Mortgage Finance

The Local Building and Loan

From the early 20th century through at least the 1970s, no single type of lender was more important to the development of risk-limiting mortgage markets than the building and loan (B&L), later called the local institutions, with many member-depositors knowing each other or having some common association. Social and geographic cohesiveness gave B&Ls an informational advantage that kept underwriting costs and defaults low. Besides B&Ls, life insurance and mortgage companies were important providers of mortgages in the late 19th and early 20th centuries. Mortgage companies made loans and then sold either individual loans or bonds backed by the loans to investors.

Local B&Ls grew significantly in the early 20th century. After the Bankers’ Panic of 1907 and through the boom period of the early 1920s, the number of local B&Ls grew, buttressed by the social and cultural mores that favored homeownership and by the general growth in real estate and the economy. With the real estate collapse of the late 1920s and the advent of the Great Depression, the number of B&Ls declined, but at the beginning of the Great Depression, savings and loans still held about one third of the outstanding home mortgages in the United States.

There were significant differences in the structure and nature of credit provided by different types of lenders. B&Ls provided longer-term loans with higher loan-to-value ratios than banks or insurance companies. Borrowers with the shorter-term loans had to take out new loans much more frequently and so incurred the up-front borrowing costs more often. Loans with lower loan-to-value ratios typically required the involvement of a substantial second mortgage, which came with very high fees and interest rates.

The 1930s: Federal Leadership in Home Finance

Federal involvement in the mortgage market began with the Federal Home Loan Bank Act of 1932, which President Hoover proposed and signed. This bill created the Home Loan Bank System to provide liquidity to B&Ls and to increase their role in the mortgage market. The Home Loan Bank System effectively endorsed the B&L-type loan and was the first direct government vehicle for dealing with the long-term/short-term liquidity mismatch that faced B&Ls with short-term deposits.

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