLBB).
A
federally-chartered
association must be
a member of the
Federal Home Loan
Bank System (FHLBS),
and carry Federal
Savings and Loan
Insurance
Corporation (FSLIC)
insurance. (The
FHLBB is the
governing body of
the FHLBS.) Until
new federal
legislation in 1981,
federally-chartered
S&Ls were
required to be
mutually owned
(owned by their
depositors). Today,
a
federally-chartered
S&L can be
either mutually
owned or owned by
stockholders.
An outgrowth of
the 1930 depression,
the FSLIC is an
agency of the U.S.
Government that
insures savers'
deposits against the
possibility they
will not be
available whenever
the savers wish to
withdraw them. For
this insurance,
which is $100,000
per account, the
S&L pays an
insurance premium to
the FSLIC of ½ of
1% per year times
its savings
deposits. The
Federal Home Loan
Bank System was also a product
of the Great
Depression; it was
formed to bring
order to chaotic and
often weak state
banking and savings
laws. Today the
FHLBS regulates the
geographic area a federally-chartered
S&L can lend in,
maximum loan size,
maximum
loan-to-value
ratios, and the
ratio of home loans
to other types of
loans. The
Federal Home Loan
Bank System also provides
S&Ls with access
to the nation's
capital markets, as
we will see
later.
State-chartered
associations can be
mutually owned by
depositors or by
corporations owned
by stockholders.
Federal Home Loan
Bank System membership and
FSLIC insurance are
optional. Whether
federal or state in
origin, to be
chartered an
association must be
financially healthy,
have a sound lending
policy, and maintain
adequate amounts of
cash and other
liquid assets to
meet depositors' withdrawal
demands. The
Federal Home Loan
Bank Board and the FSLIC
periodically audit
the accounting books
of members to assure
compliance with
regulations and
sound lending
practices.
Minnesota-chartered
associations are
subject to audit by
the Office of the
Commissioner of
Banking.
Savings
Accounts
As October, 1983,
savings and loan
associations were
offering several
types of accounts to
attract savers.
These included
regular passbook
savings accounts,
checking accounts,
fixed rate
certificates, market
rate passbook and
checking accounts
and various
retirement
accounts.
The standard
passbook pays savers
5½% per year
interest and allows
the flexibility of
depositing or
withdrawing without
penalty and requires
a minimum balance of
as little as $1.
Higher interest is
available to
passbook savers
willing to keep a
balance of $2,500 or
more. Checking
accounts, introduced
in 1981, allow the
payment of interest
on funds held in a
checking account.
The rate of interest
paid is 5¼% and
checking services
are usually free if
a minimum balance of
$500 is maintained
in the account.
Higher interest is
available with a
$2,500
minimum.
Money Market
Certificates
To compete with
yields offered on
bills, notes and
bonds offered by the
U.S. Treasury,
S&Ls offer a
variety of money
market certificates.
These are savings
certificates, also
called certificates
of deposit, wherein
the saver agrees to
leave money on
deposit for a fixed
period of time. In
return, the S&L
agrees to pay the
saver a rate of
interest which is
higher than that
offered on passbook
accounts. These
certificates range
from as short as 32
days in length up to
10 years and
sometimes 20
years.
Generally
speaking, the longer
a saver agrees to
leave money on
deposit, the higher
the rate of interest
the S&L will pay
the saver. Each
S&L sets its own
rate, and it is
usually based on
current yields
available on the
above listed
Treasury securities.
Also, each S&L
can change its rates
in response to
current interest
rates in the
marketplace. The
minimum account
balance for a
certificate is
typically $1,000 to
$2,500. If a saver
wants a certificate
of $100,000 or more,
sometimes called a
"jumbo"
certificate, most
S&Ls will
negotiate a higher
interest rate on an
individual account
basis. S&Ls also
offer various types
of tax-deferred
retirement accounts
at attractive rates
of interest.
A key point to
remember is that a
savings and loan is
an intermediary
between savers and
borrowers. S&L
loans tend to be
long-term, S&Ls
pay higher interest
rates to savers who
are willing to
commit to leaving
their savings on
deposit for longer
periods of
time.
Disintermediation
The purpose of
offering savings
certificates that
pay interest similar
to what is available
from Treasury
securities is to
prevent
disintermediation.
Disintermediation
results when
depositors take
money out of their
savings accounts and
invest directly in Treasury
securities. In the
past, when Treasury
securities, in
particular 3-month
and 6-month Treasury
bills, paid more
than S&L
accounts, money
would flow out of
savings accounts
with the result that
S&Ls had
less money to
lend. Without
loan money, the real
estate market would
go into the
doldrums. Today,
S&Ls can offer
high enough returns
to attract money.
Savings
And Loan To
Commercial Banks
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