Resolution Trust Corporation

Historical Context

The history of S&Ls dates back to the early 20th century when there was a national movement to promote homeownership through S&Ls (which would include other mutual savings associations such as building and loan societies). The homeownership movement and the viability of S&Ls were threatened by the economic crisis arising from the Great Depression. In an effort to both stimulate the economy and mitigate the financial impact on potential home buyers, legislation under the Hoover administration created the Federal Home Loan Bank Board (FHLBB) in 1932 to charter and supervise thrifts and establish a network of Federal Home Loan Banks that would charter and lend funds to S&Ls to provide mortgage financing for single-family homes. Later, Roosevelt's New Deal administration saw the passage of the Glass-Steagall Banking Act of 1933, which heralded banking reform measures that, first of all, mandated the separation of speculative investment banking away from and outside of commercial lending and depository banking institutions. The passage of Glass-Steagall formed the Federal Bank Deposit Insurance Corporation (later to become the FDIC), which insured bank deposits secured by funding commitments from member banks of the Federal Reserve. As an additional preemptive measure, the Roosevelt administration created the Home Owners’ Loan Corporation (HOLC) in 1933 to refinance at-risk mortgage loans to avert foreclosures, thereby improving the balance sheets of thrifts and other commercial lending institutions. A year later in 1934, the Federal Housing Administration (FHA), the successor organization that replaced the HOLC upon completion of its legislated 3-year tenure, was established by the National Housing Act of 1934 to insure single family and multifamily mortgage loans. As part of the same law, the Federal Savings and Loan Insurance Corporation (FSLIC) was created and organized under the FHLBB to insure deposits placed in S&Ls. By and large, the sense of urgency driven by the Great Depression–era economy shaped a regulatory framework that minimized the economic risks of depositors and lenders alike by encouraging consumers to save and lenders to underwrite mortgage loans. The ensuing decades that led up to the period just before the S&L debacle of the 1980s witnessed a robust growth in the thrift and mortgage lending industries and the expansion of homeownership largely due to the banking reform of the 1930s and the ongoing regulatory supervision and oversight incorporated into the federal banking system. Even so, S&Ls found themselves in a quandary in the late 1970s. The Federal Reserve's Regulation Q capped the interest rates that depositors could earn on S&L [Page 626]savings accounts while placing no restrictions on new forms of savings instruments such as unregulated money market funds. The Federal Reserve's rationale for Regulation Q was fundamental to the nature of savings deposits; since savings deposits could be withdrawn by customers at any time, such deposits are considered short-term liabilities. The potential of losing customers seeking higher yields to brokers of money market funds represented a financial risk to S&Ls because the book value of their deposits, in accounting terms, were generally much higher than the cash value of those deposits. Furthermore, persistently high inflation in the late 1970s and early 1980s drove up mortgage interest rates to double-digit levels. High inflation and high mortgage interest rates, taken in tandem, would have a catastrophic impact on the capitalized value of the portfolios of long-term fixed-rate mortgages held by S&Ls, which were underpinned by a huge potential call on short-term liabilities. It is no wonder that the out-of-kilter balance sheets carried by S&Ls, where liabilities far exceeded the market value of assets, led to the insolvency of S&Ls. The FDIC reported that by 1986, 441 S&Ls with $113 billion in assets had already been declared insolvent.

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