The economic significance of savings and loan associations with emphasis on Los Angeles County

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Content I
THE ECONOMIC SIGNIFICANCE OP SAVINGS AND LOAN ASSOCIATIONS
WITH EMPHASIS ON LOS ANGELES COUNTY
A T h e s is
P r e se n te d to
th e F a c u lt y o f th e S c h o o l o f Commerce
The U n iv e r s it y o f S ou th ern C a lif o r n ia
In P a r t i a l F u l f il l m e n t
o f th e R equirem ents f o r th e D egree
M aster o f B u s in e s s A d m in is tr a tio n
by
D orothy Ann Bauer
January 1953
U M I Number: EP43346
All rights reserved
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This thesisj written by
D orothy Ann Bauer
under the guidance of A.™...Facuity Committeej
and approved by all its members, has been
presented to and accepted by the Council on
Graduate Study and Research in partial fullfill-
ment of the requirements for the degree of
M aster o f B u s in e s s A d m in is tr a tio n
Faculty Committee
Chairman
TABLE OP CONTENTS
CHAPTER PAGE
I* PRESENTATION OF THE PROBLEM.............................................. 1
The p r o b l e m .................................................................................. 2
S tatem en t o f th e p rob lem .............................................. 2
Im portance o f the stu d y . . . ............................... 3
D e f i n i t i o n s o f term s u sed ............................................... 6
S a v in g ............................................. 7
S a v i n g s ......................... 7
In v e stm e n t. ................................... 7
F in a n c ia l i n s t i t u t i o n ................................................... 8
S a v in g s i n s t i t u t i o n ............................... 9
Home f in a n c in g i n s t i t u t i o n ......................................... 9
S a v in g s and lo a n a s s o c i a t i o n .................................... 10
S a v in g s and lo a n a s s o c i a t i o n s ............................... 10
D e l im i t a t io n o f th e p r o b l e m ......................................... 11
The p e r io d ch o sen f o r s t u d y .................................... 11
G eo g r a p h ic a l d e l i m i t a t i o n ......................................... 12
Types o f sa v in g s and lo a n a s s o c i a t i o n s
s t u d i e d .................................................................................. 13
Review o f th e l i t e r a t u r e . .......................... llj.
O r g a n iz a tio n o f the rem ainder o f the t h e s i s . 18
I I . THE ECONOMIC ENVIRONMENT OF SAVINGS AND LOAN
ASSOCIATIONS.................................................................................. 21
P u rp oses o f th e c h a p te r ..............................................
P u rp oses fo r w hich sa v in g s and lo a n
a s s o c i a t i o n s e x i s t .........................................................
The o r g a n iz a t io n of sa v in g s and lo a n
a s s o c i a t i o n s ........................................................................
S u p e r v is io n and r e g u la t io n o f s a v in g s and
lo a n a s s o c i a t i o n s ........................................................
The r e l a t i o n s h i p b etw een th e form o f
o r g a n iz a t io n o f s a v in g s and lo a n a s s o c i a
t i o n s i n C a lif o r n ia and th e ty p e s o f
in v e s tm e n ts o f f e r e d ....................................................
Management o f s a v in g s and lo a n a s s o c i a t i o n s
Tax s t a t u s o f sa v in g s and lo a n a s s o c i a t i o n s
E s s e n t i a l d i f f e r e n c e s betw een com m ercial
banks and sa v in g s and lo a n a s s o c i a t i o n s .
The r e l a t i o n s h i p o f the F e d e r a l Home Loan
Bank System to s a v in g s and loan a s s o c i a
t i o n s .............................................................................
E v a lu a tio n of th e r o le of th e F e d e r a l Home
Loan Bank S ystem ..............................................................
The r e l a t i o n s h i p of th e F e d e r a l S a v in g s and
Loan In su ra n ce C o rp o ra tio n to s a v in g s and
lo a n a s s o c i a t i o n s ........................................................
CHAPTER PAGE
E v a lu a tio n o f th e r o le o f th e F e d e r a l
S a v in g s and Loan In su ra n ce C o r p o r a tio n . 77
C o n c l u s i o n s .................................................................... 80
I I I . FINANCIAL M ANAGEM ENT IN SAVINGS AND LOAN
ASSOCIATIONS.................................................................... 89
P urposes o f th e c h a p t e r ...................................... 89
The in v e stm e n t p o r t f o l i o ...................................... 89
L eg a l r e s t r i c t i o n s w hich in f lu e n c e th e
in v e stm en t p o r t f o l i o ........................................... 92
O ther f a c t o r s w hich in f lu e n c e th e i n v e s t
ment p o r t f o l i o .......................................................... 97
C h a r a c t e r is t ic s o f m ortgage lo a n s made by
sa v in g s and lo a n a s s o c i a t i o n s ................. 106
S a f e t y ................................................... ........................................ 12f>
L i q u i d i t y ......................................................................... 133
C o n c l u s i o n s .............................................................................
IV . THE QUANTITATIVE IMPORTANCE OF SAVINGS AND
LOAN ASSOCIATIONS IN LOS ANGELES COUNTY . . ll+8
P u rp oses o f th e c h a p t e r ...................................... l l |_ 8
The grow th o f s a v in g s in s a v in g s i n s t i t u
t i o n s i n Los A n g ele s C o u n t y ....................... II4.8
The grow th o f sa v in g s in sa v in g s and lo a n
a s s o c i a t i o n s in Los A n g e le s C ounty. . • . l £ l
v i
CHAPTER PAGE
S u g g e ste d r e a so n s fo r th e grow th o f sa v in g s
in s a v in g s and lo a n a s s o c i a t i o n s in
Los A n g e le s C ounty.............................................................. 152
Growth of h o u sin g f a c i l i t i e s and home
ow n ersh ip in th e Los A n g e le s a rea . . . . l61|
Growth o f r e a l e s t a t e le n d in g by sa v in g s
and lo a n a s s o c i a t i o n s in Los A n g ele s
C ou nty....................................................................................... 167
S u g g e ste d r e a s o n s fo r th e in c r e a s e d p a r
t i c i p a t i o n o f r e a l e s t a t e le n d in g by
sa v in g s and lo a n a s s o c i a t i o n s i n Los
A n g e le s C ounty.................................................................... 167
C o n c l u s i o n s ............................................................................. 17l+
V. SUM M ARY AND CONCLUSIONS.................................................... 178
BIBLIOGRAPHY................................................................................................. 19 8
LIST O F TABLES
TABLE
I.
I I .
I I I .
IV.
PAGE
Comparison o f S a v in g s and Loan A s s o c ia t i o n s
and Commercial Banks a s to S e l e c t e d
B alan ce S h e e t Q u a n t it i e s , December 3 1 ,
1950 .............................. 52
A s s e t s and L i a b i l i t i e s o f F e d e r a l Home Loan
Bank System Member S a v in g s and Loan
A s s o c ia t i o n s i n C a l i f o r n ia , December 3 1 ,
1950 ................................... 90
Condensed S ta te m e n ts o f C o n d itio n o f
S ou th ern F e d e r a l S a v in g s and Loan A s s o c ia
t i o n and W ils h ir e F e d e r a l S a v in g s and Loan
A s s o c ia t i o n o f Los A n g e le s , June 30 , 1951* 98
Com parison o f S a v in g s and Loan A s s o c ia t i o n s
i n Los A n g e le s County and S a v in g s and Loan
A s s o c ia t i o n s O p eratin g Throughout th e
U n ite d S t a t e s a s to the P er ce n ta g e o f
F i r s t M ortgage Loans to T o ta l A s s e t s ,
1914.1 - 1 9 5 0 ...................................................................................................
M onthly Payments and T o ta l I n t e r e s t P aid on
a $ 1 0 ,0 0 0 Home P urch ase Assuming a F iv e
and one h a l f Per c e n t I n t e r e s t Rate and
V arying Down Payments and A m o r tiz a tio n
TABLE
VI.
VII*
V I I I .
IX.
X.
X I.
X II.
P e r io d s ............................................................................................
M onthly Paym ents and T o ta l I n t e r e s t P aid on
an $>8,000 Loan, Assum ing a Ten Y ear A m orti
z a t io n P e r io d and V arying I n t e r e s t R a te s • .
D o lla r Amount o f S a v in g s H eld by I n d iv id u a ls
in Los A n g e le s County and th e P er ce n ta g e
Change from 191*1-1951 and 191*5-1951.....................
P o p u la tio n in Los A n g e le s C ounty, C a l i f o r n ia ,
and th e U n ite d S t a t e s , 191*0-1950 . . . . . .
Number o f I n v e s t o r s , D o l l a r Amount o f I n v e s t
m en ts, and P er ce n ta g e Changes i n Number o f
I n v e s t o r s and D o lla r Amount of In v e stm e n ts
in S a v in g s and Loan A s s o c ia t i o n s i n Los
A n g e le s C ounty, 191*1-1950..............................................
D o lla r Amount o f , and P er ce n ta g e Changes i n ,
S a v in g s i n S a v in g s and Loan A s s o c ia t i o n s
in Los A n g e le s County and T o ta l S a v in g s o f
I n d iv id u a ls i n Los A n g e le s County from
1914.1 -1 9 5 1 and 1 9 i* 5 -1 9 5 l...................................................
Consumer1s P r ic e In d ex and V a lu e s o f th e
D o lla r in Los A n g e le s from 191*1-1951 • • • •
R eal E s t a t e Loans Made and H eld by S a v in g s and
Loan A s s o c ia t i o n s i n Los A n g e le s C ounty,
191* 3 - 1 9 5 1 .................................................................... . . .
v i i i
PAGE
108
121
U *9
150
153
1 5 1 4 -
156
168
CHAPTER I
PRESENTATION OF THE PROBLEM
T r a d i t i o n a l l y , A m ericans have b een d e s ir o u s o f
owning t h e i r own homes* For most f a m i l i e s , i t i s im p o s s i
b le to s a t i s f y t h i s d e s ir e fo r home ow nership by m ee tin g
th e t o t a l c a sh payment r e q u ir e d w ith sa v in g s ou t o f income,
N e c e s s i t y and th e d e s ir e fo r im m ediate h o u s in g , i n a d d i
t i o n t o c o n d it io n s w hich have made sa v in g d i f f i c u l t , have
made i t im p o s s ib le f o r m ost f a m i l i e s to fin a n c e th e e n t i r e
p u rch ase or c o n s t r u c t io n o f a home w ith p a s t s a v in g s .
F in a n c in g a h ou se through a lo a n h as been th e answer to
th e r e s u l t i n g c o n f l i c t b etw een need a n d /o r d e s i r e and
im m ediate i n a b i l i t y to p ay. The a v a i l a b i l i t y o f such
lo a n s to a la r g e segm ent o f th e p o p u la tio n u n d ou b ted ly has
p la y e d a s i g n i f i c a n t r o l e i n making th e o w n er-o ccu p ied
i
i
| home c h a r a c t e r i s t i c o f t h i s c o u n tr y .
; The su p p ly o f fu n d s g iv in g r i s e to lo a n s f o r home
|
! ow n ersh ip i s f e d by a v a r i e t y o f so u r c e s . T h is body o f
! fu n d s i s a ls o used to p r o v id e lo a n s fo r th e p u rch ase or
| c o n s t r u c t io n o f s i n g le or m u lt ip le u n it d w e llin g s w h ich
o f f e r h o u sin g f a c i l i t i e s fo r th o s e who, due to f i n a n c i a l
n e c e s s i t y or d e s i r e , are te n a n t s r a th e r th an homeowners.
T hese f i n a n c i a l r e s o u r c e s are drawn from i n d iv id u - /
! a l s or i n s t i t u t i o n s p r im a r ily or i n c i d e n t a l l y i n t e r e s t e d ]
in the le n d in g of fu n d s f o r th e buying or c o n s t r u c t in g of
i
hom es. The l a r g e s t su p p ly o f such fu n d s in the U n ite d j
S t a t e s comes from s a v in g s and lo a n a s s o c i a t i o n s . ^ The
f u r n is h in g o f th e fu n d s w ith w h ich t h e s e i n s t i t u t i o n s make
lo a n s comes p r im a r ily from i n d iv i d u a l s who have em ployed
i
them as an o u t l e t fo r e x c e s s fu n d s . ;
I . THE PROBLEM ^
i
S ta tem en t o f th e p rob lem . The sa v in g s and lo a n |
I
a s s o c i a t i o n i s unique i n i t s co m b in a tio n of f u n c t i o n s , f o r \
l
i t h as as. prim ary f u n c t io n s th e s e r v ic e b o th as an o u t l e t j
fo r e x c e s s fu n d s o f i n d iv i d u a l s and a s a sou rce o f fu n d s ]
!
f o r home f i n a n c in g . The r i s i n g q u a n t i t a t i v e p o s i t i o n o f '
sa v in g s and lo a n a s s o c i a t i o n s i n b o th th e f i e l d s o f sa v in g s
and home fin a n c e r a i s e s a v a r i e t y o f q u e s t io n s su ch a s : |
what are th e unique c h a r a c t e r i s t i c s o f s a v in g s and lo a n j
i
a s s o c i a t i o n s ? why have th e y a t t a in e d t h e i r p r e s e n t s t a t u s ? |
i
what have been th e r e s u l t s o f t h e i r grow th? and, do th e j
r e s u l t s j u s t i f y t h e i r e x is t e n c e a s an im p ortan t f a c t o r i n |
th e > f-in aneial community?, j
' “ “ “ " ■ " L l ' l
1 :
F o u rth Annual R e p o r t, H ousing and Home F in an ce
A gen cy , 19 5 0 (W ashington, D .C .: U n ite d S t a t e s Government
P r in tin g O f f i c e , 1 9 5 1 ), p . 35.
3 l
I
I t was n ot th e p u rp ose o f th e stu d y e i t h e r to defend;
i
or to condemn s a v in g s and lo a n a s s o c i a t i o n s * R a th er, i t
was th e purpose o f t h i s stu d y : (1) To i n v e s t i g a t e th e
a c t u a l f u n c t io n s o f s a v in g s and lo a n a s s o c i a t i o n s ; ( 2 ) to
show t h e i r r e l a t i v e p o s i t i o n in th e f i e l d s o f s a v in g s and
home f in a n c in g ; ( 3 ) to in q u ir e in t o th e f a c t o r s le a d in g
to t h e i r p r e s e n t q u a n t i t a t i v e im p o rta n ce; and (ij.) to co n
s id e r the e f f e c t s th e y have upon th e i n d i v i d u a l , s o c i e t y ,
and th e economy.
Im portance o f th e s tu d y . The grow th o f s a v in g s and t
i
lo a n a s s o c i a t i o n s a s an o u t l e t fo r th e e x c e s s fun ds o f ; L
\
i n d iv i d u a l s h a s been p a r t i c u l a r l y pronounced d u rin g th e .
p a s t e ig h t y e a r s .^ In 1950, s a v in g s and lo a n a s s o c i a t i o n s j
w itn e s s e d a g r e a t e r g a in i n n e t s a v i n g t h a n d id any o th er
o u t l e t f o r i n d iv i d u a l s a v in g s e x c e p t l i f e in su r a n c e compa- j
n i e s A As s t a t e d p r e v io u s l y , s a v in g s and loan a s s o c i a t i o n ^
2 ' , ;
| Trends i n the S a v in g s and Loan F i e l d (W ash in gton, i
j D .C . : O p era tin g A n a ly s is D i v i s i o n o f th e Home Loan Bank
! B oard, March 3 0 , 1951)* p. 3-
3 i
j The n e t s a v in g s f ig u r e i s d e r iv e d from th e d i f f e r
en ce b etw een th e amount o f fu n d s w h ich was e n tr u s te d t o
' i n s t i t u t i o n s and th e amount w hich was withdraw n d u rin g th e i
y e a r .
k i
Annual S t a t i s t i c a l R eport on th e S a v in g s A s s o c i - ,
a t i o n and C o -o p e r a tiv e Bank System ^ C h ic a g o : U n ited j
S t a t e s S a v in g s and Loan L eague, 1951)> p. 13* I
as a c l a s s , p r o v id e th e m ajor so u rce o f fu n d s a v a i l a b l e j
fo r home f in a n c in g . At th e end o f 1950, t h e s e in s tit u t io n s ^
h e ld n e a r ly o n e - t h ir d o f the t o t a l d o l l a r amount o f th e j
home m ortgage d eb t o f th e U n ite d S t a t e s . ^ The q u a n tita tiv e !
!
im p ortan ce o f s a v in g s and lo a n a s s o c i a t i o n s can n ot be d i s - !
r eg a r d e d .
In th e p r o c e s s o f r e c e i v in g su r p lu s fu n d s from i n d i
v i d u a ls and d i s t r i b u t i n g t h e s e fu n d s to i n d iv i d u a l s seeking!
lo a n s i n o r d e r to buy or b u ild hom es, s a v in g s and lo a n a s - i
i
s o c i a t i o n s a c t as t r a n s f e r a g e n t s . In t h i s p r o c e s s , th e ;
im m ediate sp en d in g power o f one group o f i n d iv i d u a l s i s J
d e c r e a se d i n r e tu r n f o r the o f f e r o f a p la c e where fu n d s
may s a f e l y earn a r e tu r n . Thus a c h a in o f e v e n ts i s ;
i
i
s im u lta n e o u s ly begun by in c r e a s in g th e im m ediate sp en d in g ■
power o f a n o th e r group o f i n d iv i d u a l s th ro u g h l o a n s . T h is |
I
group e i t h e r p u r c h a se s m a t e r ia ls and la b o r f o r home c o n - j
i
s t r u c t i o n , th e r e b y in c r e a s in g econom ic a c t i v i t y and th e j
i
su p p ly o f hom es, or t r a n s f e r s fu n d s to o th e r i n d iv i d u a l s
i
h a v in g homes f o r s a l e . I t i s n o t d i f f i c u l t to see t h a t
-
In 1950, s a v in g s and lo a n a s s o c i a t i o n s h e ld 3 1 .3
p er c e n t o f th e t o t a l d o l l a r amount o f th e home m ortgage ;
d e b t, banks and t r u s t com panies h e ld 2 0 .8 p e r c e n t , i n d i - j
v id u a ls h e ld llj.,2 p e r c e n t , in su r a n c e com panies h e ld 1 0 .0 ;
p er c e n t , m utu al s a v in g s banks h e ld 6 .6 p e r c e n t , and a l l j
o th e r m o rtg a g e es h e ld 17*1 p er c e n t . F o u r th Annual R eport I
H ousing and Home F in a n c e Agency , 1 9 5 0 / p / 35 * !
th e a c t i v i t y o f a sse m b lin g and t r a n s f e r r in g fu n d s c a r r i e s i
!
i w ith i t i n d i v i d u a l , s o c i a l , and econom ic i m p l ic a t i o n s .
| The a c t i v i t i e s o f s a v in g s and lo a n a s s o c i a t i o n s a re |
! d i r e c t l y co n cern ed w ith the i n t e r e s t s o f i n d i v i d u a l s who i
I I
j are a c t u a l or p o t e n t i a l i n v e s t o r s i n , o r b orrow ers from j
!
th e s e i n s t i t u t i o n s ; to th o s e who are th e i n d i r e c t r e c i p i
e n t s o f th e fu n d s d is b u r s e d to b orrow ers; t o th o s e in
[
i
j c o m p e titio n w ith s a v in g s and lo a n a s s o c i a t i o n s , se e k in g
!
to a t t r a c t th e su r p lu s fu n d s o f i n d iv i d u a l s and t o advance I
; I
I money f o r home f in a n c in g ; and t o p r e s e n t or p o t e n t i a l
i
i |
em p loyees o f s a v in g s and lo a n a s s o c i a t i o n s . i
i
As such o r g a n iz a t io n s have expanded, th e s i z e and
I number o f grou p s a f f e c t e d by them h as a ls o grown. S o , j
( a l s o , a s a n a tu r a l developm ent o f t h i s c h a in r e a c t i o n ,
t
i n d iv i d u a l i m p l ic a t i o n s have become s o c i a l and econom ic
j i m p l i c a t i o n s . The su p p ly o f h o u s in g , the econom ic a c tiv it y :
! I
| w hich e v o lv e s from home c o n s t r u c t io n , th e s a f e t y o f i n s t i - «
t u t i o n s to w hich la r g e numbers o f i n d iv i d u a l s have entrust-1
J i
ed t h e i r s a v in g s , and th e c o m p e titiv e a s p e c t s o f th e fie ld s ;
! i
i o f s a v in g s and home f in a n c e are d e f i n i t e l y o f s o c i a l and j
i :
i i
i econom ic c o n c e r n . S a v in g s and lo a n a s s o c i a t i o n s have
l i
, grown to such p r o p o r tio n s th a t tod ay th e y a r e an im p ortan t ;
I f a c t o r in any o f th e s e c o n s i d e r a t io n s .
S a v in g s and lo a n a s s o c i a t i o n s have b een d is c u s s e d [
6 I
I
p r im a r ily by th o s e a f f i l i a t e d w ith t h a t b u s i n e s s and by 1
b u s in e s s c o m p e t it o r s , e a ch r e s p e c t i v e l y em p h a sizin g th e
f a v o r a b le and u n fa v o r a b le c h a r a c t e r i s t i c s in v o lv e d . I t i s
im p o s s ib le to make an o b j e c t i v e a p p r a is a l on th e b a s i s o f
b ia s e d in fo r m a tio n . L i t t l e a ttem p t h a s b een made p r e v io u s
l y to b r in g t o g e t h e r th e f a c t u a l m a t e r ia l v i t a l to such an
a p p r a i s a l. A b u lk o f in fo r m a tio n on th e s u b j e c t i s a v a i l
a b le to one w i l l i n g t o be t o l d what t o t h in k . L i t t l e i s
a v a i l a b l e ' t o one d e s ir o u s o f making h i s d e c i s i o n from an
I
ad eq u ate su p p ly o f f a c t s . |
I
T h is stu d y was con d u cted t o p r o v id e o b j e c t i v e and ;
c u r r e n t in fo r m a tio n on th e s u b j e c t in o rd er to f a c i l i t a t e
a c le a r e r u n d e rsta n d in g o f th e q u a n t i t a t i v e and q u a l i t a t i v e \
s i g n i f i c a n c e o f s a v in g s and lo a n a s s o c i a t i o n s . j
I I . DEFINITIONS OF TERMS USED I
i
D i f f e r e n c e s in i n d iv i d u a l e x p e r ie n c e s g iv e r i s e to !
! I
1 a v a r i e t y o f i n t e r p r e t a t i o n s i n th e u n d e r sta n d in g o f a j
i . I
< g iv e n word. M isu n d ersta n d in g i s o f t e n th e r e s u l t o f a lack j
o f m u tu a lit y i n th e u n d e rsta n d in g o f a s i n g le word. I t , |
t h e r e f o r e , seems v i t a l a t th e b e g in n in g o f an e x a m in a tio n
• ;
o f any problem t h a t p e r t in e n t term s la c k in g a th o r o u g h ly
i
| common m eaning be c a r e f u l l y d e fin e d so a s t o a v o id m is
i n t e r p r e t a t i o n l a t e r on i n th e d i s c u s s i o n . I
7
S a v in g , The term ” sa v in g ” i s used i n t h i s stu d y to
i n d ic a t e th e p r o c e s s by w hich i n d iv i d u a l s r e f r a i n from
sp en d in g t h e i r e n t i r e e a r n in g s or incom es f o r good s and
i !
I s e r v i c e s d u rin g a g iv e n p e r io d . As a r e s u l t o f s a v in g , 1
:
in d i v i d u a l s r e t a i n a c e r t a i n amount o f fu n d s w hich may be j
i
! u sed f o r f u t u r e con su m p tio n .
'i
J S a v in g s . Funds w h ich have been sa ved may be c o n
v e r t e d in t o a v a r i e t y o f a s s e t s . In t h i s stu d y 1 1 s a v in g s ’1 j
i n d i c a t e s th e q u a n t i t i e s o f fu n d s saved and c o n v e r te d in t o
d e p o s i t s in sa v in g s b a n k s, sa v in g d ep artm en ts o f com m ercial
! !
j b a n k s, or th e P o s t a l S a v in g s S ystem ; l i f e in s u r a n c e , U nitedj
J S a v in g s bonds; or in v e s tm e n ts i n s a v in g s and lo a n a s s o c i
a t i o n s . I t i s assumed t h a t th e i n d iv i d u a l who h o ld s h i s
l
s a v in g s i n such form s i s p r im a r ily co n cern ed w ith p r e s e r v - ,
i
in g h i s s a v in g s f o r fu tu r e sp en d in g . T h e r e fo r e , he i s
b e lie v e d to be p r im a r ily i n t e r e s t e d i n s a f e t y o f p r i n c i p a l .;
i
i ‘ !
I In v e s tm e n t. In t h i s stu d y ,fin v e stm e n t” i s u sed ■
i
; j
1 b o th in i t s f i n a n c i a l and i t s r e a l s e n s e . In v estm en t i s I
j
I u sed h ere i n i t s f i n a n c i a l sen se t o i n d ic a t e th e p r o c e s s !
i
: by w h ich fu n d s are p la c e d i n an e n t e r p r is e or an i n s t i t u - |
; (
t i o n fo r a r e l a t i v e l y lon g p e r io d o f tim e i n o rd er t o !
, I
. o b ta in r e g u la r r e tu r n i n a d d it io n t o maximum s a f e t y . 0
I i
i -------------- I
o I
Byrne J. Hor t o n , J u l i en Ri p l e y , J r . , and j
8
T hus, s a v in g s and lo a n share a c c o u n ts are in v e s tm e n ts .
| R eal in v e stm e n t r e f e r s to a d d it io n s to th e su p p ly
o f p l a n t , b u i l d i n g s , m a ch in ery , and in v e n t o r y . I t a ls o !
i
! r e f e r s to a d d it io n s made to th e h o u sin g su p p ly . T hus, i
i
homes c o n s t r u c t e d a s a r e s u l t o f s a v in g s and lo a n f in a n e - |
t
i
in g are in v e s t m e n ts . To tr a c e th e c h a in o f such i n v e s t
ment i s to summarize th e term s w hich have been d e fin e d
t
ab ove. I n d iv id u a ls save money, e n t r u s t t h e i r s a v in g s to
t
s a v in g s and lo a n a s s o c i a t i o n s , w h ich , i n tu r n , i n v e s t su ch j
i
fu n d s i n m o rtg a g es on hom es, th e r e b y adding t o th e t o t a l j
; I
j r e a l in v e stm e n t o f th e c o u n tr y . j
I ;
F in a n c ia l i n s t i t u t i o n . The term ’’f i n a n c i a l i n s t i -
i 1 1 1 1
! t t i
j tu tio n " i s u sed h ere t o r e f e r to an o r g a n iz a t io n s p e c i a l -
i
| i z i n g i n a sse m b lin g money or c la im s to money from in d iv id u -j
| a l s or grou p s o f i n d iv i d u a l s and i n t r a n s f e r r in g such fundsj
j to o th e r i n d iv i d u a l s or groups o f i n d iv i d u a l s whose need
! f o r fu n d s e x c e e d s t h e i r su p p ly . As a r e s u l t o f t h i s ;
! p r o c e s s , a more p r o d u c tiv e and e f f e c t i v e d i s t r i b u t i o n o f (
! c a p i t a l funds and c a p i t a l good s t a k e s p la c e th a n i f a >
1 n 1 *
; la r g e number o f f i n a n c i a l middlemen d id n ot e x i s t. ' j
i <
(
i
I M. B. Schn app er, D ic tio n a r y o f Modern Econom ics (Washington,!
D .C . : P u b lic A f f a i r s P r e s s , 19ij-8), p . l 8 17
7
R o l l in G. Thomas, Our Modern Banking and M onetary 1
System (New York: P r e n tic e H a ll, I n c . , 1 9 5 0 ), pp. 7 1 -7 2 . \
9
S a v in g s and lo a n a s s o c i a t i o n s are th u s f i n a n c i a l i n s t i t u
t i o n s .
S a v in g s i n s t i t u t i o n . S a v in g s , a s i t i s d e f in e d i n
t h i s stu d y , c o n c e r n s such fu n d s a s rea c h th e m arket f o r
in v e stm e n t fu n d s i n two s t e p s . F i r s t , th e y are e n t r u s t e d
to an i n s t i t u t i o n . S eco n d , th e y a r e in v e s t e d by t h i s
i n s t i t u t i o n . In t h i s stu d y th e term " s a v in g s i n s t i t u t i o n "
i n d i c a t e s a f i n a n c i a l i n s t i t u t i o n w h ich h a s a s one o f i t s
prim ary p u rp o se s th e d u a l f u n c t io n o f a c t in g a s an o u t l e t
f o r i n d iv i d u a l s a v in g s and a s an in v e s t o r of su ch fu n d s .
A s a v in g s i n s t i t u t i o n i s a means w hereby i n d iv id u a l
s a v in g s rea c h th e m arket f o r in v e stm e n t fu n d s and, a s such,
become an a d d it io n to the c o u n tr y 1s t o t a l in v e s tm e n t.
S in c e th e e x i s t e n c e of s a v in g s i n d i c a t e s t h a t s a v e r s are
p r im a r ily co n cern ed w ith th e p r e s e r v a t io n o f th e p r i n c i p a l
amount o f t h e i r fu n d s, a s a v in g s i n s t i t u t i o n must s t r e s s
s a f e t y o f p r i n c i p a l i n i t s in v e stm e n t program i n o rd er to
come w ith in th e l i m i t a t i o n s o f th e term a s u sed i n t h i s
s tu d y . A s a v in g s i n s t i t u t i o n th u s may be a s a v in g s bank,
a s a v in g s departm ent o f a com m ercial bank, the P o s t a l
S a v in g s S ystem , a l i f e in s u r a n c e company, or a s a v in g s and
lo a n a s s o c i a t i o n .
Home fin a n c in g i n s t i t u t i o n . The term "home
f in a n c in g i n s t i t u t i o n ’1 r e f e r s h ere to a f i n a n c i a l i n s t i t u - J
t i o n h a v in g a s one o f i t s a c t i v i t i e s ad van cin g funds to
in d iv i d u a l s f o r th e pu rp ose o f p u r c h a sin g o r c o n s t r u c t in g
i
s i n g l e or m u lt ip le u n it r e s i d e n t i a l d w e l l in g s . j
i
S a v in g s and lo a n a s s o c i a t i o n * T h is term r e f e r s * j
i
h e r e to a f i n a n c i a l i n s t i t u t i o n d i s t i n g u i s h e d from o th e r j
f i n a n c i a l i n s t i t u t i o n s by th e f a c t t h a t i t com bines th e j
a c t i v i t i e s o f a s a v in g s i n s t i t u t i o n and a home f in a n c in g
i n s t i t u t i o n a s i t s prim ary f u n c t i o n s . F or t h i s r e a s o n a
s a v in g s and lo a n a s s o c i a t i o n may a l s o be r e f e r r e d t o a s
a s a v in g s and home f in a n c in g i n s t i t u t i o n * Many o th e r
f i n a n c i a l i n s t i t u t i o n s engage in the d u a l p r o c e s s o f s e r v -
i
in g as an o u t l e t f o r th e s a v in g s o f i n d iv i d u a l s and p r o - 1
i
i
v id in g fun ds f o r home f i n a n c i n g . The s a v in g s and lo a n ;
a s s o c i a t i o n i s unique i n t h a t t h e s e f u n c t io n s are i t s ;
prim ary p u r p o se s and a r e com bined in t o one u n i t . In sum- |
!
m ary, th e n , a s a v in g s and lo a n a s s o c i a t i o n r e c e i v e s m ost 1
i
o f i t s fu n d s from th e s a v in g s o f i n d i v i d u a l s , and d i s p o s e s i
i
o f m ost o f i t s fu n d s by le n d in g to i n d iv i d u a l s f o r th e !
p u rp ose o f f in a n c in g th e p u rch ase or c o n s t r u c t io n o f hom es.
S a v in g s and lo a n a s s o c i a t i o n s . T h is term i s h ere
i
d i r e c t e d tow ard t h a t group o f i n d iv i d u a l s a v in g s and lo a n j
l
a s s o c i a t i o n s o p e r a tin g in a g iv e n a r e a . A p a r t i c u l a r |
! s a v in g s and lo a n a s s o c i a t i o n d o e s n ot n e c e s s a r i l y conform
I
! t o th e p a t t e r n o f s a v in g s and lo a n a s s o c i a t i o n s a s a w h o le .
i
I I I I . DELIMITATION OP THE PROBLEM
l !
I !
i The p e r io d c h o se n f o r s t u d y . T h is stu d y was co n - |
Q
c ern ed w ith th e p e r io d o f tim e from 19lj.l t o th e p r e s e n t .
Em phasis was p la c e d on th e p r e s e n t p e r io d . Com plete s t a t i s
t i c a l d a ta was a v a i l a b l e o n ly t o th e c l o s e o f 1 9 5 0 . How-
e v e r , an a ttem p t was made to o b t a in and u se r e l i a b l e i n - j
fo r m a tio n a v a i la b l e a s o f June, 1952, i n ord er to p r e s e n t |
I a more c u r r e n t and a c c u r a te p i c t u r e . I t was f e l t th a t th e |
! !
I p e r io d s t u d ie d was a p a r t i c u l a r l y im p ortan t and in te r e s tin g ^
one w ith reg a rd to th e problem s in c e th e grow th and im por- ■
| ta n c e o f s a v in g s and lo a n a s s o c i a t i o n s was e x tr e m e ly p ro-
| nounced d u rin g t h a t t im e . I
! The s e l e c t i o n o f t h i s p e r io d a l s o p r o v id e d an
| i
I o p p o r tu n ity to stu d y s a v in g s and lo a n a s s o c i a t i o n s under j
i a v a r i e t y o f c o n d it io n s s in c e i t in v o lv e d s o c i a l a s w e l l j
econom ic c h a n g e. The p e r io d in c lu d e d p h a se s o f somewhat |
t t
norm al c o n d i t i o n s , p h a se s o f h ig h l e v e l s o f incom es and |
! l i q u i d s a v in g s b rou gh t about by a g r e a t war, a p o stw a r !
t ____________________ j
! g
i In t h i s stu d y , Ju n e, 1952 was c o n s id e r e d a s" th e
j p r e s e n t , ” and in fo r m a tio n a v a i l a b l e as o f June, 19 5 2 , was
! u sed as th e b a s i s f o r d i r e c t o r im p lie d r e f e r e n c e s t o th e
I p r e s e n t . !
12 !
|
h o u sin g boom, a l e v e l i n g - o f f p e r io d , and th e b e g in n in g o f ;
a n o th er m i l i t a r y c o n f l i c t , w hich a g a in r e s u l t e d i n h ig h j
employment and incom e l e v e l s , A ch an gin g a t t i t u d e toward
sa v in g e x i s t e d th rou gh ou t th e p e r io d d u e, i n p a r t , to a
ch a n g in g su p p ly o f a v a i l a b l e consumer g o o d s and t o a
r e c o g n i t io n o f th e c o n tin u in g d e c r e a se o f th e p u rc h a sin g
power o f th e d o l l a r . Throughout t h i s p e r io d th e r e a l s o
o c cu rr ed a g r e a t p o p u la t io n movement w h ich a f f e c t e d b o th i
i
i
r e a l e s t a t e tu r n o v e r and th e c o n s t r u c t io n o f new hom es. J
i
«
The p e r io d from 19^1 t o th e p r e s e n t w as, t h e r e f o r e , j
a p a r t i c u l a r l y i n t e r e s t i n g and im p o rta n t one i n w hich to ]
stu d y th e a c t i v i t i e s o f an i n s t i t u t i o n engaged i n th e ;
f i e l d s o f s a v in g s and home f i n a n c e .
G e o g r a p h ic a l d e l i m i t a t i o n . S a v in g s and lo a n a s s o c i- ,
i
a t i o n s have been p a r t i c u l a r l y s i g n i f i c a n t i n th e f i e l d s o f |
t
s a v in g s and home f in a n c e d u rin g th e p e r io d s e l e c t e d f o r ,
I
stu d y i n C a l i f o r n i a , and even more s p e c i f i c a l l y , in th e j
Los A n g e le s a r e a . T h is stu d y was p r im a r ily co n cern ed w ith I
1
s a v in g s and lo a n a s s o c i a t i o n s i n th e Los A n g e le s a r e a . !
i
I
Throughout th e stu d y , how ever, th e r e were many i n s t a n c e s ;
d u rin g w hich i t seemed im p ortan t to u se d a ta r e l a t i v e t o j
I
I
th e e n t i r e s t a t e o f C a l i f o r n ia or th e U n ite d S t a t e s a s a j
i
w h o le , b e c a u se o f a v a i l a b i l i t y o f d a ta and i n ord er to \
p r e s e n t a b ro a d er b a s i s f o r g e n e r a l i z a t i o n .
Types o f s a v in g s and lo a n a s s o c i a t i o n s s t u d i e d .
There are t h r e e t y p e s o f s a v in g s and lo a n a s s o c i a t i o n s
i
i
o p e r a t in g i n th e Los A n g e le s a r e a : a F e d e r a l S a v in g s and j
Loan A s s o c i a t i o n c h a r t e r e d by th e F e d e r a l g overn m en t, a ;
1
l
m utual s a v in g s and lo a n a s s o c i a t i o n c h a r t e r e d by th e S t a t e
j o f C a l i f o r n i a , and a g u a r a n te e s to c k s a v in g s and lo a n
i
! a s s o c i a t i o n c h a r t e r e d by th e S t a t e o f C a l i f o r n i a .
I A l l F e d e r a l l y c h a r t e r e d a s s o c i a t i o n s m ust b e lo n g t o
\
I th e F e d e r a l Home Loan Bank System and be in s u r e d by th e
; F e d e r a l S a v in g s and Loan I n su r a n c e C o r p o r a tio n . S a v in g s ;
i I
i and lo a n a s s o c i a t i o n s c h a r t e r e d by th e S t a t e o f C a l i f o r n i a !
I
I ]
may or may n o t be members o f th e F e d e r a l Home Loan Bank
j S y stem , o r be in s u r e d by th e F e d e r a l S a v in g s and Loan
j
; In su r a n c e C o rp o ra tio n *
j In Los A n g e le s C ounty, F e d e r a l l y c h a r t e r e d s a v in g s
i j
1 and lo a n a s s o c i a t i o n s p red om in ate i n number and a c c o u n t for|
| o v e r t w i c e a s many a s s e t s a s do th o s e c h a r t e r e d by th e !
I S t a t e . Only fo u r s a v in g s and lo a n a s s o c i a t i o n s i n Los
I
| A n g e le s County are n o t b o th members o f th e F e d e r a l Home j
i i
I Loan Bank System and in s u r e d by th e F e d e r a l S a v in g s and j
i 4
Loan In su ra n ce C o r p o r a tio n .9
T h is stu d y h a s c o n fin e d i t s e l f to t h o s e s a v in g s and
lo a n a s s o c i a t i o n s w hich a re b o th in s u r e d and a re members
o f th e F e d e r a l Home Loan Bank S y stem . Em phasis was p la c e d
on th o s e c h a r te r e d by th e F e d e r a l Government b e c a u se of
t h e i r im portance i n t h i s p a r t i c u l a r a r e a .
IV. REVIEW OF THE LITERATURE
Q u a n t i t a t i v e l y , th e r e i s an abundance o f m a t e r ia l
w h ich h as been w r i t t e n c o n c e r n in g s a v in g s and lo a n a s s o c i
a t i o n s . W hile such m a t e r i a l was u s e f u l i n t h i s s tu d y , i t
was f e l t th a t th e b u lk o f i t was e i t h e r o f a d e s c r i p t i v e
r a th e r than o f an a n a l y t i c a l n a tu r e , was p u r e ly s t a t i s t i
c a l , t r e a t e d s a v in g s and lo a n a s s o c i a t i o n s a s a w hole
r a th e r th an th o s e o f any p a r t i c u l a r a r e a , was w r it t e n by
th o s e a f f i l i a t e d w ith th e s a v in g s and lo a n b u s in e s s or by
t h e i r c o m p e tito r s and w as, t h e r e f o r e , b i a s e d , or was n ot
c u r r e n t .
As a r e s u l t o f th e d e p r e s s io n s u f f e r e d in t h i s
*
c o u n tr y d u rin g th e e a r l y 1 9 3 0 1s , e x p e r ie n c e and l e g i s l a t i o n
h as le d to many ch a n ges i n the c h a r a c te r and a c t i v i t i e s o f
9
S a v in g s and Loan A s s o c ia t i o n s in Los A n g e le s
County (Los A n g e le s : R esearch D ep artm en t, S e c u r i t y - F i r s t
N a tio n a l Bank o f Los A n g e le s , J u ly 6 , 1 9 5 0 ), p. 2 .
r ' ' 1 5 '
I s a v in g s and lo a n a s s o c i a t i o n s . S t u d i e s co n d u cted on sa v -
j i n g s and lo a n a s s o c i a t i o n s p r e v i o u s t o th e d e p r e s s i o n are
! o f v a lu e i n th e s tu d y o f modern s a v in g s and lo a n a s s o c i a
t i o n s o n ly a s a lL h i s t o r y c o n t r i b u t e s to an u n d e r sta n d in g
o f th e p r e s e n t by r e f l e c t i n g th e p a s t .
S in c e th e t u r n in g p o i n t i n s a v in g s and lo a n h i s t o r y ,
w hich o c c u r r e d a s a r e s u l t o f th e d e p r e s s i o n , two compre
h e n s iv e s t u d i e s o f s a v in g s and lo a n a s s o c i a t i o n s have been
made. I n 193$* Morton B o d f is h and A. D. T heobold w rote
S a v in g s and Loan P r i n c i p l e s , w h ich e x p la in e d many fu n d a
m e n ta ls o f th e s a v in g s and lo a n b u s i n e s s . I n 1 9 3 9 > C y c lo -
i
p e d ia o f F e d e r a l S a v in g s and Loan A s s o c i a t i o n s was w r i t t e n j
i
by Henry S . R o s e n th a l and R obert B, J a co b y . S in c e the
w r i t i n g o f t h e s e b o o k s, l e g i s l a t i v e and econom ic ch a n g es
i
h ave o c c u r r e d w hich have o u td a te d much o f th e m a t e r i a l j
I
c o n t a in e d t h e r e in * W h ile b o th volum es a re s t i l l , i n u s e ,
i
i
i n many r e s p e c t s th e y a r e o b s o l e t e . j
Most a u th o r s w r i t i n g on i n v e s t m e n t s , r e a l e s t a t e j
f i n a n c e , o r f i n a n c i a l i n s t i t u t i o n s have d e v o te d s e c t i o n s \
i
i
to s a v in g s and lo a n a s s o c i a t i o n s . T h is m a t e r i a l i s la r g e ly .
f
d e s c r i p t i v e a s o p p osed t o a n a l y t i c a l ; s in c e t h e r e are i
<
I
c o n s ta n t ch an ges i n c o n d i t i o n s a f f e c t i n g s a v in g s and lo a n
a s s o c i a t i o n s , su c h t e x t b o o k m a t e r i a l i s q u i c k l y o u t d a t e d . 1
i
P e r i o d i c a l s d e a l i n g w it h b u s i n e s s and f i n a n c e , such
, a s B u s in e s s Week, Com m ercial and F i n a n c i a l C h r o n ic le , and j
i i
i Th~ e J o u r n a l o f F in a n c e , p u b lis h c u r r e n t a r t i c l e s co n cern ed |
j
* w ith s a v in g s and lo a n a s s o c i a t i o n s , a s w e l l a s a r t i c l e s
i
| d i s c u s s i n g th e v a r io u s a s p e c t s o f th e f i e l d s o f s a v in g s andi
[
1
; home f in a n c e . W hile su ch a r t i c l e s a re c u r r e n t and o f t e n
j a n a l y t i c a l , th e y a r e in a d e q u a te i n a f i n a l a n a l y s i s and
th o ro u g h a p p r a is a l o f s a v in g s and lo a n a s s o c i a t i o n s ,
p a r t i c u l a r l y o f th o s e i n a g iv e n a r e a .
Trade a s s o c i a t i o n s w it h in th e s a v in g s and lo a n
i
; f i e l d p u b lis h m on th ly p e r i o d i c a l s c o n t a in in g a r t i c l e s p e r
t i n e n t t o th e v a r io u s t e c h n i c a l p h a se s in v o lv e d i n s a v in g s
i
I and lo a n a s s o c i a t i o n o p e r a tio n and to r e l a t e d s u b j e c t s in
1 th e s a v in g s and home f in a n c in g b u s i n e s s . S a v in g s and Loan !
i ;
I News, is s u e d by th e U n ite d S t a t e s S a v in g s and Loan L eague, ,
c o n c e r n s i t s e l f w ith m a tte r s o f i n t e r e s t t o a l l s a v in g s
f
and lo a n a s s o c i a t i o n s , w h ile S a v in g s and Loan J o u r n a l, j
c i r c u l a t e d by th e C a l i f o r n ia S a v in g s and Loan L eague, i s !
I
; more i n t e r e s t e d in th e a c t i v i t i e s o f C a l i f o r n ia s a v in g s !
I |
j and lo a n a s s o c i a t i o n s . A y e a r ly p u b l i c a t i o n o f th e U n ite d j
i S t a t e s S a v in g s and Loan League, S a v in g s and Loan A n n a ls , |
j c o n t a in s in fo r m a tio n r e l a t i n g t o th e f i e l d s o f s a v in g s and !
j home f in a n c e and th e a c t i v i t i e s o f s a v in g s and lo a n a s s o c i-l
j i
; a t i o n s . :
j A la r g e amount o f s t a t i s t i c a l m a t e r i a l i s to be j
found i n p e r io d ic r e p o r t s made by th e C a l i f o r n ia B u ild in g I
and Loan C om m ission er, th e Home Loan Bank B oard, th e |
i j
i F e d e r a l S a v in g s and Loan In su ra n ce C o r p o r a tio n , th e Housing;
i ;
i and Home F in a n ce A gency, and th e v a r io u s s a v in g s and lo a n ,
! t
i tr a d e a s s o c i a t i o n s * A v a lu a b le so u rce o f s t a t i s t i c a l i n - ]
: I
fo r m a tio n c o n c e r n in g s a v in g s and home f in a n c in g i n th e
Los A n g e le s a r ea i s found i n s t u d i e s made by th e R esea rch
i
D epartm ent o f th e S e c u r i t y - F i r s t N a tio n a l Bank o f Los
l
A n g e le s and i n q u a r t e r ly r e p o r t s p u b lis h e d by th e R e se a rc h
D epartm ent o f th e R e s i d e n t i a l R esea rch Comm ittee o f Los j
i I
1 A n g e le s . T hese so u r c e s o f in fo r m a tio n were r e l i e d upon
i
; c o n s id e r a b ly i n c o n d u c tin g the s tu d y . j
| A n other sou rce o f s t a t i s t i c a l d a ta i s The F e d e r a l |
[ Home Loan Bank R ev iew , a m on th ly p u b l i c a t i o n o f th e F e d e r a l
i
| Home Loan Bank B oard. A lth o u g h t h i s p e r i o d i c a l i s n o t a
! so u rce o f c u r r e n t in fo r m a tio n , h a v in g b een p u b lis h e d o n ly j
j u n t i l 191+7 * i t d o es p r o v id e v a lu a b le in fo r m a tio n f o r a j
stu d y o f s a v in g s and lo a n a s s o c i a t i o n s . I
i
I n d iv id u a l s a v in g s and lo a n a s s o c i a t i o n s have p laced ;
1 a g r e a t d e a l o f m a t e r ia l i n t o c i r c u l a t i o n f o r th e pu rp ose .
i j
i o f a d v e r t i s i n g . T h is in fo r m a tio n i s o f i n t e r e s t when co n - !
s id e r in g th e p r o m o tio n a l a s p e c t s ^of s a v in g s and lo a n associ-j
a t i o n s , but i s in a d eq u a te f o r th e p u rp ose o f o b j e c t i v e j
i 1
! e v a lu a t io n o f s a v in g s and lo a n a s s o c i a t i o n s . !
I A v a s t amount o f in fo r m a t io n c o n c e r n in g s a v in g s and
!
i lo a n a s s o c i a t i o n s h a s b een p u b lis h e d h e r e t o f o r e . T h is
I
j stu d y was u n d e r ta k e n i n an a tte m p t t o h e lp m eet th e need
I f o r a s i n g l e so u r ce o f c u r r e n t and u n b ia se d in f o r m a t io n .
I
| I t h as been p r e s e n t e d i n t h e form o f an a n a l y s i s i n th e
j hope t h a t i t may be a c o n t r i b u t i o n to i n v e s t o r s and to
j t h o s e i n t e r e s t e d i n th e r o l e s a v in g s and lo a n a s s o c i a t i o n s
j a re p la y i n g i n th e U n ite d S t a t e s t o d a y , p a r t i c u l a r l y i n
I t
j th e Los A n g e le s a r e a .
i V. ORGANIZATION OP THE REMAINDER OF THE THESIS i
! i
i
C hapter I I was an i n v e s t i g a t i o n o f th e econom ic !
i I
en viron m ent w i t h i n w hich s a v in g s and lo a n a s s o c i a t i o n s
i
; o p e r a t e . T h is c h a p te r d e a l t w it h th e p u r p o se s o f s a v in g s
| i
| and lo a n a s s o c i a t i o n s , t h e i r l e g a l form s o f o r g a n i z a t i o n , 1
i
I th e s o u r c e s o f t h e i r f u n d s , th e ways i n w h ich s a v in g s and
1 |
j lo a n a s s o c i a t i o n s d i f f e r from com m ercial b an k s, th e t a x I
: I
, s t a t u s o f s a v in g s and lo a n a s s o c i a t i o n s , th e r e g u l a t i o n !
i
i
i and s u p e r v i s i o n o f s a v in g s and lo a n a s s o c i a t i o n s , and th e j
! i
I r e l a t i o n o f the F e d e r a l Home Loan Bank System and th e |
j 1
F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n t o s a v in g s j
1 I
and lo a n a s s o c i a t i o n s . |
i
I
C hapter I I I c o n c e n t r a t e d on f i n a n c i a l management i n
! s a v in g s and lo a n a s s o c i a t i o n s . T h is in c lu d e d an j
i n v e s t i g a t i o n o f th e t y p i c a l in vestm en t p o r t f o l i o of sa v
in g s and lo a n a s s o c i a t i o n s and a study o f the l e g a l and I
o th e r r e l a t e d f a c t o r s t h a t in f lu e n c e the fo rm a tio n o f the
in v estm en t p o r t f o l i o . This c h a p ter a lso d e a lt w ith the
c h a r a c t e r i s t i c s o f sa v in g s and lo a n mortgage lo a n s , the
ways in which f i n a n c i a l management i n f l u e n c e s the s a f e t y
and l i q u i d i t y of sa v in g s i n v e s t e d i n sa v in g s and loan
a s s o c i a t i o n s , and the p r o f i t a b i l i t y o f sa v in g s and lo a n
as s e t s .
C h a r a c t e r i s t i c s of s a v in g s and lo a n a s s o c i a t i o n s ,
t h e i r economic environm ent, and t h e i r m anagerial p o l i c i e s
were i n v e s t i g a t e d i n Chapters II and I I I . T his was done
to p rovid e a b a s i s f o r a c l e a r e r u n derstand in g o f the
q u a n t i t a t i v e a s p e c t s of sa v in g s and lo a n a s s o c i a t i o n s
examined i n Chapter IV. The r e l a t i v e q u a n t i t a t i v e impor
tan ce o f sa v in g s and lo a n a s s o c i a t i o n s in th e f i e l d s o f
sa v in g s and home fin a n c e i n Los A n g eles County was a n a ly sed
i n t h i s c h a p te r. T h is in c lu d e d the p e r io d from 19^1
through 195>1. F ig u r e s were not a v a i l a b l e fo r the p eriod
beyond 1951. The probable rea so n s f o r the in c r e a s in g
q u a n t i t a t i v e s i g n i f i c a n c e o f sa v in g s and loan a s s o c i a t i o n s
i n Los A n g eles County were a l s o a n a ly zed in Chapter IV.
Chapter V was devoted to a summary of the i n v e s t i g a
t i o n and the c o n c lu s io n s reached as a r e s u l t o f the
f i n d in g s .
A s e l e c t e d b ib lio g r a p h y of sou rces o f in fo r m a tio n
used in the i n v e s t i g a t i o n fo llo w e d Chapter V.
i CHAPTER I I
i
i
i
j THE ECONOMIC ENVIRONMENT OF SAVINGS AND LOAN ASSOCIATIONS
i
!
* Purposes o f the c h a p te r . The purposes o f t h i s
i
j ch a p ter are to i n v e s t i g a t e the nature o f sa v in g s and lo a n
\
■ a s s o c i a t i o n s and th e economic environm ent w it h in which
I th e s e i n s t i t u t i o n s o p e r a te .
t
i
P urposes fo r w hich sa v in g s and lo a n a s s o c i a t i o n s i
i
e x i s t . S a v in g s and loan a s s o c i a t i o n s have two primary ,
| p u rp oses: ( 1 ) they se rv e as an o u t l e t fo r the s a v in g s o f ;
* i
| i n d i v i d u a l s , and (2) th ey p rov id e a source o f funds f o r j
i ;
* home f in a n c in g . The f i r s t of th e s e stems from the f a c t |
; t h a t sa v in g s of i n d iv i d u a l s p r o v id e the major source of !
; funds fo r s a v in g s and lo an a s s o c i a t i o n s and th a t sa v in g s J
i i
!
I and loan a s s o c i a t i o n s r e i n v e s t th e s e funds and pay a r e tu r n
i
I
f o r t h e ir u s e . The second purpose o f sa v in g s and lo a n
1
I a s s o c i a t i o n s , p r o v id in g a source o f funds fo r home f in a n c -
!
, in g , stems from th e f a c t th a t sa v in g s and lo a n a s s o c i a t i o n s
]
i i n v e s t t h e i r funds p r im a r ily in lo a n s f o r the pu rp oses of
j c o n s t r u c t in g , p u rch a sin g , r e f in a n c in g , or r e c o n d it io n in g
i
| one to fo u r fa m ily r e s i d e n c e s , th e s e lo a n s secu red by f i r s t
j m ortgages or f i r s t t r u s t deeds on such p r o p e r ty . Because
| sa v in g s and loan a s s o c i a t i o n s combine th e s e two p u rp oses i
I
as t h e i r primary f u n c t io n s , each o f the pu rp oses
' f a c i l i t a t e s and d eterm in es the nature of the o th e r . S in ce i
I !
) I
! sa v in g s in v e s t e d i n sa v in g s and loan a s s o c i a t i o n s provide 1
i
] the major source o f funds fo r th e se i n s t i t u t i o n s and such
i
j sa v in g s cannot n e c e s s a r i l y be withdrawn on demand, sa v in g s
I j
! and loan a s s o c i a t i o n s can i n v e s t p r im a r ily in lo n g -term I
r e a l e s t a t e lo a n s , and thus provide a source of lon g-term
funds f o r home f in a n c in g . S in ce sa v in g s and lo a n a s s o c i -
; i
I a t io n s i n v e s t p r im a r ily i n lon g-term r e a l e s t a t e lo a n s , j
j th e se i n s t i t u t i o n s a p p r o p r ia te ly p ro vid e an o u t l e t fo r I
I !
| funds which i n d iv i d u a l s do not need w ith in a sh o rt p e r io d j
j 1
; o f tim e, which s u b s t i t u t e s the h ig h er r e tu r n a v a i la b l e on j
' i
. lo n g -term r e a l e s t a t e len d in g f o r p o s i t i v e assu ra n ce of j
i
the immediate a v a i l a b i l i t y o f fu n d s. *
: In summary, by combining the pu rp oses o f se rv in g as ,
| an o u t l e t fo r th e sa v in g s o f i n d iv i d u a l s and p ro v id in g a '
I
i 1
j source o f funds f o r home f in a n c in g , sa v in g s and lo an a s s o -
j c i a t i o n s b rin g to g e th e r the supply of and demand f o r funds 1
* I
i »
i f o r lo n g -term r e a l e s t a t e lo a n s .
| The o r g a n iz a t io n of sa v in g s and loan a s s o c i a t i o n s .
I S a v in gs and loan a s s o c i a t i o n s are o r g a n ized as corp ora-
!
i t i o n s . l As o th er c o r p o r a t io n s , a sa v in g s and lo a n
i
i ________________________
S x
; The word 1 1 a s s o c i a t i o n ” i s a carry o v er from the
: p r e d e c e s s o r s of modern sa v in g s and loan a s s o c i a t i o n s which
I we re neighborhood groups known as “b u i l d i n g a s s o c i a t i o n s * 1 _
a s s o c i a t i o n r e c e i v e s i t s r i g h t to do b u s in e s s when i t i s !
gran ted a c h a r te r . I t s c o rp o ra te c h a r te r s e t s f o r t h ,
u s u a lly i n g e n e r a l term s, the pow ers, r i g h t s , and l i m i t a - j
t i o n s a ccord in g to which a sa v in g s and loan a s s o c i a t i o n ,
i s to o p e r a te , A group of i n d iv i d u a l s seek in g a c h a r te r
to o p erate a sa v in g s and loan a s s o c i a t i o n must meet c e r t a i n
req u irem en ts which are somewhat g e n e r a l in n a tu re .^ The
members o f a sa v in g s and loa n a s s o c i a t i o n adopt b y -la w s , \
w hich serv e as r u le s w it h in the l i m i t a t i o n s of the ch arter, i
t
o 1
by which the management i s s e l e c t e d and g o v e r n e d .-5 i
o rg a n ized f o r th e purpose o f accu m u latin g funds w ith w hich ,
to f in a n c e the b u ild in g of homes f o r members of groups.
In t h i s study " a s s o c ia tio n " and " s a v in g s and loa n a s s o c i -
a t i o n 1 1 are used synonymously. :
2
The b a s ic req u irem en ts fo r o r g a n iz in g a sa v in g s
and loan a s s o c i a t i o n are t h a t i t s o r g a n iz e r s must be i n d i - '
v i d u a ls o f good c h a r a c te r and r e s p o n s i b i l i t y ; th a t th e r e !
i s community need fo r the i n s t i t u t i o n and a p r o b a b i l i t y
t h a t the i n s t i t u t i o n w i l l be u s e f u l and s u c c e s s f u l ; th a t ;
e x i s t i n g i n s t i t u t i o n s in the community w i l l not be unduly
in ju r e d ; and th a t th ere i s a minimum number o f i n d iv i d u a l s
who have su b sc r ib e d to a minimum amount o f c a p i t a l , the
amount o f which depends upon the p o p u la tio n o f th e commun
i t y i n which th e sa v in g s and loan a s s o c i a t i o n i s to be ;
lo c a t e d . C arl F . D i s t e l h o r s t , "S avin gs and Loan A s s o c ia - '
t i o n and Mutual S avin gs B anks,” i n Herbert V. Prochnow,
American F in a n c ia l I n s t i t u t i o n s (New York: P r e n t i c e - H a l l ,
I n c . , 1 9 5 1 ), P. 1^9.
3
B y-law s u s u a l l y d e a l w ith m a tte r s such as th e time:
and p la c e o f m ee tin g s o f members, the number o f d i r e c t o r s ,
the ty p e s o f in v e stm e n ts which are to be o f f e r e d , the
methods o f d i s t r i b u t i n g p r o f i t s , and th e powers and d u t i e s 1
o f d i r e c t o r s and o f f i c e r s .
■ As o th e r f i n a n c i a l i n s t i t u t i o n s such as commercial
| banks and c r e d i t u n io n s, sa v in g s and lo a n a s s o c i a t i o n s are
I , 1
; c h a r te re d e i t h e r by a s t a t e or f e d e r a l a u th ority.h - In Los j
j A n g eles County, F ed er a l Savin gs and Loan A s s o c ia t i o n s
i
! exceed C a l i f o r n ia S t a t e - c h a r t e r e d s a v in g s and lo an a s s o c i
a t io n s o n ly s l i g h t l y i n number but h o ld over tw ice the
amount of t o t a l a s s e t s . 5 That F e d e r a l S a v in gs and Loan j
A s s o c ia t i o n s i n Los A n geles County a r e , as a w h ole, la r g e r |
than S t a t e - c h a r t e r e d sa v in g s and loan a s s o c i a t i o n s might
be an i n d i c a t i o n t h a t th e re i s g r e a t e r p u b lic c o n fid e n c e I
in an i n s t i t u t i o n b e a rin g th e word lfF e d e r a l,f i n i t s t i t l e , j
S u p e r v is io n and r e g u la t io n o f sa v in g s and loan j
|
a s s o c i a t i o n s . As i n the ca se o f most f i n a n c i a l i n s t i t u - '
t i o n s , the a c t i v i t i e s o f sa v in g s and lo an a s s o c i a t i o n s are !
1 i
u
The C a lif o r n ia S ta te c h a r te r in g a u t h o r it y i s the ;
S t a t e o f C a l i f o r n ia B u ild in g and Loan Com m issioner, w h ile
i the F e d e r a l c h a r te r in g a u t h o r it y i s the Home Loan Bank |
Board.
^ In Los A n g eles County a t the end o f 19^9> th e re
were 39 F e d e r a ll y ch a r te re d sa v in g s and lo a n a s s o c i a t i o n s
which h e ld t o t a l a s s e t s amounting to $539 5 8 6 2 ,0 0 0 , and 32
C a l if o r n ia S t a t e - c h a r t e r e d 'savings and loan a s s o c i a t i o n s ■
- which h e ld t o t a l a s s e t s amounting to $ 2 6I 4.,7^-0,000. Of the ,
! 25 l a r g e s t sa v in g s and loan a s s o c i a t i o n s in Los A n geles j
County at the end o f 19^-9 > 17 were F e d e r a l S a v in g s and Loan1
, A s s o c i a t i o n s . S a v in g s and Loan A s s o c ia t i o n s i n Los A n g e le s 1
j County, R esearch D epartm ent, S e c u r i t y - F i r s t N a tio n a l Bank
’ of Los A n g e le s, 1950, pp. 2 — 1 4 .. ,
J
I l i m i t e d by c e r t a i n la w s w hich r e l a t e s p e c i f i c a l l y t o t h i s
j i n s t i t u t i o n * W hile some o f t h e s e l e g a l r e s t r i c t i o n s a r e
| e x p r e s s e d i n c h a r t e r s g r a n te d s a v in g s and lo a n a s s o c i a t i o n ^
I I
j o t h e r s are n o t . L e g a l r e q u ir e m e n ts w h ich must be m et by i
| C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s
[ are s i m i l a r b u t n o t i d e n t i c a l t o t h o s e w hich m ust be met
j L
by F e d e r a l S a v in g s and Loan A s s o c i a t i o n s . In g e n e r a l ,
l e g a l r e q u ir e m e n ts r e l a t e t o th e ways i n w hich s a v in g s and j
lo a n a s s o c i a t i o n s may a c q u ir e fu n d s , th e p r o v i s i o n s f o r |
i
p a y in g w it h d r a w a ls , th e ways i n w hich fu n d s may be invested,!
i I
. th e d i s t r i b u t i o n o f e a r n i n g s , and r e q u ir e m e n ts c o n c e r n in g |
I
! th e a c c u m u la tio n o f r e s e r v e s f o r l o s s e s . j
1 I
, S a v in g s and lo a n a s s o c i a t i o n s , a s are m ost o t h e r !
j
f i n a n c i a l i n s t i t u t i o n s , a re s u p e r v is e d by the a u t h o r i t i e s
g r a n t in g t h e i r c h a r t e r s . Through th e su b m iss io n o f a n n u a l |
I
r e p o r t s t o i t s s u p e r v is i n g a u t h o r i t y and th r o u g h y e a r l y !
( j
j e x a m in a tio n s by r e p r e s e n t a t i v e s o f t h i s a u t h o r i t y , a s a v -
i i
: i n g s and lo a n a s s o c i a t i o n i s s u p e r v is e d i n o r d e r t o d e t e r - j
j mine i t s f i n a n c i a l c o n d i t i o n ; c o m p lia n c e w it h i t s governing!
t i
\ la w s , c h a r t e r , and b y - la w s ; th e h o n e s t y o f management and !
I
! _ !
The l e g a l r e q u ir e m e n ts o f C a l i f o r n i a S t a t e - '
1 c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s may be fou nd i n :
C a l i f o r n i a B u ild in g and Loan A c t , w h ile t h o s e o f F e d e r a l l y j
; c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s may be found i n i
j R u le s and R e g u l a t io n s f o r F e d e r a l S a v in g s and Loan A s s o c i - I
I a t i o n s , p u b lis h e d by th e Home Loan Bank Board.
j
p e r s o n n e l; th e adequacy o f r e s e r v e s and r e s e r v e b u ild in g
! program s; th e so u n d n ess o f l e n d i n g , i n v e s t i n g , and o t h e r
!
f i n a n c i a l p o l i c i e s ; and t h e e f f e c t i v e n e s s o f c o l l e c t i o n
| p r o c e d u r e s and o f program s r e g a r d in g th e d i s p o s i t i o n o f
I f o r e c l o s e d r e a l e s t a t e . 7
I
! L e g a l r e s t r i c t i o n s and th e s u p e r v i s i o n o f a s a v in g s
and lo a n a s s o c i a t i o n do n o t in s u r e t h a t i t w i l l be p r o f i t
a b le and w i l l b e a b le to pay a good r e t u r n , or any r e t u r n ,
I I
! on i n v e s t e d s a v i n g s , t h a t th e management w i l l a c t w it h !
i :
! i n t e g r i t y and good judgm ent, t h a t s a v in g s w i l l be r e tu r n e d i
1 i
p ro m p tly on r e q u e s t , or t h a t r e s e r v e s w i l l be a d eq u a te t o [
> i
j a b sorb l o s s e s i n o rd er t h a t i n v e s t e d s a v in g s may e v e n tu a lly :
<
■ be r e t u r n e d . L e g a l r e s t r i c t i o n s and s u p e r v i s i o n o f savings!
and lo a n a s s o c i a t i o n s s e r v e i n some m easure to p r o t e c t th e
| Q i
s a f e t y uo f s a v in g s i n v e s t e d i n s a v in g s and lo a n a s s o c i a -
I
t i o n s . R e g a r d le s s o f th e e f f e c t i v e n e s s o f t h e s e l e g a l r e - :
I s t r i c t i o n s and t h e s u p e r v i s i o n o f s a v in g s and lo a n a s s o c i - :
I * j
a t i o n s , th e mere e x i s t e n c e o f t h e s e a p p a ren t s a f e t y m eas- ’
| ;
j u r e s d o e s s e r v e t o c r e a t e p u b l i c c o n f id e n c e i n s a v in g s and .
i
lo a n a s s o c i a t i o n s . To th e e x t e n t t h a t th e y c r e a t e p u b lic ,
i 1
! 7 •
F o u r th Annual R e p o r t , H ousing and Home F in a n c e
j A g e n c y , 1950 (W ash in gton , D .G .: U n ite d S t a t e s Government ;
; Printing Office, 1951)> p. 168. !
In t h i s stu d y " s a f e t y ” means e v e n t u a l l i q u i d i t y , j
; i . e . , t h a t i n v e s t e d fu nd s w i l l e v e n t u a l l y be r e t u r n e d t o j
t h e i r o w n ers. !
27 j
c o n f id e n c e by p r o v id in g an a c t u a l o r t h e o r e t i c a l m easure
o f a d d i t i o n a l s a f e t y to s a v in g s i n v e s t e d i n t h e s e i n s t i - ,
i
t u t i o n s , l e g a l r e s t r i c t i o n s and s u p e r v i s i o n o f s a v in g s and j
i
| lo a n a s s o c i a t i o n s s e r v e to f a c i l i t a t e a so u r ce o f fu n d s j
i ;
! f o r home f i n a n c i n g by a t t r a c t i n g s a v in g s t o s a v in g s and i
i i
! lo a n a s s o c i a t i o n s . !
j The r e l a t i o n s h i p b etw een th e form o f o r g a n i z a t i o n f
I i
o f s a v in g s and lo a n a s s o c i a t i o n s i n C a l i f o r n i a and th e
! t y p e s o f in v e s t m e n t s o f f e r e d . A l l F e d e r a l S a v in g s and
I
j Loan A s s o c i a t i o n s are m u tu al c o r p o r a t i o n s , and w h ile
j C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s ,
I J
1 may be m utual c o r p o r a t i o n s , m ost a r e g u a r a n te e s to c k
i I i
c o r p o r a t i o n s ! 7 /
! In a m u tu a l s a v in g s and lo a n a s s o c i a t i o n th e c a p ita l'
i
j i s r a i s e d e n t i r e l y by paym ents made on s h a r e s o f th e a s - '
! s o c i a t i o n ! 10 /S h a r e h o ld e r s a re th e s o l e owners o f th e j
j
a s s e t s o f a m u tu a l s a v in g s and lo a n a s s o c i a t i o n , and share-!
j
h o l d e r s p a r t i c i p a t e pro r a t a i n p r o f i t s d i s t r i b u t e d a s i
1 9
i F i f t y - S e v e n th Annual R eport o f th e B u i l d i n g and ]
1 Loan C om m ission er, S a t e o f C a l i f o r n i a ~ T C a l i f o r n i a : S t a t e !
o f C a l i f o r n i a P r i n t i n g O f f i c e , 1 9 ^ 1 ), p . l £ . f
10 , ;
j S h a r e s i n F e d e r a l s a v in g s and lo a n a s s o c i a t i o n s
; are c a l l e d 1 1 s a v in g s share a c c o u n t s ” o r sim p ly , " s a v in g s ;
, a c c o u n t s ," w h ile s h a r e s i n C a l i f o r n i a S t a t e - c h a r t e r e d i
s a v in g s and lo a n a s s o c i a t i o n s are c a l l e d " w ith d raw ab le !
' s h a r e s ." I
28
d iv id e n d s and i n th e power t o c o n t r o l th e a f f a i r s o f th e
a s s o c i a t i o n .
A g u a r a n te e s t o c k s a v in g s and lo a n a s s o c i a t i o n
r e c e i v e s a p o r t i o n o f i t s fu n d s from th e s a l e o f i t s
c a p i t a l s t o c k . G uarantee s t o c k s a v in g s and lo a n a s s o c i a
t i o n s , l i k e m u tu a l s a v in g s and lo a n a s s o c i a t i o n s , may
i s s u e s h a r e s i n th e a s s o c i a t i o n . In a g u a r a n te e s to c k
s a v in g s and lo a n a s s o c i a t i o n w h ich i s s u e s s h a r e s , th e
o w n ersh ip o f the a s s e t s o f th e a s s o c i a t i o n , the r i g h t t o
p a r t i c i p a t e i n th e d i s t r i b u t i o n o f p r o f i t s , and th e r i g h t
t o c o n t r o l th e a f f a i r s o f th e a s s o c i a t i o n i s d iv i d e d b e
tw een i t s s t o c k h o l d e r s and s h a r e h o ld e r s . S in c e g u a r a n te e
s to c k i s n o t w i t h d r a w a b le ,11 c a r r i e s d o u b le l i a b i l i t y , 1^
i s a s s e s s a b l e , 13 and s in c e th e c la im s o f s t o c k h o l d e r s i n
t h e l i q u i d a t i o n o f a g u a r a n te e s t o c k a s s o c i a t i o n a re
S t o c k h o ld e r s are l i a b l e f o r a l l c o n t r a c t s , d e b t s ,
and en gagem en ts o f th e a s s o c i a t i o n t o th e e x t e n t o f th e
p ar v a lu e o f t h e i r s t o c k p l u s th e amount w hich t h e y have
i n v e s t e d i n th e s t o c k . F i f t y - S e v e n th Annual R eport o f the
B u ild in g and Loan C o m m issio n e r , S t a t e o f C a l i f o r n i a ,
A r t i c l e V I I , S e c t i o n 7 *01.
12
Guarantee sto c k may be t r a n s f e r r e d but n o t w ith
drawn. 1951 E d i t i o n , B u ild in g and Loan A s s o c ia t i o n A c t ,
S t a t e o f C a l i f o r n ia (Los A n g e le s: C a lif o r n ia S a v in g s and
Loan League, 1951)7 A r t i c l e IV, S e c t io n I 4 ..O I.
13
S t o c k h o ld e r s may be a s s e s s e d a c e r t a i n sum o f
money p er sh are i n o r d e r t o e n f o r c e t h e i r d o u b le l i a b i l i t y .
I b i d . , A r t i c l e V I I , S e c t i o n s 7*01 - 7 .0 9 *
r e s i d u a l t o a l l o t h e r c l a i m s , ^4- h o ld e r s o f g u a r a n te e s to c k
assume a r i
Sk i5
g r e a t e r th a n th a t o f th e s h a r e h o ld e r i n
th e same a s s o c i a t i o n * I n c o m p e n sa tio n f o r the a ssu m p tio n
o f t h i s r i s k , s t o c k h o ld e r s u s u a l l y r e c e i v e h ig h e r d iv id e n d s
p e r d o l l a r i n v e s t e d and have g r e a t e r v o t i n g r i g h t s th a n do
s h a r e h o ld e r s o f th e same a s s o c i a t i o n . * ^
B eca u se o f th e a d d i t i o n a l e le m e n t o f s a f e t y w h ich
may accompany g u a r a n te e s to c k a s s o c i a t i o n s s in c e th e p a r
v a lu e o f the s t o c k must rem ain u n im p aired and s i n c e g u a ra n
t e e s t o c k c a r r i e s d o u b le l i a b i l i t y and i s a s s e s s a b l e ,
g u a r a n te e s to c k a s s o c i a t i o n s may a l s o i s s u e c r e d i t o r o b l i
g a t i o n s known a s in v e s tm e n t c e r t i f i c a t e s . As a c r e d i t o r ,
th e h o ld e r o f an in v e s tm e n t c e r t i f i c a t e h a s no l i a b i l i t y
f o r d e b t s or a s s e s s m e n t s o f th e a sso c ia tio n * ^ 7 and i s e n
t i t l e d , upon l i q u i d a t i o n o f th e a s s o c i a t i o n and upon
r e q u e s t f o r w ith d r a w a l, t o r e c e i v e payment i n f u l l b e f o r e
^ I b i d . , A r t i c l e XVI, S e c t i o n 1 6 .0 5 .
15
In t h i s t h e s i s th e term ,fr i s k r e f e r s t o th e
chance o f l o s s o f a d o l l a r amount e q u a l t o p a r t o f , a l l o f ,
or more th an th e d o l l a r amount o f an in v e s t m e n t .
16
P e r s o n a l i n t e r v i e w w it h C. W. V aught, E xam iner,
D i v i s i o n o f B u ild in g and Loan, S t a t e o f C a l i f o r n i a .
17 .
19^1 E d i t i o n , B u i l d i n g and Loan A c t , S t a t e o f
C a l i f o r n i a , A r t i c l e V, S e c t i o n 5 . 0 1 .
30
■ j Q
payment i s t o be made to s h a r e h o ld e r s or s t o c k h o l d e r s .
As a c r e d i t o r , th e h o l d e r o f an in v e s tm e n t c e r t i f i c a t e
r e c e i v e s i n t e r e s t r a t h e r th a n d iv id e n d s and h a s no v o i c e
i n th e management o f th e a s s o c i a t i o n . ^ s i n c e the h o ld e r
o f an in v e s tm e n t c e r t i f i c a t e assum es l e s s r i s k than d o e s
th e s h a r e h o ld e r i n th e same a s s o c i a t i o n , th e in v e s t m e n t
c e r t i f i c a t e h o ld e r u s u a l l y r e c e i v e s a low er r e t u r n on h i s
20
money th a n t h a t p a id on s h a r e s .
Management o f s a v in g s and lo a n a s s o c i a t i o n s . W hile
th e members o f a m u tu a l s a v in g s and lo a n a s s o c i a t i o n and
th e members and s t o c k h o l d e r s o f a g u a r a n te e s t o c k s a v in g s
and lo a n a s s o c i a t i o n have th e u l t i m a t e a u t h o r i t y i n a g iv e n
s a v in g s and lo a n a s s o c i a t i o n , t h i s a u t h o r i t y i s d e l e g a t e d ,
as i n th e c a s e o f o t h e r c o r p o r a t i o n s , t o d i r e c t o r s who are
e l e c t e d a n n u a l l y . 21 The d i r e c t o r s , who a re t h e m s e lv e s
— w - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
I b i d . , A r t i c l e VI, S e c t io n 6 .0 2 and A r t i c l e XVI,
S e c tio n l 6 . 0*5.
^ I b i d . , A r t i c l e V, S e c t io n 5*01.
20
In 1950, C a l i f o r n ia s t a t e c h a r te r e d sa v in g s and
loan a s s o c i a t i o n s p a id an average r a t e o f i n t e r e s t on i n
vestm en t c e r t i f i c a t e s of 2 . 7 per c en t and an average r a te
o f d iv id e n d s on w ithdraw able sh a re s o f 2 .9 8 per c e n t.
F i f t y - S ev en th Annual Report of the B u ild in g and Loan Com
m is s io n e r , S ta t e o f C a l i f o r n i a , p. 1 $ .
21
A "member'* of a sa v in g s and lo a n a s s o c i a t i o n i s
a sh a reh o ld er or sto c k h o ld e r o f th a t a s s o c i a t i o n . A bor
rower may a l s o be a member, alth ou gh h i s membership i s
u s u a lly lim it e d to one v o t e .
31 :
sh a re h o ld er s (or sh a r e h o ld e r s or sto c k h o ld e r s i n th e case ,
o f guarantee sto ck a s s o c i a t i o n s ) , determ ine th e broad !
i
g e n e r a l p o l i c i e s o f the a s s o c i a t i o n and have c o n t r o l over :
i t s a f f a i r s . In tu r n , the board o f d i r e c t o r s a p p o in ts the ;
i
a c t i v e o f f i c e r s who conduct the a s s o c i a t i o n s d a i l y opera- ,
t i o n s and a c t u a l l y manage th e a s s o c i a t i o n . 1
In many sa v in g s and loan a s s o c i a t i o n s the management)
and the board o f d i r e c t o r s are a c t u a l l y the same group of
i n d i v i d u a l s . In o th e r s a v in g s and lo a n a s s o c i a t i o n s , the
management and th e board o f d i r e c t o r s are two sep a ra te
g ro u p s, sin ce some o f the o f f i c e r s are not d i r e c t o r s and
some o f the d i r e c t o r s are n o t o f f i c e r s . I t i s o f t e n f e l t
th a t th ere i s some advantage in the l a t t e r arrangement
because i t p r o v id e s more of an o p p o rtu n ity f o r the manage- •
ment and the board of d i r e c t o r s to ca rry out t h e i r r e s p e c
t i v e d u t i e s . I t i s th e f u n c t io n o f the board o f d i r e c t o r s :
o f any c o r p o r a tio n to r e p r e s e n t the sh a r e h o ld e r s and a c t I
as t r u s t e e s o f t h i s group. T h e o r e t i c a l l y , the board o f |
1
d i r e c t o r s forms the broad p o l i c i e s o f the c o r p o r a tio n and ;
i
keeps a c a r e f u l check to see t h a t th e y are c a r r ie d o u t,
|
and management d i r e c t s i t s a t t e n t i o n t o d a i l y o p e r a tio n s '
n e c e ss a r y to carry out the p o l i c i e s formed by the board. j
O b v io u sly , th e mere se p a r a tio n o f th e two g ro u p s, !
the board o f d i r e c t o r s and management, i s not p o s i t i v e j
assurance th a t e i t h e r group w i l l ca rry out i t s d u t i e s
e f f e c t i v e l y ; t h i s i s determ ined by the q u a l i t y o f the i n - j
d iv i d u a ls who are th e d i r e c t o r s and m anagers. On the J
i
o th e r hand, i t does seem l o g i c a l th a t i t would be e a s i e r
fo r a board o f d i r e c t o r s whose members are not a l l a c t i v e
l y engaged in the management o f the c o r p o r a tio n t o approach
th e s i t u a t i o n o b j e c t i v e l y and m ain tain th e lo n g -ra n g e
p o in t o f view n e c e s s a r y to guid e the c o r p o r a tio n in i t s ;
aim of community s e r v i c e and, t h e r e f o r e , lo n g -term p r o f i t - j
i
i
a b i l i t y f o r i t s sh a r e h o ld e r s, than i t would be f o r a board |
o f d i r e c t o r s whose members are a l l a c t i v e l y engaged in the I
d a i l y o p e r a tio n s of the corp oration * F u r th e r , i t i s
obviou s th a t the f u n c t io n o f th e board of d i r e c t o r s t o pro-,
v id e a check on management can h ard ly be c a r r ie d out when
the board of d i r e c t o r s and the management are the same
i n d i v i d u a l s . Whether a g iv e n sa v in g s and lo a n a s s o c i a t i o n ■
i
s u b s t i t u t e s sh o rt-te rm g a in s f o r lo n g -term p r o f i t a b i l i t y ,
f o r i t s sh a r e h o ld e r s and th e o p p o r tu n ity to p ro vid e lo n g - ,
t
l
term community s e r v i c e , or whether i t i s op erated fo r the ;
b e n e f i t o f management r a th e r than fo r i t s s h a r e h o ld e r s, i s j
not determ ined by whether or n ot the board of d i r e c t o r s ;
t
and a s s o c i a t i o n o f f i c e r s are two sep a ra te groups o f i n d i - j
v i d u a ls . C e r ta in ly i t would seem th a t one group o f q u a li- ■
f i e d i n d iv i d u a l s i s su p e r io r to two groups of u n q u a lif ie d 1
- 33 :
; i
i n d i v i d u a l s .
i
: U s u a lly members o f a sa v in g s and loan a s s o c i a t i o n ;
| ‘ !
I e x h i b i t l i t t l e a c t i v e i n t e r e s t i n the a f f a i r s o f the
I j
t a s s o c i a t i o n , f o r th e y r a r e ly a tte n d annual m ee tin g s nor do ;
i t
1 th ey e x e r c i s e t h e i r r ig h t to v o te i n the e l e c t i o n of d i - j
r e c t o r s or on g e n e r a l corp o ra te m a tte r s so long as th e y !
i
J are s a t i s f i e d w ith the r e s u l t s of the a s s o c i a t i o n . When j
! I
I an i n d iv id u a l s u b s c r ib e s to sh a res in an a s s o c i a t i o n , he
J u s u a lly s ig n s a proxy d e le g a t in g h i s v o t in g r i g h t s to the
i i
; a s s o c i a t i o n management. For t h i s reason sa v in g s and loan ]
I i
a s s o c i a t i o n s are c o n t r o l l e d by a s e l f - p e r p e t u a t i n g manage- ;
\ m e n t . ^ P r o x ie s are r e v o c a b le , how ever, and in c a s e s where!
i
| members have become d i s s a t i s f i e d w ith the management o f the,
I 1
; a s s o c i a t i o n , th e y have been known to e x e r c i s e t h e i r v o t in g :
I
i (
! r i g h t s . ^3 ;
i
i
In s p i t e o f the em phasis which most sa v in g s and lo an
i
i
I a s s o c i a t i o n l i t e r a t u r e p la c e s upon the f a c t th a t members
i ;
of a sa v in g s and loan a s s o c i a t i o n have v o tin g r i g h t s and,
t h e r e f o r e , a v o ic e i n the management, v o tin g r i g h t s are of
1
, l i t t l e p r a c t i c a l v a lu e f o r the f o llo w in g r ea so n : V oting
i
r i g h t s are d is p e r s e d among a la r g e number o f members i n a
22
The term ’’management’* as used here r e f e r s to the
o f f i c e r s and the board o f d i r e c t o r s o f the a s s o c i a t i o n . In,
the rem ainder o f the stu d y, t h i s i n t e r p r e t a t i o n o f th e term'
w i l l co n tin u e to be used u n le s s o th e r w ise s p e c i f i e d .
3 D i s t e lh o r s t , op. c i t . , p . 13 0 ._________ !
3^
g iv e n s a v in g s and lo a n a s s o c i a t i o n , and most v o t in g r ig h t s
are h e ld by the management by means o f th e proxy system .
As a r e s u l t , members cannot e f f e c t i v e l y e x e r c i s e t h e i r
v o t in g r i g h t s u n le s s th e y secu re enough v o t e s to exceed
th o s e h e ld by the management. I t would seem th a t a s i t u a
t i o n d i s s a t i s f y i n g enough to warrant such a c t i o n would be
ex tr em e ly s e r i o u s , and by the time such a c t i o n would be
undertaken, i t m ight n ot be e a s i l y rem edied, i f a t a l l .
T h e r e fo r e , s in c e a sa v in g s and loan a s s o c i a t i o n i s con
t r o l l e d by management not e a s i l y removed, th e q u a l it y of
i t s management i s v i t a l i n d eterm in in g w hether or not a
g iv e n sa v in g s and loan a s s o c i a t i o n w i l l be a c o n t r ib u t io n
or a d etrim en t to i t s i n v e s t o r s and th e community in which
i t o p e r a te s .
/
A lthough sa v in g s and loan a s s o c i a t i o n s are to some
e x te n t governed by e x i s t i n g laws and the s u p e r v is io n which
th e y r e c e iv e from t h e i r c h a r te r in g a u t h o r i t i e s , such reg u
l a t i o n i s broad enough to allo w a g r e a t d e a l of v a r i a t i o n
among in d iv i d u a l sa v in g s and loan a s s o c i a t i o n s as a r e s u l t
of t h e i r r e s p e c t i v e m a n a gerial p o l i c i e s . The ways i n which
th e s e p o l i c i e s a f f e c t th e c h a r a c t e r i s t i c s o f sa v in g s and
lo a n a s s o c i a t i o n s i s more th orou gh ly d is c u s s e d i n Chapter
I I I .
There are prob ab ly a v a r i e t y o f i n c e n t i v e s
35
a t t r a c t i n g i n d iv i d u a l s to the management o f sa v in g s and
loan a s s o c i a t i o n s and s e r v in g as s t i m u l i to good management.
Such i n c e n t i v e s m ight be c l a s s i f i e d as bein g b oth f i n a n c i a l
and n o n - f i n a n c i a l i n nature* N o n - f in a n c ia l m an agerial i n
c e n t i v e s which m ight e x i s t are numerous, but th o se which
are most o f t e n c i t e d are th e d e s i r e s f o r p r e s t i g e and com
m unity s e r v i c e . F in a n c ia l i n c e n t i v e s in c lu d e not o n ly
a c t u a l and p r e s e n t m onetary com p en sation, but th e p o s s i b i l i
t y o f fu tu re monetary compensation* F in a n c ia l i n c e n t iv e
must in c lu d e n o t on ly th e chance o f g a in , but a l s o the
chance o f l o s s . I n c e n t i v e s which draw i n d iv i d u a l s to th e
management of a sa v in g s and loa n a s s o c i a t i o n and which may
s tim u la te good management w i l l , o f c o u r se , d i f f e r according
to the i n d i v i d u a l s . W h ile, un dou btedly, n o n - f in a n c i a l
i n c e n t i v e s do e x i s t , a t l e a s t in some c a s e s , i t i s probable
t h a t f i n a n c i a l i n c e n t i v e s e x i s t i n alm ost a l l c a s e s . I t
i s a l s o probable th a t f i n a n c i a l i n c e n t i v e s are more p o te n t
than n o n - f i n a n c i a l i n c e n t i v e s i n a t t r a c t i n g i n d iv i d u a l s
t o the management o f sa v in g s and lo a n a s s o c i a t i o n s .
The e x t e n t to which f i n a n c i a l i n c e n t i v e s , b o th in
t h e i r p o s i t i v e and n e g a tiv e form s, i . e . , th e chance f o r
g a in , and th e chance o f l o s s , determ ine the q u a l i t y of
management i s n o t known. O pinion i s o f t e n e x p r e s s e d , how
e v e r , th a t a sa v in g s and loan a s s o c i a t i o n o r g a n ized as a
36
| sto c k c o r p o r a tio n o f f e r s g r e a te r f i n a n c i a l i n c e n t iv e to
good management than does one o r g a n ized as a mutual corp o- j
r a t i o n , s in c e the form er o f f e r s an o p p o rtu n ity f o r th e !
! management to own s to c k , th e v a lu e and e a r n in g s of w hich j
i i
; w i l l be determ ined by th e r e l a t i v e su c c e s s o f the a s s o c i -
i
a t i o n . I t i s a ls o o f t e n p o in te d out th a t the r is k i n - j
I . '
i
i h e r en t i n sto ck ownership i s la r g e r per se than the r i s k j
in h e r e n t in sa v in g s and loan sh a res and, t h e r e f o r e , the
i
management o f a guarantee stock sa v in g s and loan a s s o c i a -
t
! t i o n has more to lo s e i f th e a s s o c i a t i o n i s not op era ted
s u c c e s s f u l l y . While i n some c a s e s i t may be tru e t h a t ;
th e r e i s a c t u a l l y g r e a t e r f i n a n c i a l i n c e n t iv e to manage
ment i n a sa v in g s and loan a s s o c i a t i o n org a n ized a s a
sto c k c o r p o r a tio n than i n a mutual o r g a n iz a t io n , in o th e r
c a s e s th e r e may be g r e a t e r f i n a n c i a l i n c e n t iv e in m utual
sa v in g s and loan a s s o c i a t i o n s . ^
i
i F in a n c ia l i n c e n t iv e comes to the management o f a
sa v in g s and loa n a s s o c i a t i o n i n a v a r i e t y o f form s. These
i n c lu d e : (1) e a rn in g s on and the a p p r e c ia t io n of th e
v alu e o f s t o c k , w hich, o f c o u r s e , i s a v a i la b l e o n ly in
2 k :
The apparent f i n a n c i a l in c e n t iv e in v o lv e d in the
ownership o f sto c k i s , un dou btedly, one rea so n why the
m a jo r ity o f sa v in g s and loa n a s s o c i a t i o n s c h a r te r e d by the
S t a t e o f C a lif o r n ia are guarantee sto ck c o r p o r a tio n s r a th e r
than m utual c o r p o r a tio n s .
37 ;
guarantee sto c k a s s o c i a t i o n s , (2) s a l a r i e s , (3) b o n u ses, 1
!
(l\.) expense a c c o u n ts , and (5) income from b u s i n e s s e s r e - !
1
l a t e d to the sa v in g s and loan b u s in e s s , i n which the j
management has a f i n a n c i a l i n t e r e s t . In many c a s e s the
f i n a n c i a l i n c e n t iv e r e s u l t i n g from th e s e l a t t e r so u rces ^
s u b s t a n t i a l l y e x c e e d s the f i n a n c i a l i n c e n t iv e o f sto ck
«
ow nership. j
The a c t u a l monetary com pensation from s a l a r i e s and '
bonuses p a id t o sa v in g s and lo a n a s s o c i a t i o n management i s
J
1
o f a c o n f i d e n t i a l n atu re and was, t h e r e f o r e , im p o ssib le to :
o b ta in f o r the purpose o f t h i s study* The o n ly p r in te d i
f i g u r e s r e l a t e d in any way to t h i s m a tter were found in
annual r e p o r t s o f the F e d e r a l Home Loan Bank Board. Such
f i g u r e s , how ever, do n ot d i s t i n g u i s h betw een management* s *
s a la r y and th a t of o th e r p e r s o n n e l, and, t h e r e f o r e , are
inad eq uate in d eterm in in g e i t h e r the amount o f income
a l l o c a t e d to management or the a c tu a l d o l l a r amount of
j
com pensation p a id to management. The U n ited S t a t e s S a v in g s1
and Loan League r e c e n t l y began a s a la r y su rv ey , the r e su lts:
o f which have n ot as y e t been p u b lis h e d . In commenting on
the la ck of in fo r m a tio n a v a i la b l e co n cern in g the monetary
com pensation o f sa v in g s and loa n a s s o c i a t i o n management,
one su p e r v iso r y o f f i c i a l e s tim a te d such com p en sation,
in c lu d in g s a l a r i e s and b on u ses, to range betw een $ 6 ,0 0 0
38 |
l
and $lj.0,000 per y e a r . I t i s g e n e r a l ly f e l t t h a t such com- j
i
p e n s a tio n i s a t l e a s t as g r e a t as th a t paid the management ;
o f o th e r f i n a n c i a l i n s t i t u t i o n s . Because sa v in g s and lo a n \
a s s o 'c ia tio n s are b e g in n in g to pay income ta x a s of 1 9 5 2 , :
i t i s probable th a t s a l a r i e s and bonuses p aid to management1
may in c r e a s e as a means o f d e c r e a s in g the ta x a b le income
o f a s s o c i a t i o n s . While i t seems l o g i c a l th a t s a l a r i e s and
bonuses might ten d to be h ig h e r in sa v in g s and loan a s s o c i -
\
t i o n s o r g a n ized as mutual c o r p o r a tio n s than th o s e organ
iz e d as sto c k c o r p o r a tio n s in order t o compensate f o r the
la ck o f o p p o r tu n ity to p r o f i t from sto c k ownership in
m utual a s s o c i a t i o n s , t h i s does not seem to be t r u e . W hile ;
a g a in t h i s cannot be s u b s t a n t ia t e d by f i g u r e s , o p in io n has >
been e x p r e sse d by some s u p e r v iso r y o f f i c i a l s t h a t , in
g e n e r a l, s a l a r i e s and bon uses are no h igh er i n m utual
s a v in g s and loan a s s o c i a t i o n s than i n guarantee sto c k
a s s o c i a t i o n s *
Although a c t u a l f i g u r e s co n cern in g s a l a r i e s and
bonuses p a id a s s o c i a t i o n management would be h e l p f u l , th ey
would be inad eq uate in d eterm in in g the a c t u a l degree of
i
f i n a n c i a l i n c e n t i v e . T h i s . i s because th e r e are a t l e a s t
two o th er so u rc es of income f e l t to be s i g n i f i c a n t in the
m onetary com pensation o f sa v in g s and loan a s s o c i a t i o n ;
management. The f i r s t o f th e se i s the expense a c co u n t.
39 j
' I t i s f e l t th a t in most c a s e s expense a cco u n ts are substan-:
j t i a l and, as such, a r e a r e a l f a c t o r i n c o n s id e r in g mone-
! i
| t a r y com pensation and f i n a n c i a l i n c e n t i v e . As a r e s u l t of ■
! I
I th e p r e s e n t h ig h income ta x l e v e l , i t i s probab le t h a t
i
expense a c co u n ts are not o n ly s u b s t a n t i a l q u a n t i t a t i v e l y ,
! but a l s o are s u b s t a n t i a l q u a l i t a t i v e l y , b ecause th e y p r o - j
i
j v id e a means o f com pensating management in a s a t i s f a c t o r y |
| manner from th e s ta n d p o in ts o f both management and the
sa v in g s and lo a n a s s o c i a t i o n . The expense account i s a
i
’ n o n -ta x a b le source o f payment to management and a t the
i
! same tim e , a means of r ed u cin g the a s s o c i a t i o n ’ s ta x a b le j
; income.
In a d d it io n to s a l a r i e s and b o n u ses, an oth er source
r
of income to management comes from the o p e r a tio n of b u s i- :
n e s s e s r e l a t e d to th a t o f the sa v in g s and loan a s s o c ia t io n .;
1 I n d iv id u a ls r e c e i v in g lo a n s from sa v in g s and lo a n a s s o c i - i
a t i o n s are r eq u ire d t o have t h e i r mortgaged p r o p e r ty
covered by adequate f i r e in s u r a n c e . In most c a s e s th e s e
i n d i v i d u a l s are a d v ise d and encouraged t o employ the
s e r v i c e s o f the sa v in g s and loan a s s o c i a t i o n ’ s in su ra n ce
department or a p a r t i c u l a r in su ran ce agency recommended
i
f o r t h i s p u rp o se. While th e in su ran ce department or agency'
may be owned by the a s s o c i a t i o n and the income therefrom i
i
added to the a s s o c i a t i o n ’ s income, i n most in s t a n c e s the
k o i
I
in s u r a n c e b u s i n e s s i s owned by a s s o c i a t i o n management and, 1
t h e r e f o r e , th e p r o f i t s th e r e fr o m a ccru e t o t h e s e i n d i v i d u - ;
a l s . ^ In some c a s e s th e management o f a s a v in g s and lo a n :
a s s o c i a t i o n h a s a s u b s t a n t i a l f i n a n c i a l i n t e r e s t i n th e
in s u r a n c e company i t s e l f * T h is i s t r u e i n th e c a s e s o f
C o a st F e d e r a l S a v in g s and Loan A s s o c i a t i o n i n w h ich a t j
l e a s t p a r t o f th e management h a s a d i r e c t f i n a n c i a l i n t e r - j
e s t i n C o a st M utual F i r e In su r a n c e Company*^ and Home
i
S a v in g s and Loan A s s o c i a t i o n whose P r e s i d e n t i s a l s o P r e si-;
d e n t o f N a t i o n a l A m erican F i r e In su r a n c e Company.
i
A n o th er p o s s i b l e . s o u r c e o f m a n a g e m e n ts income from ;
f
r e l a t e d b u s i n e s s e s i s from th e escro w departm ent o f the
s a v in g s and lo a n a s s o c i a t i o n . In m ost c a s e s th e escrow
departm ent i s owned by th e a s s o c i a t i o n i t s e l f , a lt h o u g h i n
some i n s t a n c e s i t i s owned by a s s o c i a t i o n management.
I t i s o b v io u s t h a t i n many c a s e s th e income d e r i v e d I
i
by s a v in g s and lo a n a s s o c i a t i o n management due to r e l a t e d
P e r s o n a l i n t e r v i e w w it h M. F . B. MacBan, A s s i s t - j
a n t V i c e - P r e s i d e n t , C a l i f o r n i a S a v in g s and Loan L eague.
26 i
Such in s u r a n c e d e p a rtm en ts and a g e n c i e s u s u a l l y
w r i t e a l l t y p e s o f in s u r a n c e e x c e p t l i f e i n s u r a n c e . I t i s
p r o b a b le s a v in g s and lo a n a s s o c i a t i o n b o rro w ers and s a v e r s
p u rch a se o t h e r in s u r a n c e th a n o n ly f i r e in s u r a n c e c o v e r in g
m ortgaged p r o p e r t y from such in s u r a n c e d ep a rtm en ts or
a g e n c i e s , a s a r e s u l t o f encouragem ent from th e a s s o c i a t i o n
a n d /o r c o n v e n ie n c e to t h e m s e lv e s .
2+1
b u s i n e s s e s may be n o t o n ly s u b s t a n t i a l , b u t may ev e n
e x c e e d th e m onetary c o m p en sa tio n d e r iv e d from s a l a r i e s and
b o n u s e s . j
W hile some s a v in g s and lo a n a s s o c i a t i o n l i t e r a t u r e
m igh t le a d one to b e l i e v e t h a t i n d i v i d u a l s are a t t r a c t e d
to the management o f a s a v in g s and lo a n a s s o c i a t i o n s o l e l y i
from th e d e s i r e t o c o n t r i b u t e t o community s e r v i c e , i t
seems t h a t th e o p p o r t u n it y f o r p r o f i t p r o v id e d th e m anage- I
I
ment o f m ost s a v in g s and lo a n a s s o c i a t i o n s i s s u f f i c i e n t j
t o a t t r a c t management p e r s o n n e l on th e b a s i s o f r e a l j
f i n a n c i a l i n c e n t i v e . To what e x t e n t t h i s f i n a n c i a l i n c e n - ■
I
t i v e s t i m u l a t e s t h e . t y p e o f management c o n d u c iv e t o com
m u n ity s e r v i c e and th e w e l f a r e o f th e i n v e s t o r c a n n o t
a c c u r a t e l y be d e te r m in e d . W hile i t d o es n ot seem t h a t
s a v in g s and lo a n a s s o c i a t i o n s sh o u ld be o p e r a te d e x c l u s i v e
l y f o r the p u rp o se o f p r o v id in g p r o f i t f o r m anagement,
i
f u r t h e r c o n s i d e r a t i o n o f th e s i t u a t i o n i n d i c a t e s t h a t th e
i n t e r e s t s o f th e p u b l i c can b e s t be s e r v e d by p r e s e n t i n g a ’
i
f i n a n c i a l i n c e n t i v e h ig h enough t o a t t r a c t c a p a b le manage
ment and to prom ote th e d e s i r e t o manage th e a s s o c i a t i o n
on a sound b a s i s i n o r d e r t o p r o v id e lo n g -r a n g e p r o f i t
a b i l i t y . T h is seems p a r t i c u l a r l y im p o r ta n t i n c o n s id e r i n g
m a n a g e r ia l c o m p e n sa tio n i n m u tu al a s s o c i a t i o n s , b e c a u s e
such a s s o c i a t i o n s do n o t o f f e r th e o p p o r t u n it y o f s to c k
i + 2 ;
i
ow nership.
i
In many c a s e s f i n a n c i a l i n c e n t iv e to the management j
H
o f guarantee sto c k a s s o c i a t i o n s may be g r e a t e r than th a t j
o f m utual a s s o c i a t i o n s . In such c a s e s where t h i s addition-1
i
a l f i n a n c i a l i n c e n t iv e r e s u l t s i n b e t t e r management, in - j
v e s t o r s may p r o f i t . However, i n c a s e s where t h i s a d d it io n -
i
a l f i n a n c i a l in c e n t iv e does not r e s u l t in s a t i s f a c t o r y |
I
management, i n v e s t o r s i n a guarantee sto c k company may be I
at a l e s s e r advantage than th o se of a m utual a s s o c i a t i o n .
1
While sto c k ownership may p rovid e f i n a n c i a l i n c e n t i v e , i t
a l s o u s u a l l y c a r r i e s w ith i t v o t i n g c o n t r o l o f the a s s o c i - ,
a t i o n . The management o f a m utual sa v in g s and lo a n a sso c i-!
a t i o n may la c k f i n a n c i a l i n c e n t i v e eq u al to th a t of the 1
management o f a guarantee sto c k a s s o c i a t i o n ; sin c e the
i
v o t in g c o n t r o l in a m utual a s s o c i a t i o n i s d is p e r s e d among
i t s members, i t i s probably e a s i e r t o remove an u n s a t i s
f a c t o r y m utual a s s o c i a t i o n management than an u n s a t i s f a c
t o r y guarantee sto c k a s s o c i a t i o n management.
Tax s t a t u s o f sa v in g s and lo a n a s s o c i a t i o n s . U n t il :
January 1, 1952, sa v in g s and loan a s s o c i a t i o n s were exempt ’
!
from payin g F e d e r a l Income Tax. The many a ttem p ts to !
f
r e p e a l t h i s exem ption were f o r e s t a l l e d , u n t i l the 1951 '
Revenue Act was p a s se d , by e f f o r t s on the p art o f spokesmen'
I k 3 !
f o r the sa v in g s and lo a n i n d u s t r y . 27 As a r e s u l t of
| S e c t i o n 313 o f th e 1951 Revenue A c t, i n s o f a r as the Bureau ;
i :
! of I n t e r n a l Revenue i s concerned, sa v in g s and loan a s s o c i
a t i o n s are now o rd in a ry c o r p o r a tio n s and, as such, su b je c t ,
i
to paying the same r a t e o f income ta x as th a t p a id by 1
i i
' o th e r c o r p o r a t i o n s . j
i
i As str o n g as was the f i g h t o f the sa v in g s and lo a n j
i
i ,
| in d u s tr y to avoid paying income t a x , a cco r d in g to a t l e a s t I
! one s u p e r v iso r y o f f i c i a l , the g e n e r a l o p in io n o f th o se i
27
The arguments used to co n v in c e C ongress were thatj
sa v in g s and loan a s s o c i a t i o n s were c o o p e r a tiv e e n t e r p r i s e s 1
e s t a b l i s h e d as a community s e r v ic e and op erated f o r the 1
b e n e f i t o f sa v e r s and borrowers and, as such, should be j
exempt from payin g income t a x . During the p e r io d of exemp-j
t i o n , i n d iv i d u a l s con n ected w ith o th e r f i n a n c i a l i n s t i t u
t i o n s s u b je c t to paying income ta x made b i t t e r a t t a c k s I
a g a in s t sa v in g s and loan a s s o c i a t i o n s . These i n d iv i d u a l s !
a s s e r t e d th a t i t was u n fa ir th a t sa v in g s and lo a n a s s o c i a
t i o n s were n o t o b l i g a t e d to pay income t a x , s in c e sa v in g s ;
and loan a s s o c i a t i o n s were c o r p o r a tio n s o p e r a tin g e s s e n - i
t i a l l y on the same prem ise a s o th er f i n a n c i a l i n s t i t u t i o n s ,
o b lig a t e d to pay income t a x . |
28
A ccording to the Revenue Act of 1 9 5 1 t a f t e r
c e r t a i n s p e c i f i e d d e d u c tio n s , the income o f s a v in g s and >
loan a s s o c i a t i o n s w i l l be ta x ed a t the same r a te as i s the
income o f o th e r c o r p o r a tio n s , e x c e p t th a t sa v in g s and loa n
a s s o c i a t i o n s w i l l n ot be su b je c t to the E x c e ss P r o f i t s Tax.
S a v in g s and loan a s s o c i a t i o n s may deduct from t h e i r g r o s s
income normal and r e g u la r e x p e n se s, d iv id e n d s and /or
i n t e r e s t d e c la r e d and p a id or c r e d i t e d to w ithdraw able
sa v in g s during the y e a r , and a p p r o p r ia tio n s to r e s e r v e s
u n t i l r e s e r v e s are eq u a l to 12 per c e n t o f sa v in g s c a p i t a l .
George L. B l i s s , e t a l . , tfThe New Income T a x ,1 1 S avin gs and
Loan News, January, 1952, pp. 7 - 8 .
I iiU
I
\ c o n n e c te d w it h t h e s a v in g s and lo a n i n d u s t r y was t h a t
j
' t h e r e was no v a l i d r e a s o n why s a v in g s and lo a n a s s o c i a t i o n s
j i
sh o u ld n o t c o n t r i b u t e t o Government reven u e by p a y in g i n - j
come t a x . I
S in c e s a v in g s and lo a n a s s o c i a t i o n s have n o t y e t j
! p a id income t a x , i t i s i m p o s s i b l e t o know what e f f e c t th e j
; income t a x w i l l have upon th e i n d u s t r y . There i s a p o s s i - j
b i l i t y t h a t th e p r e s e n t t a x a b le s t a t u s o f s a v in g s and lo a n |
| a s s o c i a t i o n s may te n d t o s t r e n g t h e n th e s a f e t y and l i q u i d - I
, i t y o f c e r t a i n a s s o c i a t i o n s , i f n o t th e s a v in g s and loan
! b u s i n e s s a s a w h o le . The s a f e t y and l i q u i d i t y o f s a v in g s
1 and lo a n a s s o c i a t i o n s may be s t r e n g t h e n e d i n t h r e e w ays.
F i r s t , s i n c e s a v in g s and lo a n a s s o c i a t i o n s w i l l have
to pay t a x on t h e i r p r o f i t s , s a f e t y r a t h e r th a n h ig h e a r n -
t
; i n g s may become a more im p o r ta n t e le m e n t i n t h e i r i n v e s t -
■ ment program . T h is may le a d t o th e c o n c e n t r a t i o n o f a
; g r e a t e r p r o p o r t io n o f fu n d s i n v e s t e d i n lo w er y i e l d i n g
i
1 Government s e c u r i t i e s r a t h e r th a n i n h ig h e r y i e l d i n g m o r t-
' gage l o a n s . S in c e Government s e c u r i t i e s a re more l i q u i d
i
and are c o m p a r a tiv e ly r i s k - f r e e a s compared w i t h m ortgage
' l o a n s , such a c t i o n would ten d t o add s a f e t y and l i q u i d i t y
t o s a v in g s and lo a n a s s e t s .
S e c o n d , i f b e in g s u b j e c t t o income t a x r e s u l t s i n
: m aking s a v in g s and lo a n a s s o c i a t i o n s l e s s i n t e r e s t e d i n
k s I
I
s
h ig h p r o f i t s , more c o n s e r v a tiv e m ortgage le n d in g p o l i c i e s i
which would ten d to add s a f e t y to th e mortgage lo a n p o r t
f o l i o may be adop ted . |
T hird, b ecause sa v in g s and loan a s s o c i a t i o n s may
deduct a d d it io n s to r e s e r v e s from t h e i r ta x a b le incom es, ■
a s s o c i a t i o n s w ith r e s e r v e r a t i o s below 12 per c e n t o f
sa v in g s c a p i t a l may make more s u b s t a n t i a l a d d it io n s to j
i
r e s e r v e s and th u s e f f e c t an a d d i t io n a l measure o f s e c u r it y .;
S a vin g s and lo a n a s s o c i a t i o n s w ith r e s e r v e r a t i o s
i
above 12 per c e n t would probab ly n ot be stim u la te d by the j
i
income ta x to make more th an normal a d d it io n s to r e s e r v e s , j
However, sa v in g s and lo a n a s s o c i a t i o n s as a whole have ;
r e s e r v e r a t i o s below 12 per c e n t . ^9 w h ile i n some i n - |
s ta n c e s in d iv i d u a l sa v in g s and lo a n a s s o c i a t i o n s do have
r e s e r v e r a t i o s s u b s t a n t i a l l y above 12 per c e n t , most do not.
In th e Los A n g ele s area th e r e are few in d iv i d u a l sa v in g s
and lo a n a s s o c i a t i o n s w ith r e s e r v e r a t i o s above 12 per I
cent.--’ T h er efo r e, i t seems l o g i c a l th a t s u b j e c t io n to
At the end of 1950, the r a t i o o f r e s e r v e s to |
sa v in g s c a p i t a l f o r a l l sa v in g s and loa n a s s o c i a t i o n mem
b e r s of th e F e d e r a l Home Loan Bank System was 9*0 per c en t.;
C a lc u la te d from f i g u r e s in c lu d e d in Combined F in a n c ia l
S tatem en ts o f Members of th e F e d e r a l Home Loan Bank System ,
1950 (W ashington, D.C.: Home Loan Bank Board, 1 9 5 l ) ,
p. 13, Table No. 3.
30
P erso n a l in t e r v ie w w ith W illiam Purmont, A s s i s t
ant to th e V i c e - P r e s i d e n t , E le v e n th D i s t r i c t F e d e r a l Home
1 ^ 6 ;
i ;
1 income ta x c o u ld have th e e f f e c t o f s t r e n g t h e n in g th e
| r e s e r v e p o s i t i o n s o f many s a v in g s and lo a n a s s o c i a t i o n s
I i
| and may, t h e r e f o r e , s t r e n g t h e n th e r e s e r v e p o s i t i o n o f th e |
\ i
! in d u s t r y as a w h o le .
t
' In some i n s t a n c e s s u b j e c t i o n to th e income t a x may j
»
le a d t o a tte m p ts to red u ce t a x a b le incom e by i n c r e a s i n g ;
! d iv id e n d or i n t e r e s t r a t e s to investors, 31 a d v e r t i s in g j
' I
; a p p r o p r ia t io n s , and c o m p en sa tio n t o management and o th e r
, s a v in g s and lo a n p e r s o n n e l. S in c e th e e f f e c t s o f th e
! l e v e l s o f d iv id e n d or i n t e r e s t r a t e s and th e e f f e c t s o f
j a d v e r t i s i n g are d is c u s s e d i n C hapter IV, i t d o e s n o t seem
! n e c e s s a r y to i n v e s t i g a t e t h e s e m a tte r s now. Here i t seems
s u f f i c i e n t t o p o in t o u t t h a t i n c r e a s e s i n d iv id e n d or
i n t e r e s t r a t e s p a id i n v e s t o r s o f s a v in g s and lo a n a s s o c i a -
I t i o n s and f u r t h e r i n c r e a s e s i n th e a d v e r t i s i n g done by
! t h e s e i n s t i t u t i o n s m ig h t le a d t o f u r t h e r g ro w th , b u t to
grow th w h ich may, or may n o t , be b e n e f i c i a l to th e s a v in g s
I
and lo a n in d u s tr y o r to th e s o c i e t y and th e economy in
g e n e r a l .
The c o m p en sa tio n o f management and o th e r p e r s o n n e l
* 1 ■ ■ ■ ■ ■ ■■ ■ ■ ■ » ■ ■ — ■ ■ ■ .
Loan Bank.
31
Many s a v in g s and lo a n a s s o c i a t i o n s i n Los A n g e le s
County have r a i s e d d iv id e n d r a t e s s in c e Jan u ary, 1952. I t ,
■ i s f e l t t h a t t h i s h a s r e s u l t e d from an e f f o r t to d e c r e a s e
i t a x a b le income r a th e r th a n from in c r e a s e d e a r n in g s . :
] o f s a v in g s and lo a n a s s o c i a t i o n s i s a m a tte r w h ich h a s been'
I |
] d i s c u s s e d i n a p r e v io u s s e c t i o n o f th e study* I t seem s 1
i 1
| im p ortan t o n ly t o n o te h ere t h a t i n c r e a s e s i n th e compensa-i
1 t i o n o f t h e s e i n d i v i d u a l s may le a d to b e t t e r management i
i and p e r s o n n e l, w h ich , o f c o u r s e , would be a b e n e f i c i a l ,
i !
; d evelop m en t i f com m ensurate w it h th e s a f e t y o f s a v in g s and 1
I . i
| lo a n a s s o c i a t i o n s and th e p r o f i t a b i l i t y o f in v e s t m e n ts in
i
j t h e s e i n s t i t u t i o n s . C e r t a in ly i n c r e a s e s i n c o m p en sa tio n j
(
a re n o t j u s t i f i a b l e i f th e y le a d to in a d e q u a te a d d i t i o n s 1
i to r e s e r v e s and t o a d i s t r i b u t i o n o f l e s s th an a f a i r
I
sh are o f th e p r o f i t s a f t e r ad eq u ate a d d it io n s t o r e s e r v e s , j
i I
I t o i n v e s t o r s . I t i s n o t l i k e l y t h a t s u b j e c t i o n o f s a v in g s !
i I
j and lo a n a s s o c i a t i o n s to th e income t a x w ould be r e s p o n s i -
i b le f o r an in c r e a s e i n co m p en sa tio n to u n r e a so n a b le l e v e l s ,
I s in c e th e amount o f incom e w h ich ca n be d e d u cte d f o r su ch
i
! e x p en se may n o t e x c e e d an amount c o n s id e r e d r e a s o n a b le by
; i
1 th e Bureau o f I n t e r n a l R evenue. I
; I
The lo n g -te r m e f f e c t s o f th e new t a x s t a t u s o f !
i !
i s a v in g s and lo a n a s s o c i a t i o n s are n o t y e t known. U ndoubt-
1 e d ly th e r e w i l l be d i f f e r e n t e f f e c t s d ep en d in g on i n d i v i d - •
j u a l c a s e s and on the m ethod management c h o o s e s to h a n d le
l th e ta x s i t u a t i o n . As a r e s u l t o f now b e in g s u b j e c t e d to ■
p a y in g incom e t a x , i n a l l p r o b a b i l i t y , c e r t a i n ch a n g es i n j
i ;
j i
I s a v in g s and lo a n a s s o c i a t i o n s w i l l become ap p aren t a s th e
■ y e a r s p r o g r e ss* I t i s p o s s i b l e t h a t th e s e ch a n g es w i l l
j r e s u l t in s t r e n g th e n in g th e in d u s tr y and, a s a r e s u l t , i
i J
s a v in g s and lo a n a s s o c i a t i o n s w i l l become more p o s i t i v e j
I
' c o n t r ib u t o r s t o th e com m unity. W hatever t h e e f f e c t s , i t j
i !
: d o es n o t seem t h a t th e r e i s any v a l i d r e a s o n why s a v in g s
I
♦ 1
j and lo a n a s s o c i a t i o n s sh o u ld n o t c a r r y t h e i r sh are o f th e j
, t a x b u rd en . J
!
E s s e n t i a l d i f f e r e n c e s b etw een com m ercial banks and !
i............................................................................................................................................— '"■■■' - ------------- -------- -.I . ..................... — — — i
I s a v in g s and lo a n a s s o c i a t i o n s . W hile s a v in g s and lo a n ;
i a s s o c i a t i o n s and com m ercial banks a re i n some ways a l i k e , j
i
t h e r e a re c e r t a i n fu n d am en tal d i f f e r e n c e s w h ich do e x i s t
and s e p a r a te t h e s e two t y p e s o f f i n a n c i a l I n s t i t u t i o n s .
! B oth th e t y p i c a l s a v in g s and lo a n a s s o c i a t i o n and
th e t y p i c a l com m ercial bank a c c e p t th e s a v in g s o f i n d i v i d -
i »
u a l s , make r e a l e s t a t e l o a n s , and o f f e r i n c i d e n t a l s e r v ic e s '
to t h e i r c u sto m e r s . T h e s e " in c id e n t a l s e r v i c e s ” in c lu d e
i
i
th e f o l l o w i n g : C h ristm a s s a v in g s and v a c a t io n c lu b a c -
c o u n t s , s c h o o l s a v in g s , p a y r o l l d e d u c tio n p l a n s , th e s a l e
i o f money o r d e r s and t r a v e l e r s 1 c h e c k s , s a f e t y d e p o s it
b o x e s , and a d v ic e on f i n a n c i a l m a t t e r s . The a c t i v i t i e s o f .
b o th s a v in g s and lo a n a s s o c i a t i o n s and com m ercial banks ,
a re r e g u la t e d and s u p e r v is e d by g o v ern m en ta l a u t h o r i t i e s ,
i
m ost s a v in g s and lo a n a s s o c i a t i o n s and m ost com m ercial '
i banks make u se o f a su p p ly o f fu n d s from a r e s e r v e c r e d i t j
i n s t i t u t i o n , and m o st s a v in g s and lo a n a s s o c i a t i o n s a s w e l l
a s m o st c o m m e r c ia l b an k s h a v e t h e i r a c c o u n t s in s u r e d b y an
in s u r a n c e c o r p o r a t i o n . The l i k e n e s s e s w h ic h e x i s t b e tw e e n
s a v i n g s and lo a n a s s o c i a t i o n s and c o m m e r c ia l b a n k s a r e
p r o b a b ly m ore o f t e n r e c o g n i z e d th a n a r e t h e i r d i f f e r e n c e s .
The e s s e n t i a l d i f f e r e n c e s b e tw e e n s a v in g s and lo a n
a s s o c i a t i o n s and c o m m e r c ia l b a n k s e x i s t s l a r g e l y b e c a u s e
o f t h e d i f f e r e n c e s i n t h e s o u r c e s and d i s p o s i t i o n o f th e
fu n d s o f e a c h . C om m ercial b a n k s r e c e i v e m o st o f t h e i r
fu n d s from i n d i v i d u a l s o r b u s i n e s s c o n c e r n s i n th e form o f
demand o r tim e d e p o s i t s . A demand d e p o s i t o r i s e n t i t l e d
t o t h e r e t u r n o f h i s fu n d s w it h o u t p r e s e n t i n g p r e v i o u s
n o t i c e , e i t h e r b y w r i t i n g c h e c k s o r b y h a v in g h i s d e p o s i t
c o n v e r t e d i n t o c u r r e n c y . A tim e d e p o s i t o r i s e n t i t l e d t o
t h e r e t u r n o f h i s f u n d s a t t h e end o f a s p e c i f i e d l e n g t h
o f t im e . I n p r a c t i c e , tim e d e p o s i t o r s a r e p a id c a s h on
dem and. C om m ercial b a n k s m u st a d h e r e t o t h e s e o b l i g a t i o n s
o r t h e y may be d e c l a r e d i n l e g a l d e f a u l t . S a v in g s and lo a n
a s s o c i a t i o n s , on th e o t h e r h a n d , r e c e i v e m o st o f t h e i r
f u n d s from p a y m en ts on s h a r e s o r in v e s t m e n t c e r t i f i c a t e s
w h ic h a re n o t w ith d r a w a b le on demand o r a t th e end o f any
5 o
s p e c i f i e d le n g t h o f t i m e . 32 j n p r a c t i c e , h o w ev er, r e
q u e s t s f o r th e w ith d r a w a l o f s a v in g s i n v e s t e d a re met on
dem and.33
32 1
W hile th e word " w ith d ra w a l” i s u s e d , s a v in g s and,
lo a n sh a r e s a re a c t u a l l y r e p u r c h a se d by th e a s s o c i a t i o n j
r a th e r th a n a re th e fu n d s i n v e s t e d w ithdraw n b y th e i n - ;
v e s t o r . In s e e k in g th e w ith d ra w a l o f fu n d s i n v e s t e d i n a j
F e d e r a l S a v in g s and Loan A s s o c i a t i o n , an i n v e s t o r may I
have t o g iv e th e a s s o c i a t i o n a 30 d ay n o t i c e b e f o r e he can
o b t a in su ch fu n d s . A lth o u g h th e p e r io d o f n o t i c e w h ich
may be e n fo r c e d by s a v in g s and lo a n a s s o c i a t i o n s c h a r te r e d
by th e S t a t e o f C a l i f o r n i a v a r i e s a c c o r d in g to th e b y -la w s
o f i n d i v i d u a l a s s o c i a t i o n s , t h i s p e r io d may be a s lo n g a s ;
s i x m o n th s. I f im p o s s ib le f o r s a v in g s and lo a n a s s o c i a
t i o n s to m eet w ith d ra w a l r e q u e s t s a t th e end o f such
p e r io d o f n o t i c e a s may be r e q u ir e d , th e amount r e q u e s te d :
i s p a id i n i n s t a l l m e n t s a s fu n d s are a v a i l a b l e . I n j
F e d e r a ll y c h a r te r e d s a v in g s and lo a n a s s o c i a t i o n s su ch
w ith d ra w a l r e q u e s t s are f i l e d i n th e o r d e r r e c e i v e d and
i n s t a l l m e n t s up t o $>1,000 p a id a s ea ch i s r e a c h e d . A f t e r 1
such i n s t a l l m e n t s are p a id , w ith d ra w a l r e q u e s t s e x c e e d in g !
$ 1 ,0 0 0 a r e p la c e d a t th e end o f th e l i s t o f w ith d ra w a l j
r e q u e s t s and when r ea c h e d a g a in , a r e p a id a l i k e amount.
T h is p r o c e s s c o n t in u e s u n t i l th e f u l l amount o f th e w it h
d raw al r e q u e s t s h a s b een p a id . R u le s and R e g u la t io n s f o r
th e F e d e r a l S a v in g s and Loan System (W ash in gton , D . C . :
Home Loan Bank B oard , 1 9 5 1) > S e c t i o n llj.5• 4• The p ro ced u re
f o llo w e d w ith r eg a rd t o p a y in g w ith d ra w a l r e q u e s t s by sa v
in g s and lo a n a s s o c i a t i o n s c h a r te r e d by th e S t a t e o f
C a l i f o r n i a i s a p p r o x im a te ly th e same a s t h a t d e s c r ib e d ,
a b o v e , e x c e p t t h a t i n s t a l l m e n t s v a r y from $ 2 5 0 t o fi^.,000, :
d ep en d in g on th e amount o f th e w ith d r a w a l r e q u e s t , and
t h a t ea ch i n s t a l l m e n t on a g iv e n w ith d ra w a l r e q u e s t b e
comes p a y a b le 3© d ays a f t e r payment h a s b een made on th e
p r e c e d in g i n s t a l l m e n t on such w ith d ra w a l r e q u e s t . F ed er a l
l y c h a r te r e d s a v in g s and lo a n a s s o c i a t i o n s and t h o s e c h a r
t e r e d by th e S t a t e o f C a l i f o r n i a may pay up to $200 and
$ 1 0 0 , r e s p e c t i v e l y , to any i n v e s t o r w ith o u t r e q u ir in g a
n o t i c e o f i n t e n t i o n to w ithdraw and w ith o u t reg a r d t o un
p a id w ith d r a w a l r e q u e s t s w hich may e x i s t . 1951 E d i t i o n ,
B u ild in g and Loan A c t, S t a t e o f C a l i f o r n i a , A r t i c l e V i ,
S e c t i o n s 6 . 0 1 - 6 . 0 2 .
S in c e 19^.1 , s a v in g s and lo a n a s s o c i a t i o n s i n the,
B ecau se o f th e d i f f e r e n c e s e x i s t i n g b etw een th e
l i a b i l i t i e s o f a com m ercial bank and a s a v in g s and lo a n
a s s o c i a t i o n , due to th e d i f f e r e n c e s i n th e s o u r c e s o f ;
fu n d s o f e a c h , t h e r e are fu n d am en tal d i f f e r e n c e s w h ich i
m ust e x i s t i n th e ways i n w h ich ea ch i n v e s t s i t s fu n d s . j
i
4
B ecau se a com m ercial bank m ust sta n d rea d y to m eet w it h - i
I
i
d raw als w it h in a r e l a t i v e l y s h o r t t im e , i t m ust k eep a |
h ig h p e r c e n ta g e o f i t s fu n d s i n l i q u i d fo r m .3 b B ecau se a
s a v in g s and lo a n a s s o c i a t i o n n eed n o t r e t u r n th e s a v in g s
fu n d s w i t h i n a s h o r t p e r io d o f tim e , i t s n eed f o r l i q u i d
i t y i s f a r b e lo w th a t, n eed ed by com m ercial b a n k s. T ab le I ,
page 5 2 , w h ich shows th e d i s t r i b u t i o n o f th e a s s e t s o f
com m ercial banks and s a v in g s and lo a n a s s o c i a t i o n s , i l l u s
t r a t e s th e d i f f e r e n c e i n th e d e g r ee o f l i q u i d i t y (a s
m easured by c a sh and U n ite d S t a t e s Government s e c u r i t i e s
r e l a t i v e t o t o t a l a s s e t s ) o f th e two i n s t i t u t i o n s . Com
m e r c ia l banks a re f a r more l i q u i d th a n s a v in g s and lo a n j
Los A n g e le s a r ea have b e e n m e e tin g w ith d r a w a l r e q u e s t s on
demand. One s a v in g s and lo a n a s s o c i a t i o n i n t h i s a r e a i s '
known t o have e n fo r c e d a 30 day w a itin g p e r io d f o r w it h
d r a w a ls r e c e n t l y , n o t b e c a u se o f i n a b i l i t y t o pay on d e
mand, b u t i n an e f f o r t to e d u c a te i t s i n v e s t o r s to consider,
s a v in g s i n v e s t e d i n t h i s i n s t i t u t i o n a s lo n g -te r m i n v e s t
m en ts r a th e r th a n a s fu n d s t o b e u sed f o r c u r r e n t payments.;
P e r s o n a l in t e r v i e w w ith W illia m Purm ort.
3k
I . e . , a bank must keep a h ig h p e r c e n ta g e o f i t s
fu n d s i n c a s h or a s s e t s such a s U n ite d S t a t e s Government ;
s e c u r i t i e s , w h ich ean q u i c k ly , e a s i l y , and w ith o u t l o s s ,
be c o n v e r te d i n t o c a sh a t any g iv e n tim e .
52
T A B L E I
COMPARISON OF SAVINGS AND LOAN ASSOCIATIONS AND COMMERCIAL BANKS AS TO
SELECTED BALANCE SHEET QUANTITIES, DECEMBER 31, 1950
All Insured Savings and Loan Associations in the United States
December 31, 1950
Per cent
of total
5.6
8.8
81.7
3.9
Assets
Cash
United States Government Securities
First Mortgage Loans
Other Assets
Total
L 772,581)., 000
1,200,320,000
11,188,1* 88,000
530,018,000
$13,691,1*10,000 100.0
All Insured Banks in the United States and Possessions
December 31, 1950
Per cent
Assets of total
Cash
United States Government Securities
Other Securities
Loans and Discounts
Other Assets
Total
$ 1 * 0, 1 * 81, 286,000 22.2
68,531**185,000 37.5
13,679,717,000 7.5
57,895,001*,000 31.7
2, 109, 229,000 1.1
$182, 698, 1 * 21,000 100.0
Liabilities
Savings Accounts3
Federal Home Loan Bank Advances
Reserves and Undivided Profits
Other Liabilities
Total
$11, 373,986,000
752.952.000
955.307.000
609. 165.000
Per cent
of total
83.1
5.5
7.0
l*.l*
$13,691,1*10,000 100.0
Liabilities
Deposits
Capital Accounts^
Other Liabilities
Total
$167, 817, 696,000
12,793,875,000
2, 086,850,000
Per cent
of total
91.9
7.0
i a
$182, 698,1 * 21,000 100.0
S L
Share accounts and investment certificates.
Capital, surplus, undivided profits, and unallocated reserves.
SOURCE % Insurance of Accounts in Savings and Loan Associations, Research Department, Security-First National Bank of Los Angeles,
June 2, 1951.

^3 ;
a s s o c i a t i o n s b e c a u se th e form er m ust sta n d rea d y t o m eet
w ith d r a w a ls w it h in a s h o r t p e r io d o f tim e . ’!
i
I
As i n d ic a t e d i n T ab le I , com m ercial banks i n v e s t i
i
a s m a lle r p r o p o r tio n o f t h e i r fu n d s i n lo a n s th a n do j
I
s a v in g s and lo a n a s s o c i a t i o n s . Not o n ly i s t h e r e a d i f - j
f e r e n c e i n th e p r o p o r t io n o f fu n d s i n v e s t e d i n l o a n s , bu t ;
th e r e i s a l s o a d i f f e r e n c e i n th e ty p e o f lo a n s made. j
i
W hile com m ercial b an ks do make lo n g -te r m r e a l e s t a t e loansj
a l a r g e r p a r t o f t h e i r lo a n s a re s h o r t-te r m com m ercial and
consum er l o a n s . 35 As shown i n T ab le I , m ost o f th e lo a n s
I
i
made b y s a v in g s and lo a n a s s o c i a t i o n s a re r e a l e s t a t e
[
l o a n s . Not o n ly i s th e r e a d i f f e r e n c e b etw een th e p r o p o r -
i
t i o n o f th e fu n d s o f com m ercial banks and s a v in g s and lo a n
a s s o c i a t i o n s i n v e s t e d i n r e a l e s t a t e l o a n s , b u t t h e r e i s
i
a l s o a d i f f e r e n c e i n th e term s o f su ch r e a l e s t a t e lo a n s . \
i
E x cep t f o r lo a n s in s u r e d or g u a r a n te e d by th e V eteran* s !
A d m in is t r a t io n or F e d e r a l H ou sin g A d m in is t r a t io n , N a tio n a l'
banks may make r e a l e s t a t e lo a n s up to 60 p e r c e n t of th e
a p p r a is e d v a lu e o f th e p r o p e r ty and f o r a p e r io d o f t e n j
y e a r s .-5 S a v in g s and lo a n a s s o c i a t i o n s , b o th F e d e r a l and
R eport Number : Com m ercial and M utual S a v in g s '
Banks (W ash in gton , D . C. : F e d e r a l D e p o s it In su ra n ce
C o r p o r a tio n , 1951)> p . 2 .
^ R ich a rd U. R a t c l i f f , Urban Land E conom ics (New
Y ork: M cG raw -H ill Book C o ., I n c . , 191+9) » p . £lj.l.
C a l i f o r n i a S t a t e - c h a r t e r e d , may make r e a l e s t a t e lo a n s up
to 80 p e r c e n t o f th e a p p r a is e d v a lu e o f th e p r o p e r ty , and
f o r a p e r io d o f 20 y e a r s . 37 B eca u se lo n g -te r m r e a l e s t a t e ;
lo a n s y i e l d a h ig h e r r e t u r n th a n do s h o r t-te r m lo a n s or
1
Government s e c u r i t i e s , s a v in g s and lo a n a s s o c i a t i o n s a re ‘
1
a b le to e a rn a h ig h e r r e tu r n on t h e i r i n v e s t e d fu n d s th a n j
are com m ercial b a n k s, and s a v in g s and lo a n a s s o c i a t i o n s
a r e th u s a b le to pay a h ig h e r r a t e o f r e t u r n on s a v in g s .
The d i f f e r e n c e s w hich e x i s t b etw een com m ercial
banks and s a v in g s and lo a n a s s o c i a t i o n s b e c a u se o f th e
a c q u i s i t i o n and d i s p o s i t i o n o f th e fu n d s o f e a c h have
s e v e r a l i m p l i c a t i o n s w orth y o f m en tio n h e r e . The n a tu r e
o f th e l i a b i l i t i e s o f each i s c o n d u c iv e t o m aking s a v in g s
and lo a n a s s o c i a t i o n s b e t t e r ad ap ted t o th e c o n t r ib u t io n
o f a h ig h e r p r o p o r t io n o f t h e i r fu n d s t o th e stream o f
lo n g -te r m r e a l e s t a t e c r e d i t , w h ile com m ercial banks are
more a d a p ted t o c o n t r ib u t in g a h ig h e r p r o p o r tio n o f t h e i r ,
fu n d s to th e stream o f s h o r t-te r m com m ercial and consum er j
c r e d i t . Due to th e w ith d ra w a l p r i v i l e g e s o f i t s d e p o s ito r s
j
and th e r e l a t i v e l y h ig h d eg ree o f l i q u i d i t y m a in ta in e d by
37 1
R u le s and R e g u la tio n s f o r th e F e d e r a l S a v in g s
and Loan S y s te m , S e c t i o n 1L}.5. b ; 195>1 E d i t i o n , B u ild in g and
Loan A c t , S t a t e o f C a l i f o r n i a , S e c t i o n 9 .1 0 . ;
a t y p i c a l com m ercial ban k, t h i s i n s t i t u t i o n p r o v id e s an
a p p r o p r ia te o u t l e t f o r fu n d s to be u sed f o r c u r r e n t p a y
m en ts and f o r th e s a v in g s o f i n d i v i d u a l s who p la c e more
i
im p o rta n ce on th e im m ed iate a v a i l a b i l i t y o f t h e i r fu n d s
i
th a n on th e amount su ch fu n d s may e a r n . B ecau se th e t y p i- ,
e a l s a v in g s and lo a n a s s o c i a t i o n i n v e s t s th e m a j o r it y o f
i t s fu n d s on a lo n g -te r m b a s i s , and b e c a u se i t i s n o t \
!
l e g a l l y bound to r e tu r n fu n d s t o i t s i n v e s t o r s w it h in a
i
s h o r t p e r io d o f t im e , i t d o es n o t p r o v id e an a p p r o p r ia te !
i
o u t l e t f o r fu n d s t o be u sed f o r c u r r e n t paym ents; a i
i
s a v in g s and lo a n a s s o c i a t i o n p r o v id e s an a p p r o p r ia te o u t-
i
l e t f o r t h e s a v in g s o f i n d i v i d u a l s p la e in g more im portance;
on th e amount t h e i r s a v in g s may e a rn th a n on th e immediate!
a v a i l a b i l i t y o f su ch fu n d s .
The r e l a t i o n s h i p o f th e F e d e r a l Home Loan Bank
S ystem to s a v in g s and lo a n a s s o c i a t i o n s . The F e d e r a l
Home Loan Bank System i s r e l a t e d t o s a v in g s and lo a n a s
s o c i a t i o n s i n a way s i m i la r t o th e way i n w hich th e
F e d e r a l R e se rv e S ystem i s r e l a t e d t o com m ercial b a n k s.
The F e d e r a l Home Loan Bank S ystem p r o v id e s a p o t e n t i a l
so u rce o f fu n d s to member a s s o c i a t i o n s . 3® T h is
38
W hile m em bership i n th e F e d e r a l Home Loan Bank
System i s open to a l l home f in a n c in g i n s t i t u t i o n s w hich
m eet c e r t a i n r e q u ir e m e n ts , a t th e end o f 1950 o n ly 36 o f j
56
su p p lem en ts fun ds i n v e s t e d by i n d i v i d u a l s , fu n d s w hich
have b een r e t a i n e d from p a s t e a r n in g s , and fu n d s borrow ed
from o t h e r s o u r c e s * 39 The f u n c t i o n s o f th e F e d e r a l Home
Loan Bank System a r e c a r r ie d on by e le v e n r e g i o n a l F e d e r a l
Home Loan Banks s e r v in g member s a v in g s and lo a n a s s o c i a
t i o n s i n t h e i r r e s p e c t i v e a r e a s . Through F e d e r a l Home
Loan B an k s, th e F e d e r a l Home Loan Bank S ystem f u n c t i o n s
t o a s s i s t member s a v in g s and lo a n a s s o c i a t i o n s in
th e 3 ,9 3 0 members o f th e System were i n s t i t u t i o n s o th e r
th a n s a v in g s and lo a n a s s o c i a t i o n s . F e d e r a l S a v in g s and
Loan A s s o c i a t i o n s m ust be m em bers, and m em bership i s op
t i o n a l f o r S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s .
The r e q u ir e m e n ts f o r m em bership i n th e F e d e r a l Home Loan
Bank S ystem a re g e n e r a l i n n a t u r e . To comply w it h member
sh ip r e q u ir e m e n ts , an i n s t i t u t i o n must be o r g a n iz e d under
th e law s o f any S t a t e o r th e U n ite d S t a t e s , be s u b j e c t to
e x a m in a tio n and r e g u l a t i o n b y th e S t a t e or th e U n ite d
S t a t e s , make lo n g -te r m m ortgage lo a n s , an d , i n th e o p in io n
o f th e F e d e r a l Home Loan Bank S y stem , be f i n a n c i a l l y sound
and p o s s e s s a home f i n a n c i n g p o l i c y c o n s i s t e n t w it h sound
and e c o n o m ic a l home f i n a n c i n g . Members a re r e q u ir e d to
h o ld c a sh and U n ite d S t a t e s Government o b l i g a t i o n s i n an
amount e q u a l to a t l e a s t 6 p e r c e n t o f t h e i r w ith d ra w a b le
s a v in g s a c c o u n ts and m ust own s to c k o f t h e i r r e s p e c t i v e
F e d e r a l Home Loan Banks i n an amount e q u iv a le n t t o 2 p e r
c e n t o f t h e i r m ortgage lo a n s o u t s t a n d in g . F o u r th Annual
R e p o r t, H ousing and Home F in a n c in g A g en cy , l 9 5 0 > p p . l 6? *
1 7 1 9 and 17ii*
39
A C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n
a s s o c i a t i o n may borrow from o th e r s o u r c e s i n an amount n o t
e x c e e d in g 5 p er c e n t o f i t s t o t a l a s s e t s . 1951 E d i t i o n ,
B u ild in g and Loan A c t , S t a t e o f C a l i f o r n i a , A r t i c l e IX ,
S e c t i o n 9 .0 5 * A F e d e r a l S a v in g s and Loan A s s o c i a t i o n may
borrow from o th e r s o u r c e s i n an amount n o t e x c e e d in g 10 per
c e n t o f I t s t o t a l s a v in g s e a p i t a l . R u le s and R e g u la t io n s
f o r th e F e d e r a l S a v in g s and Loan S y ste m , S e c t i o n l l ^ . 1 .
57 ;
I
p r o v i d i n g an o u t l e t f o r s a v i n g s and a s o u r c e o f f u n d s f o r
home f i n a n c i n g .
F e d e r a l Home Loan Banks r e c e i v e fu n d s from d e p o s i t s !
I
o f m em bers and o t h e r F e d e r a l Home Loan B a n k s, th e s a l e o f j
I
b on d s t o t h e p u b l i c , and th e s a l e o f t h e i r c a p i t a l j
s t o c k . ^ By m a k in g l o a n s t o m e m b e r s F e d e r a l Home Loan J
At th e end o f 1950 , ab ou t o n e - t h i r d o f th e
c a p i t a l s to c k o f F e d e r a l Home Loan Banks was owned by th e j
U n ite d S t a t e s G overnm ent. As members o f th e S ystem p u r- j
c h a se a d d i t i o n a l s t o c k , U n ite d S t a t e s Government s to c k i s ;
r e t i r e d . At th e tim e o f th e f i n a l r e t ir e m e n t o f U n ite d ■
S t a t e s Government s t o c k i n the F e d e r a l Home Loan Bank
S y stem , t h e r e w i l l be no f u r t h e r o b l i g a t i o n on th e p a r t 1
o f th e U n ite d S t a t e s Government to f i n a n c i a l l y su p p ort
th e F e d e r a l Home Loan Bank S ystem . The S e c r e ta r y o f th e
U n ite d S t a t e s T r e a s u r y , h ow ever, i s a u t h o r iz e d t o p u rc h a se
o b l i g a t i o n s o f th e F e d e r a l Home Loan Bank S y stem , b u t a t
no tim e may th e h o ld in g s o f o b l i g a t i o n s so p u rch a sed
e x c e e d $ 1 ,0 0 0 ,0 0 0 ,0 0 0 . F o u r th A nnual R e p o r t, H ousing and
Home F in a n c e A g e n c y , 1 9 5 0 , pp. T 75-TF6.
F e d e r a l Home Loan Banks may make to m em bers, .
lo a n s f o r a t e n - y e a r p e r io d i f such lo a n s are s e c u r e d by :
home m o r tg a g e s , and s h o r t-te r m u n se cu re d a d v a n c e s.
D i s t e l h o r s t , op. c i t . , p . li|.0. B o th F e d e r a l S a v in g s an d ' j
Loan A s s o c i a t i o n s and t h o s e c h a r te r e d by th e S t a t e o f 1
C a l i f o r n i a may borrow up t o 50 p e r c e n t o f s a v in g s c a p ita l!
from F e d e r a l Home Loan B anks. R u le s and R e g u la t io n s f o r
th e F e d e r a l S a v in g s and Loan S y s te m , S e c t i o n l l | i f . l ; a l s o
p e r s o n a l i n t e r v i e w w ith W illia m P urm ort. F e d e r a l Home !
Loan Bank b o r r o w in g s may n o t e x c e e d 12 tim e s th e amount j
an a s s o c i a t i o n h a s p a id on c a p i t a l s t o c k o f i t s F e d e r a l '
Home Loan Bank. F o u r th A nnual R e p o r t, H ousing and Home ,
F in a n c e A g en cy , l 9 5 0 * p . I l k * Hot more th a n 50 per c e n t :
o f th e F e d e r a l Home Loan Bank b orrow in g c a p a c it y o f a
s a v in g s and lo a n a s s o c i a t i o n may be u sed f o r le n d in g p u r
p o s e s . B etw een J u ly 1950 and May 1 9 5 2 , b orrow in g f o r
Banks p r o v id e a p o t e n t i a l so u rce o f fu n d s f o r s a v in g s and
*
lo a n a s s o c i a t i o n s t o u se i n su p p lem en tin g t h e i r own fu n d s |
F e d e r a l Home Loan B anks, t h e n , p r o v id e an a d d i t i o n a l
so u rce o f fu n d s f o r home f in a n c in g th ro u g h th e medium o f
s a v in g s and lo a n a s s o c i a t i o n s and p r o v id e a so u r c e o f
demand d e p o s i t s from member s a v in g s and lo a n a s s o c i a t i o n s ,
i n i t s r e s p e c t i v e d i s t r i c t , a F e d e r a l Home Loan Bank
p r o v id e s a d e p o s it o r y where s a v in g s and lo a n a s s o c i a t i o n s
may k eep fu n d s t o be u sed f o r c u r r e n t p aym ents. By a c
c e p t in g tim e d e p o s i t s from d i s t r i c t member s a v in g s and
lo a n a s s o c i a t i o n s , F e d e r a l Home Loan Banks p r o v id e an o u t - 1
l e t f o r s a v in g s and lo a n a s s o c i a t i o n fu n d s n o t t o be u sed .
I
f o r c u r r e n t p aym en ts, where su ch fu n d s may e a rn a r e t u r n j
and, a l s o , be a v a i l a b l e w i t h i n a s h o r t p e r io d o f t i m e .^-2
su ch p u r p o se s c o u ld n o t e x c e e d 30 p er c e n t o f th e maximum :
b orrow in g c a p a c it y o f a member s a v in g s and lo a n a s s o c i a - «
t i o n . T h is r e s t r i c t i o n was a d o p ted i n an e f f o r t t o c o n - i
se r v e m a t e r i a l s and manpower and to r ed u ce i n f l a t i o n a r y
t e n d e n c ie s due to th e o u tb rea k o f K orean h o s t i l i t i e s . |
I b i d . , pp. 1 65-1 66;' a l s o p e r s o n a l i n t e r v ie w w it h W illia m
Purm ort. The i n t e r e s t r a t e ch a rg ed on b o r r o w in g s by th e !
E le v e n t h D i s t r i c t F e d e r a l Home Loan Bank s e r v in g member !
s a v in g s and lo a n a s s o c i a t i o n s i n th e Los A n g e le s a r e a , a s
o f January 1, 1951> was 2 .2 5 p e r c e n t . F o u r th A nnual
R e p o r t, H ousing and Home F in a n c e A g en cy , 1950 > P^ 198 .
As o f January 1 , 1 9 5 1 * t h e E le v e n th D i s t r i c t
F e d e r a l Home Loan Bank p a id 1 .0 p e r c e n t i n t e r e s t on
i n m e e tin g th e demands f o r m ortgage lo a n s and w ith d r a w a ls .!
l i q u i d i t y t o s a v in g s and lo a n a s s o c i a t i o n s . By a c c e p t in g j
! By a c c e p t in g tim e d e p o s i t s from member s a v in g s and lo a n
I
a s s o c i a t i o n s , th e F e d e r a l Home Loan Bank System n o t o n ly |
I p r o v id e s an o u t l e t where a p o r t i o n o f th e fu n d s o f s a v in g s
| and lo a n a s s o c i a t i o n s can be k ep t l i q u i d and a t th e same
I tim e e a r n a r e t u r n , but i t a l s o p r o v id e s a means b y w hich j
i |
j th e s u r p lu s fu n d s o f c e r t a i n s a v in g s and lo a n a s s o c i a t i o n s j
| can be e x te n d e d to o th e r s a v in g s and lo a n a s s o c i a t i o n s i n I
i I
: need o f fu n d s i n th e same a r e a . F e d e r a l Home Loan Bank
i
, d e p o s i t s i n o th e r F e d e r a l Home Loan Banks p r o v id e a means ;
I
by w h ich th e e x c e s s fu n d s o f s a v in g s and lo a n a s s o c i a t i o n s .
i
i n one p a r t o f th e e n t i r e c o u n tr y can be t r a n s f e r r e d to j
s a v in g s and lo a n a s s o c i a t i o n s i n n eed o f fu n d s i n a n o th er |
J
i
I s e c t i o n o f th e e o u n tr y . T h us, th e F e d e r a l Home Loan Bank [
i t
I System p r o v id e s a c e n t r a l c r e d i t r e s e r v o i r w h ich a c t s a s j
| a p o t e n t i a l a s s i s t a n t t o an i n d i v i d u a l s a v in g s and lo a n j
i
| a s s o c i a t i o n i n c a r r y in g o u t i t s f u n c t i o n s a s a s a v in g s [
o u t l e t and a so u rc e o f fu n d s f o r home f i n a n c i n g , by p r o - j
v id in g a p o t e n t i a l so u rce o f fu n d s w it h w h ich th e a s s o c i - i
i
a t i o n may m eet th e demands o f b orrow ers f o r lo a n s and
d e p o s i t s l e f t f o r a p e r io d o f 30 d a y s , and 1 .5 p e r c e n t
i n t e r e s t on d e p o s i t s l e f t a t l e a s t on© y e a r . I b i d . ,
p . 1 9 8 . As o f Decem ber 3 0 , 195®, d e p o s i t s o f members o f
th e F e d e r a l Home Loan Bank System i n F e d e r a l Home Loan
Banks amounted t o $ 2 2 ^ ,0 9 6 ,8 5 9 » r e p r e s e n t in g one o f th e
p r i n c i p a l s o u r c e s o f fu n d s o f F e d e r a l Home Loan B anks.
I b i d . , p . 1 7 6 .
j savers fo r w ithdraw als. The System a ls o p rovid es a means [
| by which the fu n c tio n s of member savin gs and loan a s s o c ia
t io n s throughout the country can be c a r rie d o u t, by b r in g -|
1 i
! ing a more e f f e c t i v e d is t r ib u t io n o f the supply o f and j
I
demand fo r funds.
I S ince i t s o r g a n iz a tio n in 1932, the F ed eral Home
Loan Bank System has fu n ctio n ed more as a p o t e n t ia l sourceJ
of c r e d it than as an a c tu a l source o f c r e d it* At no time
!
I
| have i t s loan s been e q u iv a le n t to more than 5 per cen t of
I i
, the t o t a l a s s e t s o f i t s members.^3 During most o f the j
i p eriod between 1 9I 4 .I and the p resen t tim e, new savin gs havei
I t
1
i flow ed in to savin gs and loan a s s o c ia t io n s to the ex ten t
i 1
th a t the demand fo r w ithdraw als and mortgage loans was j
met w ithout the need o f e x te n siv e borrowing from F ed er a l |
1
Home Loan Banks. Due to the heavy demand f o r mortgage
I i
I funds in the Los A ngeles a rea , sa v in g s and loan a s s o c ia - j
| i
I t io n s in t h i s area have used the e r e d it f a c i l i t i e s of the;. ■
I13
I Home Loan Bank Board: O u tlin e o f F u n ction s 1
i (W ashington, D.C. : Home Loan Bank Board, 1 9 5 1 ), p . 2. It!
i s estim ated th a t the p o t e n t ia l len d in g c a p a c ity o f the j
, F ed eral Home Loan Bank System i s $ 2 ,5 0 0 ,0 0 0 ,0 0 0 . Financla 1
F a cts about Savings and Loan A sso c ia tio n s (W ashington, 1
D.C. : U nited S ta te s Savings and Loan League, 1951) > P* l5»i
As of December 3 1 , 1950, t o t a l a s s e t s o f members o f the
1 F ed eral Home Loan Bank System stood a t $ l 6 , 1 9 7 ,0 0 0 ,0 0 0 .
Combined F in a n c ia l Statem ents o f Members o f the F ed eral
Home Loan Bank System , 1950 ('Washington, D.C. : Home Loan :
; Bank Board, 1 9 5 1 ) , p. 3* Using such f ig u r e s , i t appears
F e d e r a l Home Loan Bank t o a g r e a t e r e x t e n t th a n have
s a v in g s and lo a n a s s o c i a t i o n s a s a w h o le . But e v e n i n
t h i s a r e a , d u rin g th e p e r io d from 19^1 th r o u g h 1 9 5 0 ,
F e d e r a l Home Loan Bank a d v a n ces d id n o t e x c e e d more th a n !
t
j
7 .7 p e r c e n t o f th e t o t a l a s s e t s or 1 0 .8 9 p e r c e n t o f th e j
t o t a l s a v in g s a c c o u n ts o f s a v in g s and lo a n a s s o c i a t i o n s .
In o th e r w o rd s, ev en i n th e Los A n g e le s a r e a where th e
!
demand f o r m ortgage fu n d s was a t a h ig h p e a k , s a v in g s and f
!
lo a n a s s o c i a t i o n s d id n o t , d u rin g th e 19I 4 .I th r o u g h 1950 j
p e r io d , u se more th a n a p p r o x im a te ly o n e - f i f t h o f t h e i r j
i
t o t a l F e d e r a l Home Loan Bank b orrow in g c a p a c i t y . T h is i s ,
n o t u n u su a l s in c e d u rin g m ost o f t h i s p e r io d , new s a v in g s i
flo w e d i n t o s a v in g s and lo a n a s s o c i a t i o n s i n t h i s a r e a a t ;
a h ig h r a t e , paym ents on m ortgage lo a n s c o n tin u e d s t e a d y , !
1
and th e r e w ere no lo n g p e r io d s d u rin g w h ich w ith d r a w a ls !
w ere a t a h ig h l e v e l . Under su ch c ir c u m s t a n c e s , i t d o e s 1
i
n o t seem t h a t s a v in g s and lo a n a s s o c i a t i o n s sh o u ld have
u se d t h e i r F e d e r a l Home Loan Bank b orrow in g c a p a c it y t o j
1
any g r e a t e x t e n t . R a th e r , i t seem s a d v is a b le t h a t t h i s ■
t h a t th e p o t e n t i a l le n d in g c a p a c it y o f th e F e d e r a l Home
Loan Bank S ystem w ould be e q u iv a le n t t o 1 5 -4 p e r c e n t o f
th e t o t a l a s s e t s o f i t s members.
C a lc u la t e d from d a ta made a v a i l a b l e by th e j
R e se a rc h D epartm ent o f th e S e c u r i t y - F i r s t N a t io n a l Bank ;
o f Los A n g e le s and th e E le v e n t h D i s t r i c t F e d e r a l Home L o a n :
Bank. i
62 |
I
p o t e n t i a l so u rce o f fu n d s sh o u ld be p r e s e r v e d a s much a s j
i
' p o s s i b l e i n o r d e r t h a t i t w i l l be a v a i l a b l e t o a id a s s o c i
a t i o n s i n m e e tin g f u t u r e econom ic c o n d i t i o n s w h ich may b© j
i i
! l e s s fa v o r a b le th a n th o s e w h ich have e x i s t e d from 19U l t o |
i
the, p r e s e n t tim e*
1
I E v a lu a t io n o f th e r o l e o f th e F e d e r a l Home Loan
! Bank S y ste m . The p e r io d from 19^1 t o th e p r e s e n t h a s n o t
j b e e n one i n w h ich th e u lt im a t e b e n e f i t s o f th e F e d e r a l
1
| Home Loan Bank S ystem c o u ld be t e s t e d , s i n c e econom ic
! c o n d i t i o n s e x i s t i n g d u rin g t h i s tim e have e n a b le d s a v in g s
and lo a n a s s o c i a t i o n s to m eet demands f o r w ith d r a w a ls and ;
m ortgage le n d in g w ith o u t e x t e n s i v e r e l i a n c e upon borrow ed
j fu n d s .
1 The r e a l t e s t o f th e e f f e c t i v e n e s s o f th e F e d e r a l
1
1
i Home Loan Bank System w i l l come d u rin g a p e r io d o f d e -
I p r e s s e d econom ic c o n d i t i o n s w h ich w ould b r in g abou t a
i i
d e c r e a s e i n th e s a v in g s w h ich w ou ld flo w i n t o s a v in g s and j
lo a n a s s o c i a t i o n s | a d e c r e a s e i n th e a b i l i t y o f b o rro w ers |
: i
| to c o n tin u e paym ents on m ortgage lo a n s ; and an i n c r e a s e in j
1 i
| w ith d r a w a ls , e i t h e r b e c a u se o f n eed f o r fu n d s , o r due to !
♦
! th e f e a r o f i n d i v i d u a l s t h a t t h e i r s a v in g s a re n o t s a f e . I
| I f th e p o t e n t i a l le n d in g f a c i l i t i e s o f th e F e d e r a l !
' ' 1
! Home Loan Bank S ystem p rove t o be g r e a t en ou gh , th e y may
1
[__a id s a v in g s and lo a n a s s o c i a t i o n s i n m e e tin g w i t hdrawal s j
63
I and, t h e r e f o r © , h e lp ch eck w ith d r a w a ls by i n d i v i d u a l s
i
| n o t a c t u a l l y i n n eed o f funds* F e d e r a l Home Loan Bank
fu n d s may in c r e a s e th e a b i l i t y o f s a v in g s and lo a n a s s o c i
a t i o n s t o make new lo a n s w h ich w ou ld s t im u la t e b u ild in g
a c t i v i t y and, t h e r e f o r e , h e lp e f f e c t r e c o v e r y . T hese
fu n d s may a l s o e n a b le s a v in g s and lo a n a s s o c i a t i o n s to
i
r e f in a n c e lo a n s i n ord er t o a v o id th e n e c e s s i t y o f f o r e -
i
I
; c l o s u r e s on homes o f i n d i v i d u a l s u n a b le to make paym ents
i i
j and , t h u s , red u ce th e amount o f r e a l e s t a t e w h ich would
j o th e r w is e be on th e m a rk et. I t seem s l o g i c a l to assume ;
I i
t h a t su ch a c t i o n w ould ten d to cheek th e d e c l i n e o f
? J
p r o p e r ty v a l u e s . <
i
| I f i t i s a c c u r a t e t h a t th e F e d e r a l Home Loan Bank j
I
System c o u ld le n d $ 2 ,5 0 0 ,0 0 0 ,0 0 0 , th e n , on th e b a s i s o f
th e p r e s e n t t o t a l o f s a v in g s a c c o u n ts h e ld by member '
s a v in g s and lo a n a s s o c i a t i o n s (am ounting to j
1 $> 12,861,553*000) th e F e d e r a l Home Loan Bank System j
; c o u ld su p p ort t h e repaym ent o f a p p r o x im a te ly 20 p e r c e n t ;
i »
o f th e s a v in g s a c c o u n ts o f member s a v in g s and lo a n a s s o c i - ' ■
i
a t io n s * In a p e r io d o f n a tio n -w id e d e p r e s s i o n , undoubtedly
Combined F i n a n c i a l S ta te m e n ts o f Members o f th e j
F e d e r a l Home Loan Bank S y s te m , 195Q, P» 12, T a b le No. 2 . '
61* !
]
m ore th a n 20 p e r c e n t o f th e s a v i n g s a c c o u n t s i n s a v i n g s !
I
and lo a n a s s o c i a t i o n s w o u ld s e e k w it h d r a w a l. I f more I
th a n 20 p e r c e n t o f th e amount o f t h e s a v in g s a c c o u n t s i n j
s a v i n g s and lo a n a s s o c i a t i o n s s o u g h t w it h d r a w a l, t h e j
d e t e r m i n a t i o n o f w h e th e r o r n o t s u c h r e q u e s t s w o u ld be
m e t, t o a g r e a t e x t e n t , w ou ld d ep en d on t h e b a s i c l i q u i d
i t y o f s a v in g s and lo a n a s s o c i a t i o n s , e v e n i f a l l th e
l
fu n d s o f th e F e d e r a l Home Loan Bank S y stem w ere d e l e g a t e d ;
t o t h e rep a y m en t o f w it h d r a w a ls . S in c e w ith d r a w a l r e
q u e s t s i n s a v in g s and lo a n a s s o c i a t i o n s do n o t h a v e t o be !
m et w i t h i n an y p a r t i c u l a r l e n g t h o f t i m e , t h e F e d e r a l Home;
Loan Bank S y ste m w o u ld p r o b a b ly n o t lo a n a l l i t s fu n d s t o
I
s a v i n g s and lo a n a s s o c i a t i o n s f o r p a y in g w it h d r a w a ls b u t , 1
r a t h e r , w ould le n d p a r t o f i t s fu n d s t o s a v in g s and lo a n
i
a s s o c i a t i o n s f o r th e p u r p o se o f home f i n a n c i n g , i n an j
e f f o r t t o s t i m u l a t e b u i l d i n g a c t i v i t y and c h e c k t h e d e - i
c l i n e o f r e a l e s t a t e v a l u e s a n d , t h e r e f o r e , c h e c k th e j
e x t e n t o f a d e p r e s s i o n and work to w a rd r e c o v e r y . !
D i s r e g a r d i n g th e amount o f f u n d s t h e F e d e r a l Home j
Loan Bank S y ste m c o u ld l e n d , w h ic h i n i t s e l f s h o u ld c h e c k j
any t e n d e n c y upon th e p a r t o f s a v in g s and lo a n a s s o c i a t i o n s
i
t o r e l y e n t i r e l y on b o r r o w in g from F e d e r a l Home Loan B a n k s (
i n m e e t in g w it h d r a w a ls o r i n s u p p ly in g fu n d s f o r le n d in g I
p u r p o s e s i n a p e r i o d o f n a t io n - w i d e d e p r e s s i o n , th e f a c t
t h a t s a v in g s and lo a n a s s o c i a t i o n s are l i m i t e d in t h e i r
b o r r o w in g s from F e d e r a l Home Loan Banks to 5>0 p e r c e n t o f
t h e i r s a v in g s a c c o u n ts l i m i t s th e e x t e n t t o w h ich s a v in g s
and lo a n a s s o c i a t i o n s sh o u ld r e l y on b o rro w in g i n o r d e r
to m eet w ith d r a w a ls and c o n tin u e to le n d d u rin g a p e r io d
when w ith d r a w a ls w ould be h ig h , new s a v in g s lo w , and p ay
m en ts by b orrow ers on lo a n s r e s t r i c t e d . H owever, i t i s
p r o b a b le t h a t i n o r d e r to ch eck th e e x t e n t o f a d ep ressio n ,!
i
th e Government w ould le n d fu n d s to th e F e d e r a l Home Loan |
i
Bank S ystem by w h ieh th e b o rrow in g c a p a c it y o f s a v in g s a n d ;
lo a n a s s o c i a t i o n s c o u ld be in c r e a s e d .
From 19^-1 t o th e p r e s e n t tim e , th e c o n t r i b u t i o n s
o f th e F e d e r a l Home Loan Bank System have b een a p p a re n t i n
th e Los A n g e le s a r e a . F e d e r a l Home Loan Bank b o r r o w in g s
have a s s i s t e d s a v in g s and lo a n a s s o c i a t i o n s i n m e e tin g
w ith d r a w a l r e q u e s t s p rom p tly i n a t l e a s t two p e r io d s
d u rin g t h i s t im e , th e b e g in n in g o f World War I I and t h a t
o f th e K orean c o n f l i c t . Funds borrow ed from th e F e d e r a l
Home Loan Bank have a l s o h e lp e d s a v in g s and lo a n a s s o c i a
t i o n s i n th e Los A n g e le s a r e a m eet th e h ea v y demand f o r
m ortgage fu n d s d u rin g th e l a t t e r p a r t o f th e p e r io d .
A n oth er c o n t r i b u t i o n o f th e F e d e r a l Home Loan Bank System
h as b e e n th e im p o sin g o f r e g u l a t i o n s upon member a s s o c i a
t i o n s , T hese r e g u l a t i o n s u n d o u b te d ly have h e lp e d t o
66
s t r e n g th e n s a v in g s and lo a n a s s o c i a t i o n s * Through t h is ,
c o n t r i b u t i o n and lo a n s w h ich h ave made i t p o s s i b l e f o r
s a v in g s and lo a n a s s o c i a t i o n s t o m eet w ith d r a w a ls prom pt
l y , th e F e d e r a l Home Loan Bank S ystem h a s se r v e d to c r e a te
g r e a t e r p u b lic c o n f id e n c e i n s a v in g s and lo a n a s s o c i a t i o n s
i
J That s a v in g s and lo a n a s s o c i a t i o n s have r e a l i z e d
| th e v a lu e o f m em bership i n t h e F e d e r a l Home Loan Bank
System f o r e i t h e r one or b o th o f th e f o l lo w in g r e a s o n s ,
i s e v id e n t* Such m em bership p r o v id e s a so u rc e o f c r e d i t
i and th e a d d i t io n o f a c e r t a i n amount o f p r e s t i g e t o th e I
i !
! i n d i v i d u a l a s s o c i a t i o n . E v id e n c e o f th e r e c o g n i t i o n o f
; t h e s e v a lu e s i s r e f l e c t e d i n th e f a c t t h a t 65*0 p e r c e n t
o f a l l s a v in g s and lo a n a s s o c i a t i o n s o p e r a tin g i n th e j
I
j U n ite d S t a t e s i n 1950 were members o f th e S y stem , and
j t h a t members o f th e System h e ld 92*0 p e r c e n t o f a l l th e j
a s s e t s o f s a v in g s and lo a n a s s o c i a t i o n s o p e r a t in g i n th e i
] U n ite d S t a t e s . O n l y th r e e o f th e 75 s a v in g s and lo a n !
1 ' i
1 ,
a s s o c i a t i o n s o p e r a tin g i n Los A n g e le s County a t th e end |
o f 19if9 w ere n o t members o f th e F e d e r a l Home Loan Bank !
f 1
S y stem . These s a v in g s and lo a n a s s o c i a t i o n s a c c o u n te d j
1 f o r o n ly if. 0 p e r c e n t o f th e t o t a l s a v in g s and lo a n |
! k6
Combined F in a n c ia l Statem en ts o f th e Members o f
th e F e d e r a l Home Loan Bank S y stem , 1950 > p . 5*
a s s o c i a t i o n s i n Los A n g e le s County and o n ly o n e - f i f t h o f
1 p e r e e n t o f th e t o t a l a s s e t s o f s a v in g s and lo a n a s s o c i- i
a t i o n s i n Los A n g e le s C ou nty, k 7 ■
' The r e l a t i o n s h i p o f th e F e d e r a l S a v in g s and Loan i
1 i
| In su r a n c e C o r p o r a tio n t o s a v in g s and lo a n a s s o c i a t i o n s . ;
I The p r o v i s i o n s o f F e d e r a l S a v in g s and Loan In su r a n c e le n d
| an a d d i t i o n a l m easure o f safety^"® t o i n d i v i d u a l s h a v in g
* s a v in g s i n a s a v in g s and lo a n a s s o c i a t i o n s u b s c r ib in g t o j
i I
! su ch in s u r a n c e .^-9 The F e d e r a l S a v in g s and Loan In su r a n c e j
S a v in g s and Loan A s s o c i a t i o n s i n Los A n g e le s
j C ou n ty, p . 2 T.
i The F e d e r a l S a v in g s and Loan In su r a n c e C orpora-
; t i o n p r o v id e s t h a t th e p r i n c i p a l am ount, p lu s e a r n in g s
t h e r e o n , o f s a v in g s w hich i t g u a r a n te e s w i l l be e v e n t u a l l y
I r e t u r n e d , r e g a r d l e s s o f th e s u f f i c i e n c y o f a s a v in g s and
' lo a n a s s o c i a t i o n * s own fu n d s t o r e t u r n such s a v in g s .
! k 9
A s a v in g s and lo a n a s s o c i a t i o n w hich s u b s c r ib e s
t o in s u r a n c e o f th e F e d e r a l S a v in g s and Loan In su r a n c e !
C o r p o r a tio n w i l l h e r e a f t e r be r e f e r r e d t o a s b e in g
" i n s u r e d .” F e d e r a l S a v in g s and Loan A s s o c i a t i o n s m ust be ]
in s u r e d , w h ile t h i s i s o p t i o n a l f o r S t a t e - c h a r t e r e d :
s a v in g s and lo a n a s s o c i a t i o n s . In o r d e r t o be in s u r e d , a
s a v in g s and lo a n a s s o c i a t i o n i s i n v e s t i g a t e d and , a f t e r
, su ch i n v e s t i g a t i o n , m ust be c o n s id e r e d by th e F e d e r a l 1
; S a v in g s and Loan In su r a n c e C o r p o r a tio n t o have c e r t a i n
q u a l i f i c a t i o n s . N e c e s s a r y q u a l i f i c a t i o n s in c lu d e unim - j
j p a ir e d c a p i t a l , s a f e f i n a n c i a l p o l i c i e s and m anagem ent, '
| and a management and home f in a n c in g p o l i c y c o n s i s t e n t w i t h <
; e c o n o m ic a l home f i n a n c i n g . In su r e d s a v in g s and lo a n
j a s s o c i a t i o n s are exam ined y e a r ly by t h e i r s u p e r v is o r y
a u t h o r i t i e s or by r e p r e s e n t a t i v e s o f th e Home Loan Bank '
i Board when s a v in g s and lo a n a s s o c i a t i o n s a re n o t exam ined 1
by S t a t e s u p e r v is o r y a u t h o r i t i e s . In su r e d s a v in g s and I
C o r p o r a tio n may u se one or b o th o f two m eth ods i n p r o v id - j
in g s a f e t y to in s u r e d s a v i n g s ( 1 ) i t may a c t t o p reven t)
th e d e f a u l t and l i q u i d a t i o n o f an in s u r e d s a v in g s and loanj
a s s o c i a t i o n , and ( 2 ) i t must pay th e in s u r e d s a v in g s i n a j
i
s a v in g s and lo a n a s s o c i a t i o n w h ich h as b e e n d e c la r e d i n j
i f
• >
j d e f a u l t and l i q u i d a t e d . In o r d e r to p r e v e n t th e d e f a u l t
I
I
I o f an in s u r e d s a v in g s and lo a n a s s o c i a t i o n or th e l i q u i d a -
I t i o n o f an in s u r e d s a v in g s and lo a n a s s o c i a t i o n i n default,;
! !
j th e F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n may act'
i ]
! w ith s u p e r v is o r y a u t h o r i t i e s i n g i v i n g c o u n s e l and a d v ic e 1
I i
! to c o r r e c t d i f f i c u l t i e s , or i t may make c a s h c o n trib u tio n s,)
! i
I l o a n s , or p u rc h a se some o f th e a s s o c i a t i o n 1s a s s e t s ; th e .
I
a s s o c i a t i o n may th u s be a b le to c o n tin u e o p e r a t i o n s . The
F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n a l s o may (
j p u rc h a se a l l o f th e a s s e t s o f an in s u r e d s a v in g s and lo a n
I a s s o c i a t i o n ; c o n s e q u e n t ly , th e a s s o c i a t i o n may be a b le to
j 1
; l i q u i d a t e v o l u n t a r i l y and m eet i t s own o b l i g a t i o n s t o |
lo a n a s s o c i a t i o n s m ust pay a m em bership f e e o f fl+OO p e r ;
j m i l l i o n d o l l a r s o f in s u r e d s a v i n g s , and an an n u al premium
' o f o n e - t w e l f t h o f 1 p e r c e n t o f th e v a lu e o f su ch s a v in g s .:
P r e v io u s to 1 9 5 0 , th e a n n u a l premium ch a rg ed in s u r e d 1
s a v in g s and lo a n a s s o c i a t i o n s was o n e - e ig h t h o f 1 p e r cent!
o f in s u r e d s a v in g s . F o u r th A nnual R e p o r t, H ousing and
! Home F in a n c e A g en cy , 1950 > ppT l 8 9 - l 9 0 and 192. !
I 5o
1 " in s u r e d ” s a v in g s a r e th o s e i n v e s t e d i n s a v in g s i
| and lo a n a s s o c i a t i o n s and g u a r a n te e d a s to t h e i r s a f e t y
i by th e F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n .
69 j
5 i !
s a v e r s . j
»
i
The F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n |
i
g u a r a n te e s th e s a f e t y o f s a v in g s to th e e x t e n t o f j
$ 1 0 , 000^ f o r each i n d i v i d u a l whose s a v in g s are in s u r e d ;
i n ea ch in s u r e d s a v in g s and lo a n a s s o c i a t i o n . 53 When an !
i
in s u r e d s a v in g s and lo a n a s s o c i a t i o n i s d e c la r e d i n
d e f a u l t and i s l i q u i d a t e d , th e F e d e r a l S a v in g s and Loan
In su r a n c e C o r p o r a tio n h a s two a l t e r n a t i v e m ethods by >
w h ich t o m eet i t s o b l i g a t i o n to i n d i v i d u a l s whose s a v in g s j
i
i t i n s u r e s i n su ch a s a v in g s and lo a n a s s o c i a t i o n : ( 1 ) itj
I
i
may pay in s u r e d s a v in g s i n c a s h , or ( 2 ) a t i t s o p t i o n , j
!
may make a c c o u n ts a v a i l a b l e i n an o p e r a t in g , in s u r e d |
s a v in g s and lo a n a s s o c i a t i o n . W h i l e t h i s m ethod o f
51 <
F o u r th A nnual R e p o r t, H ousin g and Home F in a n c e i
A g en cy , J -9 ^ 0 . P- 19 0 . !
P r e v io u s to 1950, th e F e d e r a l S a v in g s and Loan ;
In su r a n c e C o r p o r a tio n g u a r a n te e d s a v in g s o n ly t o th e ;
e x t e n t o f $5>,Q00. L oc. c i t . !
53 ;
W hile th e F e d e r a l S a v in g s and Loan In su r a n c e ;
C o r p o r a tio n g u a r a n te e s th e s a f e t y o f o n ly $ 1 0 ,0 0 0 o f each
in s u r e d a c c o u n t, i n d i v i d u a l s who have a c c o u n ts i n e x c e s s 1
o f $ 1 0 , 0 0 0 , $ 1 0 ,0 0 0 o f w h ich i s in s u r e d , may r e c e i v e more j
th a n t h i s amount I f th e l i q u i d a t i n g v a lu e o f th e a s s e t s j
o f an a s s o c i a t i o n w h ich h a s f a i l e d e x c e e d s th e amount
w h ich th e F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n
h a s p a id t o i n v e s t o r s o f su ch an a s s o c i a t i o n .
51+
P r e v io u s t o 195 0 , th e h o ld e r o f an in s u r e d
a c c o u n t had th e o p t io n to s e l e c t e i t h e r an In su r e d a c c o u n t
i n an o p e r a tin g in s u r e d s a v in g s and lo a n a s s o c i a t i o n , or
p r o t e c t i o n g u a r a n te e s t h a t th e h o ld e r o f in s u r e d s a v in g s
w i l l e v e n t u a l ly r e c e i v e h i s fu n d s , i t d o e s n o t g u a r a n te e
t h a t he w i l l r e c e i v e h i s fu n d s w it h in a s h o r t p e r io d o f
tim e . The F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n
g u a r a n te e s th e s a f e t y r a th e r th a n l i q u i d i t y o f in s u r e d
s a v in g s . The F e d e r a l S a v in g s and Loan In su r a n c e C orpora
t i o n m ust m eet i t s o b l i g a t i o n s t o i n d i v i d u a l s h a v in g
in s u r e d s a v in g s i n a s a v in g s and lo a n a s s o c i a t i o n o n ly
a f t e r such an a s s o c i a t i o n h as b e e n d e c la r e d i n d e f a u l t
and i s p la c e d in r e c e i v e r s h i p fo r th e p u rp o se o f l i q u i d a
t i o n . S in c e a s a v in g s and lo a n a s s o c i a t i o n i s n o t o b l i
g a t e d to m eet w ith d r a w a l r e q u e s t s p r o m p tly , i t i s n o t i n
d e f a u l t u n t i l so d e c la r e d by s u p e r v is o r y a u t h o r i t i e s or
by a c o u r t . A l t h o u g h a s a v in g s and lo a n a s s o c i a t i o n
may n o t be l i q u i d enough t o m eet a l l o f i t s w ith d r a w a l
r e q u e s t s im m e d ia te ly or f o r a lo n g p e r io d o f t im e , i t may
n o t be d e c la r e d i n d e f a u l t u n t i l i t s l i a b i l i t i e s ex ce ed
i t s a s s e t s . A n oth er r e f l e c t i o n o f th e f a c t t h a t th e
c a s h and d e b e n tu r e s o f th e F e d e r a l S a v in g s and Loan I n -
, su ra n ce C o r p o r a tio n . F o u r th Annual R e p o r t , H ousing and
! Home F in a n c e A gen cy, 19^ 0, p . 1^0.
c c
I " N a tio n a l H ou sin g A c t , S e c t i o n if01(d ) ," R u le s
and R e g u la t io n s f o r In su ra n ce o f A c co u n ts (W ash in gto n ,
D.G.: Home Loan Bank B oard, 1 9 5 lJT
F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n d o e s n o t J
g u a r a n te e th e l i q u i d i t y o f in s u r e d s a v in g s i s t h a t i t i s !
i
n o t r e q u ir e d t o pay th e in s u r e d s a v e r i n c a s h . I f insu red ;
i
s a v in g s are t r a n s f e r r e d to a n o th e r in s u r e d s a v in g s and .
lo a n a s s o c i a t i o n , i n o p e r a t io n , but n o t l i q u i d enough to |
p ay w ith d ra w a l r e q u e s t s , i t may be a lo n g p e r io d o f tim e
b e f o r e su ch s a v in g s may be c o n v e r te d i n t o c a s h .
In p r a c t i c e , th e F e d e r a l S a v in g s and Loan In su ra n ce'
C o r p o r a tio n h a s p erform ed i t s f u n c t io n o f g u a r a n te e in g ;
in s u r e d s a v in g s p r im a r ily by e x e r c i s i n g i t s pow ers In
j
p r e v e n tin g th e d e f a u l t and in v o lu n t a r y l i q u i d a t i o n o f j
s a v in g s and lo a n a s s o c i a t i o n s i n f i n a n c i a l d i f f i c u l t y . ;
56 ;
In c o n t r a s t to th e g u a r a n te e o f s a f e t y w hich the]
F e d e r a l S a v in g s, and Loan In su ra n ce C o r p o r a tio n g i v e s to j
in s u r e d s a v in g s i n v e s t e d i n s a v in g s and lo a n a s s o c i a t i o n s , ;
th e F e d e r a l D e p o s it In su r a n c e C o r p o r a tio n , w h ich I n s u r e s j
bank s a v in g s up t o $ > 1 0 ,0 0 0 f o r e a ch in s u r e d s a v in g s a c
c o u n t, g u a r a n te e s th e l i q u i d i t y o f su eh a c c o u n t s . The
F e d e r a l D e p o s it In su r a n c e C o r p o r a tio n m ust m eet i t s i n
su red l i a b i l i t i e s by p a y in g c a sh or by p r o v id in g an account
In an in s u r e d bank i n o p e r a t io n . The F e d e r a l D e p o s it j
In su r a n c e C o r p o r a tio n i n s u r e s th e l i q u i d i t y o f in s u r e d '
s a v in g s b e c a u s e : ( 1 ) i t s in s u r a n c e p r o v i s i o n s become I
e f f e c t i v e when an in s u r e d bank d o es n o t pay w ith d r a w a ls atj
th e end o f th e p e r io d o f tim e s p e c i f i e d in th e bank* s :
c o n t r a c t w ith d e p o s i t o r s , and (2 ) i f in s u r e d a c c o u n ts are j
t r a n s f e r r e d to o th e r b a n k s, s a v in g s a c c o u n ts m ust be p a id !
a t th e end o f a s p e c i f i e d tim e by th e banks to w h ich |
a c c o u n ts are t r a n s f e r r e d . Amendments o f FDIC and FSLIC , !
r e : Payment o f In su r a n c e (New Y ork: S a v in g s and M ortgage :
D i v i s i o n , A m erican B ankers A s s o c i a t i o n , 1 9 5 1 ); F r a n c is j
J. C a lk in s , "Government R e g u la t io n o f F i n a n c i a l I n s t i t u - ;
t i o n s , " i n Prochnow, A m erican F i n a n c i a l I n s t i t u t i o n s , pp. j
57 .8 - .7 _9 - . ____________________________________________________________________________ 1
72
By d o in g t h i s i t h as s e r v e d to k eep th e p u b lic l a r g e l y un
aware o f f i n a n c i a l d i f f i c u l t i e s f a c e d by s a v in g s and lo a n
a s s o c i a t i o n s an d , t h u s , h as s t im u la t e d p u b lic c o n fid e n c e
i n s a v in g s and lo a n a s s o c i a t i o n s a s a w h o le . D u ring th e
p e r io d o f i t s e x i s t e n c e , 57 th e F e d e r a l S a v in g s and Loan
In su r a n c e C o r p o r a tio n h a s g iv e n a s s i s t a n c e t o ij.0 s a v in g s
and lo a n a s s o c i a t i o n s i n f i n a n c i a l d i f f i c u l t y . In 29 o f
t h e s e c a s e s , th ro u g h c o n t r i b u t i o n s o f c a s h , l o a n s , o r th e
p u rch a se o f a s s e t s by th e F e d e r a l S a v in g s and Loan I n s u r
ance C o r p o r a tio n , i t h as b e e n p o s s i b l e f o r t h e s e s a v in g s
and lo a n a s s o c i a t i o n s t o m erge w ith o th e r s a v in g s and lo a n
a s s o c i a t i o n s , to v o l u n t a r i l y l i q u i d a t e , or t o c o n tin u e
e x i s t e n c e w it h th e same or new m anagem ent. In fo u r c a s e s
i t was p o s s i b l e f o r th e f i n a n c i a l d i f f i c u l t i e s to be c o r
r e c t e d by means o f c o u n s e l and a d v ic e r a t h e r th a n by
f i n a n c i a l a s s i s t a n c e .5 8
In se v e n o f th e I 4 .O c a s e s w a r r a n tin g th e a t t e n t i o n
and a c t i o n o f th e F e d e r a l S a v in g s and Loan In su r a n c e
C o r p o r a tio n , th e o th e r m ethod o f m e e tin g i t s o b l i g a t i o n s
t o i n d i v i d u a l s h a v in g in s u r e d s a v in g s i n s a v in g s and lo a n
57
The F e d e r a l S a v in g s and Loan In su r a n c e C orpora
t i o n b egan o p e r a t io n s i n 193^-
58
S a v in g s and Loan A n n a ls , 1950 (W ash in gton , D . C . :
U n ite d S t a t e s S a v in g s and Loan L ea gu e, 1951)» p . 2 1 8 .
73
a s s o c i a t i o n s was u se d . T h ese s a v in g s and lo a n a s s o c i a t i o n s
were p la c e d i n r e c e i v e r s h i p and l iq u i d a t e d ; th e in s u r e d
s a v in g s w ere t r a n s f e r r e d t o o th e r in s u r e d s a v in g s and lo a n
a s s o c i a t i o n s n o t i n d e f a u l t . ^
W ith r e l a t i v e sp e e d , i t was p o s s i b l e f o r th e F e d e r a l
S a v in g s and Loan In su r a n c e C o r p o r a tio n t o m eet i t s o b l i g a
t i o n s t o i n d i v i d u a l s h a v in g in s u r e d s a v in g s i n s a v in g s and
lo a n a s s o c i a t i o n s r e q u ir in g i t s a t t e n t i o n and a c tio n * In
a l l b u t t e n o f th e I 4 .O e a s e s , th e tim e o f th e F e d e r a l
S a v in g s and Loan In su r a n c e C orporation * s f i r s t a t t e n t i o n
and f i n a l a c t i o n , w h ich e v e n t u a l ly r e s u l t e d i n m e e tin g
Z - A
c la i m s , d id n o t e x t e n t g r e a t l y o v e r s i x m on th s. u
Thus f a r , th e F e d e r a l S a v in g s and Loan In su r a n c e
C o r p o r a tio n h a s met i t s o b l i g a t i o n s t o in s u r e d s a v e r s w ith
/
r e l a t i v e sp eed and no a p p a ren t s t r a i n on i t s f i n a n c i a l
zl - 1
r e s o u r c e s . ’ W hether t h i s c o u ld c o n tin u e i n a p e r io d more
c o n d u c iv e to f i n a n c i a l d i f f i c u l t i e s on th e p a r t o f many
s a v in g s and lo a n a s s o c i a t i o n s and a t a tim e d u rin g w hich
th e l e v e l o f r e a l e s t a t e p r i c e s would r e s u l t i n l o s s e s
59
7 I b i d . , pp . 2 1 0 -2 1 7 .
I b i d . , pp. 2 0 9 -2 1 0 .
The r a t i o o f l o s s e s t o g r o s s incom e (premiums
p lu s e a r n in g s on U n ite d S t a t e s Government s e c u r i t i e s ) a s o f
June 3 0 , 1 9 5 1 9 was 3 .5 8 p e r c e n t . C om parative S u rv ey o f
th e FDIC and FSLIC (W ash in gto n , D .C . : n a t i o n a l S a v in g s
7k
g r e a t e r th a n th o s e a lr e a d y e x p e r ie n c e d i n th e l i q u i d a t i o n
o f th e a s s e t s o f s a v in g s and lo a n a s s o c i a t i o n s , i s n o t y e t
known* The p e r io d d u rin g w h ich th e F e d e r a l S a v in g s and
Loan In su r a n c e C o r p o r a tio n h a s e x i s t e d h a s n o t b een one i n
w h ich i t s p o t e n t i a l i t y c o u ld be t e s t e d . As o f June 3 0 ,
1 9 5 1 , th e f i n a n c i a l p o t e n t i a l i t y o f th e F e d e r a l S a v in g s
and Loan In su ra n ce C o r p o r a tio n , a s m easured by i t s c a p i t a l
and r e s e r v e s , was $ 199 >7 6 l , 6 3 3 > w h ile i t s in s u r e d l i a b i l i
t y ^ was $ 1 3 * 08lj.,7 0 2 , 0 0 0 . ^3 T h us, a s o f June 3 0 , 1 9 5 l >
t h e r e was $ 1*53 i n th e in s u r a n c e fund f o r e v e r y $100 o f
in s u r e d l i a b i l i t y .
I t i s exp ected th a t the p o t e n t ia l, as measured by
i t s c a p it a l and r e s e r v e s , o f the F ed eral Savings and Loan
Insurance C orporation to meet i t s in su red l i a b i l i t i e s
through i t s own f in a n c ia l re so u rce s w i l l d ecrease in the
ensuing y e a r s . A s s u m i n g th at the in su red l i a b i l i t y
and Loan League, 1953)-
62
"Insured l i a b i l i t y ” i s the t o t a l amount o f sav
in g s which are guaranteed by the F ed era l Savings and Loan
Insurance C orporation.
C om parative S u rvey o f th e FLIC and FSLIC.
6k -
Such an a ssu m p tio n i s b a se d on th e f o l l o w i n g c o n
s i d e r a t i o n s . F i r s t , th e c a p i t a l o f t h e F e d e r a l S a v in g s and
Loan In su r a n c e C o r p o r a tio n , w h ich am ounts t o $ 1 0 0 ,0 0 0 ,0 0 0 ,
r e p r e s e n t s an advance by th e U n ite d S t a t e s G o v e r n m e n t •
B e g in n in g June 30» I9 5 l> such c a p i t a l w i l l be g r a d u a lly
r e t i r e d by th e F e d e r a l S a v in g s and Loan In su ra n ce C orpora
t i o n by a l l o c a t i n g o n e - h a l f o f i t s e a r n in g s , a f t e r
75
r em a in s th e same, th e amount i n th e in s u r a n c e fund w i l l
d e c r e a s e i n r e l a t i o n to in s u r e d l i a b i l i t y , b e c a u se c a p i t a l
w i l l c o n t i n u a l l y d e c r e a s e a s w i l l th e amount w h ich can be
added t o r e s e r v e s . In a l l p r o b a b i l i t y th e in s u r e d l i a
b i l i t y w i l l , i n c r e a s e , t h e r e f o r e c a u sin g th e amount i n th e
in s u r a n c e fun d ( i n r e l a t i o n to in s u r e d l i a b i l i t y ) t o
f u r t h e r d e c r e a s e . As o f June 3 0 , 1951# th e r e s e r v e o f th e
F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n were e q u a l
t o a p p r o x im a te ly f o u r - f i f t h s o f 1 p e r c e n t o f in s u r e d
l i a b i l i t y , i . e . , t h e r e was 76 c e n t s i n th e r e s e r v e fund
f o r e v e r y $100 o f in s u r e d l i a b i l i t y . ^5
W hether o r n o t th e F e d e r a l S a v in g s and Loan
d e d u c t io n s f o r e x p e n s e s and l o s s e s , t o t h i s p u r p o se . Be
f o r e June 3 0 , 1951* incom e rem a in in g a f t e r d e d u c tio n s f o r
e x p e n s e s and l o s s e s was a l l o c a t e d t o r e s e r v e s f o r l o s s e s .
S eco n d , d u rin g 1950 th e F e d e r a l S a v in g s and Loan In su r a n c e
C o r p o r a tio n was d i r e c t e d to pay d iv id e n d s on th e rem a in in g
p o r t io n o f th e e a p i t a l . Funds u sed f o r su ch d iv id e n d p ay
m en ts m ig h t o th e r w is e have b een added t o r e s e r v e s f o r
l o s s e s . T h ir d , th e incom e o f th e F e d e r a l S a v in g s and Loan
In su r a n c e C o r p o r a tio n w i l l te n d to d e c r e a s e , s i n c e , a s o f
1 9 5 0 , th e a n n u a l premium rat© was red u ced from o n e - e ig h t h
o f 1 p er c e n t to o n e - t w e l f t h o f 1 p er c e n t o f th e v a lu e
o f in s u r e d sa v in g s* F o u r th A nnual R e p o r t, H ou sin g and
Home F in a n c e A g en cy , 1 9 5 0 , p p . 1 9 1 -1 9 2 .
6 5 .
As o f June 3 0 , 1 9 5 1 5 th e r e was $1.3© i n th e
r e s e r v e fun d o f th e F e d e r a l D e p o s it In su r a n c e C o r p o r a tio n
f o r e v e r y $100 o f in s u r e d l i a b i l i t y . C om parative S u rvey
o f th e PDIC and FSLIC.
76
In su r a n c e C o r p o r a tio n w i l l be a b le to a b so rb th e l o s s e s
w h ich may r e s u l t d u r in g a p e r io d c a u s in g f i n a n c i a l d i f f i
c u l t i e s f o r s a v in g s and lo a n a s s o c i a t i o n w ith i t s own
r e s o u r c e s , o f c o u r s e , depends on th e e x t e n t o f th e l o s s e s .
To s t r e n g th e n th e a b i l i t y o f th e F e d e r a l S a v in g s and Loan
In su r a n c e C o r p o r a tio n to m eet i t s in s u r e d l i a b i l i t i e s and,
t h e r e f o r e , c o n tin u e t o a s s i s t i n e n c o u r a g in g p u b lic c o n
f id e n c e i n s a v in g s and lo a n a s s o c i a t i o n s , th e r e are two
a d d i t i o n a l s o u r c e s o f fu n d s w h ich may be ta p p ed i n a period
o f em ergen cy. The F e d e r a l S a v in g s and Loan In su r a n c e
C o r p o r a tio n may a s s e s s in s u r e d s a v in g s and lo a n a s s o c i a
t i o n s an a d d i t i o n a l premium o f o n e - e ig h t h o f 1 p e r c e n t o f
in s u r e d s a v in g s p e r annum, u and th e U n ite d S t a t e s G overn
ment i s a u th o r iz e d t o le n d up t o $ 7 5 0 , 0 0 0 ,0 0 0 to th e
F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n a t any on©
tim e .k ^ i t i s p r o b a b le t h a t i f t h e s e fu n d s were i n s u f f i
c i e n t t o m eet th e in s u r e d l i a b i l i t i e s o f th e F e d e r a l
S a v in g s and Loan In su r a n c e C o r p o r a tio n , th e U n ite d S t a t e s
Government w ould le n d e v en more th a n th e amount i t i s now
a u th o r iz e d t o p r o v id e .^ ® I t would seem , t h e r e f o r e , t h a t
-
Lo c • c i * t *
67
F o u r th A nnual R e p o r t, H ou sin g and Home F in a n c e
A g en cy , 19^0, P* 191*
60
I t i s a l s o p r o b a b le t h a t i f F e d e r a l D e p o s it
77
th© F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n w i l l be
a b le t o c o n tin u e le n d in g an a d d i t i o n a l m easure o f s a f e t y
t o in s u r e d s a v in g s i n s a v in g s and lo a n a s s o c i a t i o n s .
E v a lu a t io n o f th e r o l e o f th© F e d e r a l S a v in g s and
Loan In su r a n c e C o r p o r a tio n . The d i r e c t c o n t r i b u t i o n s o f
th e F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n may be
m easured by i t s a s s i s t a n c e i n m a in ta in in g th e s a f e t y o f
s a v in g s i n v e s t e d i n s a v in g s and lo a n a s s o c i a t i o n s w h ich
have w a rra n ted i t s a t t e n t i o n d u rin g th© y e a r s o f i t s
o p e r a t io n . The i n d i r e c t c o n t r i b u t i o n s w h ich th e F e d e r a l
S a v in g s and Loan In su r a n c e C o r p o r a tio n h a s made t o th e
s a f e t y o f s a v in g s and lo a n a s s o c i a t i o n s are n o t so e a s i l y
m easured b u t a r e p r o b a b ly a s im p o r ta n t a s th o s e w h ich may
be c o n s id e r e d a s d i r e c t .
The d i r e c t c o n t r i b u t i o n s o f th e F e d e r a l S a v in g s and
Loan In su r a n c e C o r p o r a tio n may be c l a s s i f i e d i n two c a t e
g o r i e s : ( 1 ) a c t i o n ta k e n to p r e v e n t th e d e f a u l t o f sa v in g s
and lo a n a s s o c i a t i o n s ! and ( 2 ) s u c c e s s f u l and q u ick m eetin g
o f i t s in s u r e d l i a b i l i t i e s i n c a s e s where s a v in g s and lo a n
a s s o c i a t i o n s have been d e c la r e d In d e f a u l t . By
In su r a n c e C o r p o r a tio n fu n d s were i n s u f f i c i e n t , th e U n ite d
S t a t e s Governm ent would le n d s u f f i c i e n t fu n d s to e n a b le
th e F e d e r a l D e p o s it In su r a n c e C o r p o r a tio n to m eet i t s
in s u r e d l i a b i l i t i e s .
78
c o n t r i b u t i n g fu n d s and a d v ic e to s a v in g s and lo a n a s s o c i a
t i o n s i n f i n a n c i a l d i f f i c u l t y , th e F e d e r a l S a v in g s and
Loan In su r a n c e C o r p o r a tio n h a s p r e v e n te d th e d e f a u l t o f
t h e s e i n s t i t u t i o n s w ith o u t know ledge o f th e p u b lic * T h us,
i t h as p r e v e n te d l o s s o f p u b lic c o n fid e n c e w h ich m igh t
have r e s u l t e d i f t h e s e a s s o c i a t i o n s had f a i l e d , and so
a t t r a c t e d p u b lic a t t e n t i o n and concern* By m e e tin g i t s
in s u r e d l i a b i l i t i e s w i t h i n a s h o r t p e r io d o f tim e i n e a s e s
where s a v in g s and lo a n a s s o c i a t i o n s d id f a i l , th e F e d e r a l
S a v in g s and Loan In su r a n c e C o r p o r a tio n h a s i l l u s t r a t e d i t s
p o t e n t i a l c o n t r i b u t i o n to th e u lt im a t e s a f e t y o f i n v e s t -
✓
m en ts i n in s u r e d a s s o c i a t i o n s , n o t o n ly to i n d i v i d u a l s
h o ld in g s a v in g s i n l i q u i d a t e d a s s o c i a t i o n s , b u t to o th e r
i n d i v i d u a l s g a in in g know ledge o f t h e s e i n c i d e n t s . The
F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n h as h e lp e d
t o s t im u la t e p u b lic c o n fid e n c e i n s a v in g s and lo a n a s s o c i
a t i o n s .
P erh ap s th e m ost im p o r ta n t i n d i r e c t c o n t r i b u t i o n
made b y th e F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n
h a s been i n e n f o r c in g c e r t a i n r u l e s and r e g u l a t i o n s p e r
t a i n i n g t o su ch m a t t e r s a s r e s e r v e s and le n d in g r e s t r i c
t i o n s e f f e c t e d tow ard th e s a f e t y o f s a v in g s and lo a n a s
s o c i a t i o n s . Such r u l e s and r e g u l a t i o n s a r e , i n m ost c a s e s ,
more s t r i n g e n t th a n t h o s e im posed upon u n in su r e d s a v in g s
79
and lo a n a s s o c i a t i o n s . In a d d i t i o n , in s u r e d s a v in g s and
lo a n a s s o c i a t i o n s c h a r te r e d by s t a t e s n o t p r o v id in g f o r
e x a m in a tio n s a re exam ined and s u p e r v is e d by th e Home Loan
Bank B o a r d .^9 i t ± s p r o b a b le t h a t su ch c o n t r o l s have
p la y e d a s i g n i f i c a n t r o l e i n s t r e n g t h e n in g th e s a f e t y o f
s a v in g s and lo a n a s s o c i a t i o n s , th e r e b y i n c r e a s i n g p u b lic
c o n fid e n c e i n t h e s e i n s t i t u t i o n s .
The F e d e r a l S a v in g s and Loan In su ra n ce C o r p o r a tio n
h as s e r v e d a s a means by w h ich p u b lic r e s p e c t and c o n f i
dence i n s a v in g s and lo a n a s s o c i a t i o n s have b e e n in c re a se d *
As su c h , i t h a s b een a c o n t r i b u t i n g f o r e e i n b r in g in g new
s a v in g s i n t o s a v in g s and lo a n a s s o c i a t i o n s , e n a b lin g t h e s e
i n s t i t u t i o n s t o c o n t r ib u t e more w id e ly t o th e stream o f
fu n d s u t i l i z e d f o r home f i n a n c i n g . That s a v in g s and lo a n
a s s o c i a t i o n s and i n v e s t o r s have r e c o g n iz e d th e b e n e f i t s
o f F e d e r a l S a v in g s and Loan In su r a n c e i s r e f l e c t e d by th e
f a c t s t h a t , a s o f June 3 0 , 195l> 1+9*0 p er c e n t o f a l l
s a v in g s and lo a n a s s o c i a t i o n s w ere in s u r e d ; and t h a t th e
* gr
In most c a se s where th ere i s p r o v isio n for the
exam ination of S ta te -c h a r te r e d sa v in g s and loan a s s o c ia
tio n s by S ta te a u t h o r it ie s , such exam inations are mad©
j o in t ly by S ta te and F ed eral exam iners. Exam inations
determ ine f in a n c i a l soundness; com pliance w ith governing
laws and r e g u la tio n s ; the adequacy o f r e se r v e s and reserv e
b u ild in g programs; the soundness of le n d in g , in vestm en t,
and oth er f in a n c ia l p o l i c i e s ; and th© e f f e c t iv e n e s s of
c o l l e c t i o n procedures and programs fo r th© d is p o s it io n of
8o
a s s e t s o f in s u r e d a s s o c i a t i o n s r e p r e s e n t e d o v e r 8 2 .0 p e r
c e n t o f th e com bined a s s e t s o f a l l s a v in g s and lo a n a s s o c i
a t i o n s .^ ^ From t h e s e f i g u r e s i t w ould appear th a t more
im p ortan ce may be p la c e d upon th e p o t e n t i a l b e n e f i t s o f
F e d e r a l S a v in g s and Loan In su r a n c e by i n v e s t o r s th an by
s a v in g s and lo a n a s s o c i a t i o n s t h e m s e lv e s . As o f Decem ber
3 1 , 19^9 9 o n ly th r e e o f th e 75 s a v in g s and lo a n a s s o c i a
t i o n s i n o p e r a t io n i n Los A n g e le s C ounty w ere n o t in s u r e d
by th e F e d e r a l S a v in g s and Loan In su ra n ce C o r p o r a tio n .
T h ese s a v in g s and lo a n a s s o c i a t i o n s a c co u n te d f o r o n ly
lf.0 p e r c e n t o f th e t o t a l s a v in g s and lo a n a s s o c i a t i o n s
in Los A n g e le s C ounty and f o r o n ly t h r e e - f i f t h s o f 1 p e r
c e n t o f th e t o t a l a s s e t s o f s a v in g s and lo a n a s s o c i a t i o n s
in Los A n g e le s C o u n t y .^
C o n e lu s io n s . S a v in g s and lo a n a s s o c i a t i o n s , o p e r
a t i n g p r im a r ily w ith s a v in g s o f i n d i v i d u a l s , p r o v id e a
so u rc e o f lo n g -te r m fu n d s f o r home f i n a n c i n g . I n v e s t i n g
r e a l e s t a t e . F o u r th A nnual R e p o r t, H ousin g and Home
F in a n c e A g e n c y , 1950 > PP• I 5 ? - l b 8 .
70
F i n a n c i a l R e p o r t, F e d e r a l S a v in g s and Loan
In su r a n c e C o r p o r a tio n , June 3 0 , 19?1 (W ash in gton , D . C . :
Home Loan Bank B oard , 1951) > P* I 4 ..
71
S a v in g s and Loan A s s o c i a t i o n s in Los A n g e le s
C ou n ty, p . 2 .
th© body o f t h e i r fu n d s i n lo n g -te r m m o r tg a g e s, t h e s e
f i n a n c i a l i n s t i t u t i o n s s e r v e e s s e n t i a l l y a d i f f e r e n t e c o
nomic f u n c t i o n th an do com m ercial b a n k s. Banks i n v e s t
p r im a r ily i n Government s e c u r i t i e s and s h o r t-te r m commer
c i a l and consum er lo a n s , a lth o u g h t h e y , t o o , b u t to a much
l e s s e r e x t e n t , i n v e s t i n r e a l e s t a t e lo a n s . The d i f f e r
e n c e s i n th© ty p e o f c r e d i t p r o v id e d by t h e s e two f i n a n c i a l
i n s t i t u t i o n s a r i s e s p r im a r ily b e c a u se o f th© d i f f e r e n c e s
i n t h e so u r c e o f fu n d s o f e a c h . Banks r e c e i v e m ost o f
t h e i r fu n d s from r e c e i v i n g d e p o s i t s p a y a b le on demand o r
w it h in a s h o r t and s p e c i f i e d p e r io d o f tim e . S a v in g s and
lo a n a s s o c i a t i o n s r e c e i v e m ost o f t h e i r fu n d s from th e
s a le o f sh a r e s o r , i n th© c a s e o f g u a r a n te e s t o c k a s s o c i a
t i o n s , from th© s a l e o f s h a r e s a n d /o r in v e stm e n t c e r t i f i -
*
c a t e s . S a v in g s and lo a n a s s o c i a t i o n s are n o t l e g a l l y
o b l i g a t e d to r e t u r n fu n d s so i n v e s t e d on demand o r w i t h i n
any s p e c i f i e d p e r io d o f t im e . A lth o u g h th e term M s a v in g s
a c c o u n t” i s u se d w id e ly by s a v in g s and lo a n a s s o c i a t i o n s
t o r e f e r to fu n d s i n v e s t e d by i n d i v i d u a l s i n a s s o c i a t i o n
s h a r e s , th e r e i s a fu n d a m en ta l d i f f e r e n c e i n su ch a s a v
in g s a c c o u n t when compared w ith a s a v in g s a c c o u n t i n a
bank. Bank a c c o u n ts p r o v id e an o u t l e t fo r fu n d s t o be
u sed f o r c u r r e n t paym ents and an o u t l e t f o r s a v in g s w h ich
may be n eed ed w i t h i n a s h o r t p e r io d o f t im e . S a v in g s and
82
lo a n a c c o u n ts or in v e s tm e n t c e r t i f i c a t e s p r o v id e an o u t l e t
f o r s a v in g s w h ich are lo n g -te r m i n n a tu re* By p a y in g w it h
draw al r e q u e s t s ( a c t u a l l y r e q u e s t s f o r th e r e p u r c h a se o f
s h a r e s , i n th e c a s e o f s a v in g s and lo a n sh a re a c c o u n ts ) on
demand, s a v in g s and lo a n a s s o c i a t i o n s have b e e n p r o v id in g
l i q u i d i t y to s a v in g s e q u a l t o t h a t p r o v id e d by b an k s.
S a v e r s ean n ot depend on th e i n d e f i n i t e c o n t i n u a t i o n o f
t h i s p r a c t i c e . S a v in g s i n v e s t e d i n s a v in g s and lo a n a s
s o c i a t i o n s may n o t a lw a y s be so r e a d i l y a v a i l a b l e t o th e
s a v e r a s s a v in g s i n v e s t e d i n com m ercial b a n k s, b e c a u se
a s s o c i a t i o n s are n e i t h e r so l i q u i d a s b a n k s, n o r a re th e y
l e g a l l y o b l i g a t e d t o r e t u r n s a v in g s w i t h i n any s p e c i f i e d
p e r io d o f tim e* S a v in g s i n v e s t e d i n s a v in g s and lo a n
a s s o c i a t i o n s do n o t s e r v e th e same p u rp o se t o th e sa v e r
a s do s a v in g s i n v e s t e d i n com m ercial b a n k s.
W hile s a v in g s and lo a n a s s o c i a t i o n s u se th e t i t l e
" a s s o c i a t i o n , " t h i s i s n o t e n t i r e l y d e s c r i p t i v e o f th e
n a tu r e o f t h e s e i n s t i t u t i o n s . S a v in g s and lo a n a s s o c i a
t i o n s a re p r o f i t s e e k in g c o r p o r a t io n s . T h e ir "members”
do n o t a c t i v e l y p a r t i c i p a t e i n th e a f f a i r s o f t h e a s s o c i a
t i o n , d e l e g a t i n g t h e i r v o t i n g r i g h t s t o th e management
w hich i s , t h u s , s e l f - p e r p e t u a t i n g . In m ost a s s o c i a t i o n s
th e b oard o f d i r e c t o r s and th e o f f i c e r s are one group o f
i n d i v i d u a l s . There seem s t o be some v a lu e i n a board o f
83
d i r e c t o r s c o n s i s t i n g o f i n d i v i d u a l s o th e r th a n m e r e ly th e
m a n a g e r ia l g r o u p . T h is may f u r t h e r f a c i l i t a t e th e a b i l i t y
o f d i r e c t o r s t o more e f f e c t i v e l y c a r r y ou t t h e i r f u n c t i o n
o f g u id in g th e a s s o c i a t i o n a c c o r d in g to i t s i n v e s t o r s 1
b e s t i n t e r e s t s , w hich a re p r o b a b ly i n a c c o r d w ith th e b e s t
i n t e r e s t s o f th e comm unity se r v e d by th e a s s o c i a t i o n , by
p r o v id in g an o p p o r tu n ity f o r th e board o f d i r e c t o r s t o
m a in ta in a lo n g -r a n g e p o in t o f v ie w and t o e f f e c t some
c o n t r o l o v e r th e a c t i v i t i e s o f th e management o f th e
a s s o c i a t i o n .
A lth o u g h a l l F e d e r a l S a v in g s and Loan A s s o c i a t i o n s
are m u tu al c o r p o r a t io n s , m ost C a l i f o r n i a S t a t e - c h a r t e r e d
a s s o c i a t i o n s are g u a r a n te e s t o c k a s s o c i a t i o n s . The g u a r
a n te e s to c k d e v ic e seem s to be o f v a lu e f o r two p a r t i c u l a r
r e a s o n s . F i r s t , g u a r a n te e s t o c k p r o v id e s an a d d i t i o n a l
f i n a n c i a l c u s h io n w h ich may add t o th e s a f e t y o f th e
a s s o c i a t i o n . S e c o n d , a s s t o c k h o ld e r s , th e management o f
su ch an a s s o c i a t i o n may have a f i n a n c i a l i n c e n t i v e g r e a t e r
th a n t h a t o f th e management o f a m u tu al a s s o c i a t i o n , to
manage th e a s s o c i a t i o n w e l l . On th e o th e r hand, i t i s
p r o b a b ly e a s i e r to remove an u n s a t i s f a c t o r y management o f
a m u tu al a s s o c i a t i o n th a n to remove an u n s a t i s f a c t o r y
management o f a g u a r a n te e s t o c k a s s o c i a t i o n . T h is f o l lo w s
from the f a c t t h a t th e v o t i n g c o n t r o l o f a m u tu al
a s s o c i a t i o n i s d is p e r s e d pro r a ta among i t s m em bers, w h ile
th e v o t i n g c o n t r o l o f a g u a r a n te e s to c k a s s o c i a t i o n i s
u s u a l l y h e ld by s t o c k h o ld e r s , and th e management u s u a l l y
h o ld s t h e m a j o r it y o f s t o c k .
I t i s p r o b a b le t h a t i n d i v i d u a l s a r e a t t r a c t e d t o
th e management o f a s a v in g s and lo a n a s s o c i a t i o n b e c a u se
o f th e o p p o r tu n ity i t p r o v id e s f o r p r o f i t . The o p p o r tu n ity
f o r p r o f i t to th e management o f a s a v in g s and lo a n a s s o c i a
t i o n , w h eth er g u a r a n te e s t o c k o r m u tu a l, seem s s u b s t a n t i a l .
An im p o r ta n t so u rce o f incom e t© many s a v in g s and lo a n
m anagem ents i s d e r iv e d from th e o p e r a tio n o f an in s u r a n c e
b u s in e s s w h ich r e c e i v e s p a r t , i f n o t m o s t, o f i t s c l i e n t e l e
from c u sto m e r s o f th e a s s o c i a t i o n . W hile i t w ould seem
t h a t s a l a r i e s p a id t o th e management o f m u tu a l a s s o c i a t i o n s
m igh t te n d to be h ig h e r th a n t h o s e p a id t o th e management
o f g u a r a n te e s to c k a s s o c i a t i o n s , on th e w h o le t h i s d o e s
n o t seem t o be th e c a s e . In o r d e r t h a t th e management o f
m u tu al a s s o c i a t i o n s have a f i n a n c i a l i n c e n t i v e a s g r e a t
a s t h a t o f th© management o f g u a r a n te e s t o c k a s s o c i a t i o n s ,
i t a p p ea r s t h a t s a l a r i e s and o t h e r m on etary co m p en sa tio n
sh o u ld be h ig h e r w it h r e g a r d t o th e management o f m u tu a l
a s s o c i a t i o n s i n o r d e r to com p en sate f o r th e la c k o f op
p o r t u n it y f o r s t o c k o w n e r sh ip . A lth o u g h f i n a n c i a l i n c e n
t i v e may be a s t im u la t in g f o r c e i n a t t r a c t i n g q u a l i f i e d
8 5
i n d i v i d u a l s t o th e management o f an a s s o c i a t i o n , and i n
p rom otin g a d e s i r e t o do th e job w e l l , th e q u a l i t y o f th e
management o f an a s s o c i a t i o n i s n o t n e c e s s a r i l y c o r r e
l a t e d w ith th e f i n a n c i a l i n c e n t i v e t h i s p o s i t i o n p r o v id e s .
The F e d e r a l Home Loan Bank S y s te m , to w h ich m ost
s a v in g s and lo a n a s s o c i a t i o n s i n Los A n g e le s County
b e lo n g , p r o v id e s a c e n t r a l s o u r c e o f c r e d i t to s a v in g s
and lo a n a s s o c i a t i o n s , by m aking a v a i l a b l e fu n d s by w h ich
s a v in g s and lo a n a s s o c i a t i o n s are a id e d i n m e e tin g th e
demands f o r m ortgage fu n d s and th e demands f o r w ith d raw als
i n t h e i r p a r t i c u l a r a r e a s . A lth o u g h econ om ic c o n d i t i o n s
a s y e t have n o t t e s t e d th o r o u g h ly th e p o t e n t i a l o f th e
F e d e r a l Home Loan Bank S y stem , i t seem s t h a t i t can be
an e f f e c t i v e t o o l i n su p p le m e n tin g th© fu n d s o f s a v in g s
and lo a n a s s o c i a t i o n s i n m e e tin g w ith d r a w a l r e q u e s t s and
i n m aking home l o a n s , th e r e b y s t i m u l a t i n g p u b lic c o n f i
dence i n t h e s e i n s t i t u t i o n s and h e lp in g to k eep money
f lo w in g i n t o th© stream o f home f i n a n c i n g . As a r e s u l t ,
th© F e d e r a l Home Loan Bank System can h e lp ch eck th e
e x t e n t o f a d e p r e s s io n and work tow ard r e c o v e r y .
S a v in g s and lo a n a s s o c i a t i o n s have a l i m i t e d b o r
row ing c a p a c it y from t h e i r r e s p e c t i v e F e d e r a l Home Loan
Bank, and are t h e r e f o r e l i m i t e d i n th e e x t e n t to w h ich
t h e y may r e l y on t h i s so u rc e o f fu n d s . I t seem s th a t
8 6
th e borrow in g p o t e n t i a l o f a s a v in g s and lo a n a s s o c i a t i o n
sh o u ld be p r e s e r v e d a s much a s p o s s i b l e d u rin g fa v o r a b le
econom ic c o n d i t i o n s . i n o r d e r t h a t t h i s so u rc e o f fu n d s may
be a v a i l a b l e d u rin g p e r io d s o f l e s s f a v o r a b le econom ic
c o n d i t i o n s .
The F e d e r a l S a v in g s and hoan In su r a n c e C o r p o r a tio n
i n s u r e s th e s a f e t y o f s a v in g s i n v e s t e d i n s a v in g s and lo a n
a s s o c i a t i o n s . M ost s a v in g s and lo a n a s s o c i a t i o n s i n Los
A n g e le s C ounty s u b s c r ib e to t h i s in s u r a n c e p la n . The
F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n n eed n o t
m eet i t s o b l i g a t i o n s t o I n d i v i d u a ls w hose s a v in g s i t
g u a r a n te e s u n t i l th e l i a b i l i t i e s o f an a s s o c i a t i o n e x c e e d
I t s a s s e t s . The F e d e r a l D e p o s it In su r a n c e C o r p o r a tio n ,
w h ich i n s u r e s d e p o s i t s i n com m ercial b a n k s, m ust m eet i t s
o b l i g a t i o n s t o d e p o s i t o r s when th e bank d o e s n o t m eet i t s
w ith d r a w a l r e q u e s t s a t th e end o f a p e r io d o f tim e s p e c i
f i e d by th e bank i n i t s c o n t r a c t w ith d e p o s i t o r s . T h ere
f o r e , e v en an in s u r e d s a v in g s and lo a n a c c o u n t d o e s n o t
have th e a s s u r e d l i q u i d i t y o f an a c co u n t i n a com m ercial
b an k.
The F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n
h as u n d o u b te d ly don© a g r e a t d e a l tow ard s t i m u l a t i n g
p u b lic c o n f id e n c e i n s a v in g s and lo a n a s s o c i a t i o n s . Of
th e two m ethods w h ic h may be u sed by t h e C o r p o r a tio n i n
87
m e e tin g i t s o b l i g a t i o n s t o s a v e r s , t a k in g a c t i o n to p r e v en t
th e d e f a u l t o f a s a v in g s and lo a n a s s o c i a t i o n i n a f i n a n
c i a l d i f f i c u l t y seem s to have th e g r e a t e r m e r it* I t i s
p r o b a b le t h a t th e C o r p o r a tio n , i n so f a r a s i s p o s s i b l e ,
w i l l c o n tin u e t o u s e t h i s m ethod o f m e e tin g i t s o b l i g a
t i o n s to s a v e r s .
D u rin g 1951 s a v in g s and lo a n a s s o c i a t i o n s l o s t t h e ir
ex em p tio n from p a y in g incom e t a x . S in c e s a v in g s and lo a n
a s s o c i a t i o n s a re o p e r a te d e s s e n t i a l l y th e same a s o th e r
f i n a n c i a l i n s t i t u t i o n s p r e v i o u s l y s u b j e c t e d to p a y in g
incom e t a x , i t a p p ea r s t h a t t h e i r p r e s e n t incom e t a x
s t a t u s i s j u s t i f i a b l e . I t i s p r o b a b le t h a t t h e r e w i l l be
c e r t a i n ch a n g e s i n s a v in g s and lo a n a s s o c i a t i o n s a s a
r e s u l t o f now h a v in g to p ay incom e t a x . M ost o f th e
ch a n g e s w i l l n o t become a p p a ren t f o r some t im e . T here i s
a p o s s i b i l i t y t h a t one o f t h e s e ch a n g es may be th e stren gth
en in g o f th e s a f e t y o f some a s s o c i a t i o n s . On th e o th e r
hand, th e r e i s some i n d i c a t i o n a lr e a d y t h a t s u b j e c t i o n to
th e t a x w i l l have th e e f f e c t o f I n c r e a s in g r a t e s p a id by
a s s o c i a t i o n s on s a v in g s .
The e le m e n ts o f s a f e t y and l i q u i d i t y o f s a v in g s
i n v e s t e d i n s a v in g s and lo a n a s s o c i a t i o n s a r e in c r e a s e d
by th e f a c t s t h a t s a v in g s and lo a n a s s o c i a t i o n s have l e g a l
r e s t r i c t i o n s , a re exam ined and s u p e r v is e d , can borrow
88
fu n d s from t h e i r F e d e r a l Home Loan B a n k s, and may be
in s u r e d by th e F e d e r a l S a v in g s and Loan In su r a n c e C orpora
t i o n . T h ese c o n t r i b u t i o n s tow ard th e s a f e t y and l i q u i d i t y
o f s a v in g s i n v e s t e d i n s a v in g s and lo a n a s s o c i a t i o n s
ap p ear t o have s e r v e d to s t im u la t e th e f lo w o f s a v in g s
i n t o a s s o c i a t i o n s and have th u s i n c r e a s e d th e a b i l i t y o f
t h e s e f i n a n c i a l i n s t i t u t i o n s to f u n c t i o n a s a so u rce o f
fu n d s f o r home f i n a n c i n g . W hether or n o t a s a v in g s and
lo a n a s s o c i a t i o n w i l l p r o v id e a s a v in g s o u t l e t s u f f i c i e n t
l y s a f e , p r o f i t a b l e , and l i q u i d t o a t t r a c t th e s a v in g s o f
I n d i v i d u a ls and a s t a b l e so u r c e o f fu n d s f o r home fin a n c in g
i s l a r g e l y up t o i t s m anagem ent; t h i s i s n o t in s u r e d by
th e e x i s t e n c e o f l e g a l r e s t r i c t i o n s , s u p e r v i s i o n , th e
! p r o v i s i o n s o f th e F e d e r a l Home Loan Bank S y stem , or th e
F e d e r a l S a v in g s and Loan In su r a n c e C o r p o r a tio n .
CHAPTER I I I
FINANCIAL M ANAGEMENT IN SAVINGS AND LOAN ASSOCIATIONS
P u rp o ses o f th e c h a p t e r . The p u r p o se s o f t h i s
c h a p te r a re t o show how f i n a n c i a l management i n s a v in g s
and lo a n a s s o c i a t i o n s i n f l u e n c e s th e t y p e s o f home f i n a n c
in g done by s a v in g s and lo a n a s s o c i a t i o n s , th e s a f e t y and
l i q u i d i t y o f s a v in g s i n v e s t e d i n s a v in g s and lo a n a s s o c i a
t i o n s , and th e p r o f i t a b i l i t y o f s a v in g s and lo a n a s s e t s .
The In v e stm e n t p o r t f o l i o . The a g g r e g a te b a la n c e
s h e e t o f F e d e r a l Home Loan Bank S ystem member s a v in g s and
lo a n a s s o c i a t i o n s o p e r a tin g i n C a l i f o r n i a i n 1950 i s shown
i n T a b le I I , page 9 0 . T h is b a la n c e s h e e t shows th e q u a n ti
t a t i v e im p o rta n ce o f i n d i v i d u a l it e m s making up th e i n v e s t
ment p o r t f o l i o o f s a v in g s and lo a n a s s o c i a t i o n s . The
p r i n c i p a l e a r n in g power o f a s a v in g s and lo a n a s s o c i a t i o n
l i e s i n i t s h o l d in g s o f lo a n s w h ic h , a s T a b le I I i n d i c a t e s ,
are p r i n c i p a l l y f i r s t m ortg a g e l o a n s .^ “O th er” lo a n s a r e
se c u r e d by sh a re a c c o u n ts o r in v e s tm e n t c e r t i f i c a t e s or
are u n se c u r e d p r o p e r ty im provem ent lo a n s in s u r e d or g u a r
a n te e d b y th e F e d e r a l H ousin g A d m in is t r a t io n or th e
^ The i n t e r e s t r a t e on m ortgage lo a n s c u r r e n t ly
b e in g made by s a v in g s and lo a n a s s o c i a t i o n s i n th e Los
A n g e le s a r e a i s from I 4 ..O p e r c e n t to 6 . 5 p er c e n t .
90
T A BLE II
!
ASSETS A N D LIABILITIES O F FED ER A L H O M E L O A N B A N K SYSTEM
M E M B E R SAVINGS A N D L O A N ASSOCIATIONS H
S !
0
5
H
1
£
V *
December 31, 1950
(Amounts in thousands of dollars)
Per cent to
Assets to ta l a ssets
F ir st Mortgage Loans $1,265,720 85.32
Other loans
7,653
.52
Real Estate sold on contract
315
.02
Real Estate owned U,0it5 .27
FHLB Stock
l5 ,U 7 i 1.0k
U.S. Government obligations 76,509 5.16
Other investments i,U 6o .10
Cash on hand and in banks 95,170 6.1+1
O ffice building (net) 10,663 .72
Furniture and fixtu res (net)
2,552 .17
Other assets
3,939 .27
Total $1,1(83,1(97 100.00
Per cent to to ta l
L ia b ilitie s and Capital l i a b i l i t i e s and capital
Savings cap ita l $1,159,11(6
78.11+
Mortgage pledged shares
855
.06
Advances from FH LB 108,022 7.28
Other borrowed money
1,807 .12
Loans in process
87,1(99
5.90
Other l i a b i l i t i e s
7,969 .51+
Permanent stock
10,193 .69
Deferred credits 752
.05
S p ecific reserves 2,51(0
.17
General reserves 5U,66U
3.69
Undivided p ro fits
5o,o5o 3.36
Total
$1,1(83,1(97
100.00
SO URCEs Combined Financial Statements of Members of the Federal Home
Loan Bank System, 1950. Washington, D.C.s 1951, Table No. 9,
p. 23. " '
91
Veterans A d m i n i s t r a t i o n . 2 Federal Home Loan Bank stock
is a low earning asset^ required for membership in the
Federal Home Loan Bank System. Although Federal Home Loan
Bank stock can be considered neither a liquid asset nor an
important earning asset, it does provide a means by which
a savings and loan association can gain additional liquid
ity and by which it can increase its earnings, since it
may borrow funds up to twelve times the amount of such
stock held from its Federal Home Loan Bank.^- United
States Government securities are held for their qualities
of safety and liquidity rather than for their earning
power, since yields on these securities range from 1.0 per
cent to 2.75 per c e n t.5 Funds held either in Federal Home
Loan Banks or In commercial banks, as United States Govern
ment securities, are held primarily as a source of
2
A ll loan s in su red or guaranteed by th e se govern
m ental a g e n c ie s are h e r e a fte r r e fe r r e d to as FHA loan s or
VA lo a n s.
3
In 1950 dividends paid on Federal Home Loan Bank
stock ranged between 1.0 per cent and 2.0 per cent per
annum. Fourth Annual Report, Housing and Home Finance
Agency, 1950 (Washington, D.C.: United States Government
Printing Office, 1951)> P# 1?8.
^ I b id . , p . 171}..
5
Carl F. D is t e lh o r s t , ,1Savings and Loan A sso c ia
t io n s and Mutual S avings B anks,” In Herbert V. Prochnow,
American F in a n c ia l I n s t it u t io n s (Hew York: P r e n tic e -H a ll,
I n c., 1951)» P. 135^
92
l i q u i d i t y r a t h e r th a n f o r t h e i r e a r n in g pow er, s in c e such
d e p o s i t s e a r n from a p p r o x im a te ly o n e - h a l f o f 1 p er c e n t
t o 2 . 0 p e r c e n t i n t e r e s t . Funds h e ld a s c a s h or demand
d e p o s i t s i n F e d e r a l Home Loan Banks or com m ercial banks
have no e a r n in g power and are u se d to m eet c u r r e n t payments.
Legal r e s t r i c t i o n s which in flu e n c e the investm ent
p o r t fo lio * The fou n d ation o f the investm ent p o lic y of a
savin gs and loan a s s o c ia t io n l i e s in the le g a l framework
w ith in which i t must o p era te.
Since June 2 7 , 1 9 5 0 , the Home Loan Bank Board has
had the power to r e g u la te the minimum amount o f cash and
U nited S ta te s Government o b lig a tio n s which a sa v in g s and
loan a s s o c ia t io n member of the F ed er a l Home Loan Bank
System must have b efo re fu r th e r loan s may be made or pur
chased. S ince June 2 7 , 1 9 5 0 , the Home Loan Bank Board
has p rescrib e d t h i s amount to be 6 per cent o f withdraw
able accounts* The Home Loan Bank Board may s e t t h is
l i q u i d i t y requirem ent between L j . per cent and 8 per cent
o f withdrawable account s. 6
Fourth Annual Report, Housing and Home Finance
Agency, 1950, P» 167* Withdrawable accounts are share
accounts and/or investment certificates. For the purposes
of this regulation "cash” means cash on hand and cash on
deposit in commercial banks or Federal Home Loan Banks,
and "United States Government obligations” mean obligations
93
W ith th e e x c e p t i o n o f 15 p er c e n t of i t s a s s e t s , a
F e d e r a l S a v in g s and Loan A s s o c i a t i o n i s p e r m it te d t o make
r e a l e s t a t e lo a n s o n ly on th e s e c u r i t y o f homes or eorabina
t i o n homes and b u s i n e s s p r o p e r ty w i t h i n 50 m i l e s o f i t s
7 8
home o f f i c e * ' I t may make a m o r tiz e d lo a n s i n an amount
up to 80 p e r c e n t o f th e a p p r a is e d v a lu e o f su ch p r o p e r t y ,
\
b u t n o t i n e x c e s s o f $ 2 0 ,0 0 0 , and f o r a p e r io d o f n o t
lo n g e r th a n tw e n ty y e a r s . 9 Loans n o t f u l l y a m o r tiz e d or
i s s u e d by o r g u a r a n te e d a s to p r i n c i p a l and i n t e r e s t by
th e U n ite d S t a t e s . R u le s and R e g u la t io n s f o r th e F e d e r a l
S a v in g s and Loan S ystem (W ash in gton , D .C . : Home Loan Bank
B oard , 1 9 5 1 )» S e c t i o n 1 ^ 5 •8 -2 .
7
F i f t e e n p e r c e n t o f i t s a s s e t s may be I n v e s t e d i n
r e a l e s t a t e lo a n s s e c u r e d by f i r s t m o rtg a g e s on o t h e r
t y p e s o f r e a l e s t a t e su ch a s b u s i n e s s p r o p e r t i e s , a p a r t
ment h o u s e s , and im proved r e a l e s t a t e beyond th e u s u a l
f i f t y m ile le n d in g a r e a ; n o n -a m o r tiz e d lo a n s ; and lo a n s i n
e x c e s s o f $ 2 0 ,0 0 0 . I b i d . , S e c t i o n s II4 .5 . 6 and llj.5.7 •
8
”A m o rtized lo a n s 1 1 a r e lo a n s made p a y a b le i n r e g u
l a r p e r i o d i c paym ents w h ich r e t i r e th e p r i n c i p a l o f and
i n t e r e s t on th e d e b t w i t h i n a c e r t a i n s p e c i f i e d tim e .
9
D uring 1 9 5 0 , a s a r e s u l t o f K orean h o s t i l i t i e s ,
th e D e fe n s e P r o d u c tio n A ct was p a s s e d , g i v i n g th e Board o f
G overn ors o f th e F e d e r a l R eserv e System and th e H o u sin g
and Home F in a n c e A gency a u t h o r i t y t o r e g u la t e n e c e s s a r y
down paym ents and maximum m a t u r i t i e s f o r m ortgage l o a n s .
R e s u lt in g r e g u l a t i o n s , i n many i n s t a n c e s , lo w e re d th e m a x i
mum lo a n am ounts and sh o r te n e d th e m a t u r i t i e s o f lo a n s
w h ich c o u ld fo r m e r ly be made by le n d in g i n s t i t u t i o n s .
Norman S tr u n k , ,fUrban R e a l E s t a t e F i n a n c in g ,” i n Prochnow ,
A m erican F i n a n c i a l I n s t i t u t i o n s , p . 1 6 7 # I n t h i s s t u d y , in
d i sc u s s in g maximum lo a n s w hich may be made by le n d in g i n
s t i t u t i o n s , t h e s e r e s t r i c t i o n s r e f e r to maximum lo a n s w hich
c o u ld be made by such le n d in g i n s t i t u t i o n s p r e v io u s t o th e
p a s s a g e o f th e D e fe n s e P r o d u c tio n A c t.
91+
n o t se c u r e d by f i r s t m o r tg a g e s on homes or c o m b in a tio n
homes and b u s i n e s s p r o p e r t i e s may be made to e x te n d f o r a
s h o r t e r p e r io d o f tim e and f o r a s m a lle r p e r c e n t a g e o f th e
a p p r a is e d v a l u e •
The l e g a l p ow ers o f a C a l i f o r n i a S t a t e - c h a r t e r e d
s a v in g s and lo a n a s s o c i a t i o n , w ith r e g a r d to r e a l e s t a t e
le n d in g , a r e somewhat b ro a d er th a n a re t h o s e o f a F e d e r a l
S a v in g s and Loan A s s o c ia t io n * C a l i f o r n i a S t a t e - c h a r t e r e d
a s s o c i a t i o n s a re p e r m itt e d t o make lo a n s on unim proved
r e a l e s t a t e a s w e l l a s im proved r e a l e s t a t e * The m ost
l i b e r a l lo a n such an a s s o c i a t i o n may m ake, a s i n t h e c a se
o f a F e d e r a l S a v in g s and Loan A s s o c i a t i o n , i s a f u l l y
a m o r tiz e d lo a n s e e u r e d by a f i r s t m ortgage on r e a l e s t a t e
upon w h ich th e p r i n c i p a l im provem ent i s a s i n g l e f a m ily
r e s i d e n c e . -* -1 A C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and
lo a n a s s o c i a t i o n , a s a F e d e r a l S a v in g s and Loan A s s o c i a
t i o n , may n o t make lo a n s e x te n d in g lo n g e r th a n tw e n ty
10
R u le s and R e g u la t io n s f o r th e F e d e r a l S a v in g s and
Loan S y s te m , S e c t i o n ~ I l 0 7 6 . The l e g a l r e s t r i c t i o n s w h ich
have b een r e l a t e d c o n c e r n in g r e a l e s t a t e le n d in g by F e d e r a l
S a v in g s and Loan A s s o c i a t i o n s and th o s e f o l lo w in g r e g a r d in g
C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s ,
a p p ly o n ly t o c o n v e n t io n a l l o a n s . FHA and VA lo a n s may be
made a c c o r d in g to th e r e g u l a t i o n s i s s u e d by th e F e d e r a l
H ousin g A d m in is t r a t io n and th e V e te r a n s A d m in is t r a t io n .
11
1951 E d i t i o n , B u ild in g and Loan A c t , S t a t e o f
C a l i f o r n i a ( Los A n g e le s : S a v in g s and Loan L ea g u e, 19^1)>
A r t i c l e IX , S e c t i o n 9 * 1 0 .
9 5
1 P
y e a r s * T h e m ost l i b e r a l lo a n w h ich a C a l i f o r n i a S t a t e -
c h a r te r e d s a v in g s and lo a n a s s o c i a t i o n i s p e r m itt e d to
make i s s l i g h t l y l e s s w it h r e g a r d t o lo a n - v a lu e ratio-**3
th a n t h a t w h ich a F e d e r a l S a v in g s and Loan A s s o c i a t i o n
i s p e r m itte d to m ake. H ow ever, C a l i f o r n i a S t a t e - c h a r t e r e d
s a v in g s and lo a n a s s o c i a t i o n s may be a b le t o make more
lo a n s i n e x c e s s o f $ 2 0 ,0 0 0 th a n F e d e r a l S a v in g s and Loan
A s s o c i a t i o n s , s in c e th e o n ly l i m i t a t i o n on th e s i z e o f
lo a n s w h ich C a l i f o r n i a S t a t e - c h a r t e r e d a s s o c i a t i o n s are
p e r m it te d to make i s t h a t a s i n g l e lo a n may n o t e x c e e d 1
p e r c e n t o f th e book v a lu e o f th e t o t a l a s s e t s . I t i s
c o n c e i v a b l e , t h e r e f o r e , t h a t t h e lo a n p o r t f o l i o o f a
C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n
c o u ld c o n s i s t o f more lo a n s e x c e e d in g $2 0 ,0 0 0 th a n c o u ld
th e lo a n p o r t f o l i o o f a F e d e r a l S a v in g s and Loan A s s o c ia
t i o n l i m i t e d t o i n v e s t i n g o n ly 15 P©** c e n t o f i t s a s s e t s
i n su eh l o a n s .
U n lik e a F e d e r a l S a v in g s and Loan A s s o c i a t i o n , an
in s u r e d C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n
L oc. c i t .
13 '
^ L o a n -v a lu e r a t i o ” i s th e p e r c e n ta g e lo a n e d i n
r e l a t i o n to th e a p p r a is e d v a lu e o f th e p r o p e r t y . C a lifo rn ia
S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s may lo a n up
to 80 p e r c e n t on th e f i r s t $ 1 0 ,0 0 0 o f a p p r a is e d v a lu e
and 70 p e r c e n t on th e r em a in in g p o r t i o n . L o c. c i t .
96
a s s o c i a t i o n i s e n t i r e l y p r o h i b it e d from m aking any lo a n
i n t e r r i t o r y l o c a t e d beyond $0 m i l e s from i t s p r i n c i p a l
o f f i c e , e x c e p t i n th e t e r r i t o r y i n w h ich i t was o p e r a tin g
a s o f June 2 7 , 1934* ^ A ls o u n l ik e a F e d e r a l S a v in g s and
Loan A s s o c i a t i o n , a C a l i f o r n i a S t a t e - c h a r t e r e d a s s o c i a t i o n
*
i s p e r m it t e d , to a v e r y l i m i t e d e x t e n t , t o own, r e n t ,
m anage, and o p e r a te r e s i d e n t i a l u n i t s p r i n c i p a l l y f o r th e
occu p an cy o f v e t e r a n s . -* -5
B oth F e d e r a l and C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s
and lo a n a s s o c i a t i o n s a re a llo w e d t o make lo a n s s e c u r e d
by w ith d ra w a b le a c c o u n ts and to i n v e s t t o an u n lim it e d
e x t e n t i n U n ite d S t a t e s Government o b l i g a t i o n s and o b l i g a
t i o n s o f th e F e d e r a l Home Loan Bank S y stem . C a l i f o r n i a
S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s have a n o th e r
in v e s tm e n t p r i v i l e g e n o t a f f o r d e d F e d e r a l S a v in g s and Loan
A s s o c i a t i o n s ; t h e y may i n v e s t , t o a l i m i t e d e x t e n t , i n
o b l i g a t i o n s o f th e ty p e u s u a l l y l e g a l f o r in v e s tm e n t by
m u tu al s a v in g s b a n k s, 16 and th e y may make lo a n s se c u r e d by
R u le s and R e g u la t io n s f o r In su r a n c e o f A c c o u n ts
(W a sh in gto n , D .C .: Home Loan Bank B oard , 1951T7 S e c t i o n
I 6 3 . 9 .
1 ^
F iv e per c e n t o f i t s a s s e t s may be i n v e s t e d i n
su ch p r o p e r ty . 195>1 E d i t i o n , B u ild in g and Loan A c t , S t a t e
o f C a l i f o r n i a , A r t i c l e IX , S e c t i o n 9*10-
M utual s a v in g s ban ks o p e r a te p r im a r ily i n
e a s t e r n s t a t e s . T hese f i n a n c i a l i n s t i t u t i o n s a r e s im ila r
to s a v in g s and lo a n a s s o c i a t i o n s . ________________________
97
su ch o b l i g a t i o n s i n an amount n o t e x c e e d in g t h a t w h ich
th e y a r e e n t i t l e d t o i n v e s t . ^
O ther f a c t o r s w h ich i n f l u e n c e th e in v e s tm e n t p o r t
f o l i o * The t y p e s o f in v e s t m e n t s and t h e i r p r o p o r t io n a t e
am ounts made by a s a v in g s and lo a n a s s o c i a t i o n r e s t s on
th e d e c i s i o n o f i t s management i n th e l i g h t o f l e g a l l i m i
t a t i o n s and econom ic c o n d i t i o n s . T a b le I I I , page 9 8 > i s
i n d i c a t i v e o f th e w ide v a r i a t i o n w h ieh may e x i s t i n th e
in v e s tm e n t p o l i c y o f s a v in g s and lo a n a s s o c i a t i o n s i n th e
same a r e a . The m ost s t a r t l i n g d i f f e r e n c e b e tw e e n th e
p o r t f o l i o s o f S o u th e r n F e d e r a l S a v in g s and Loan A s s o c ia
t i o n and W ils h ir e F e d e r a l S a v in g s and Loan A s s o c i a t i o n o f
Los A n g e le s , l i e s i n th e p r o p o r t io n a t e am ounts o f fu n d s
w h ich e a c h h a s i n v e s t e d i n e a r n in g and l i q u i d a s s e t s . A
co m p a riso n o f th e b a la n c e s h e e t s o f e a ch i n d i c a t e s t h a t
17
C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n
a s s o c i a t i o n s may i n v e s t t o an u n lim it e d e x t e n t i n bonds o f
th e S t a t e o f C a l i f o r n i a , or o f any c o u n ty , m u n i c i p a l i t y ,
or s c h o o l d i s t r i c t i n C a l i f o r n i a . An amount n o t e x c e e d in g
10 p e r c e n t o f th e t o t a l a s s e t s o f a C a l i f o r n i a S t a t e -
c h a r te r e d s a v in g s and lo a n a s s o c i a t i o n may be i n v e s t e d in
b o n d s, o th e r s e c u r i t i e s , and b a n k e rs * a c c e p t a n c e s w h ich
a re l e g a l f o r in v e s tm e n t by banks i n C a l i f o r n i a ; r a i l r o a d
and p u b lic u t i l i t y bonds approved b y th e b u i l d i n g and lo a n
c o m m issio n e r ; and n o t e s , b o n d s, and d e b e n tu r e s o r o th e r
o b l i g a t i o n s o f n a t i o n a l m ortgage a s s o c i a t i o n s or s i m i l a r
c r e d i t i n s t i t u t i o n s . 1951 E d i t i o n , B u ild in g and Loan A c t ,
S t a t e o f C a l i f o r n i a , A r t i c l e IX , S e c t i o n 9 * 0 2 .
98
TABUS I I I
CONDENSED STATEMENTS OF CONDITION OF SOUTHERN FEDERAL SAVINGS AND LOAN ASSOCIATION AND
WILSHIRE FEDERAL SAVINGS AND LOAN ASSOCIATION OF LOS ANGELES, June 30, 1951
Southern Federal Savings and Loan Association
June 30, 1951
Wilshire Federal Savings and Loan Association of Los Angeles
June 30, 1951
Assets
First Mortgage Loans
Loans Secured Shares
Investments and Securities'*
Cash on Hand and in Banks
Furniture, Fixtures and Equipment, Net
Deferred charges and other Assets
Total Assets
Liabilities
Per cent
•
Per cent
to total to total
Assets Assets Assets
$7,233,91*5.25 87.82 First'Mortgage Loans $ 8,785,721*.76 62.07
191,51*2.51
2.32 Loans on Savings Accounts 79,827.08 .56
1*80,537.50 5.83
Properties Sold on Contract 191,102.31 1.35
299,631.27
3.6U Real Estate Owned and in Judgement 1*1,61*0.1*5 .29
26,391.73 .32 Investments and Securities7 * 600,000.00 lt.2l*
i*,931.214.
.07
Cash on Hand and in Banks
1 * , 310,975.31* 30.1*5
Furniture, Fixtures, and Equipment,
Leasehold Improvements ll*5,973.82 l.Oi*
$8,236,979.50 100.00 Deferred Charges and other Assets None .00
Total Assets $11*, 155^21*5.76 100.00
Per cent to Per cent to
total total
Liabilities Liabilities Liabilities
Savings and Investment Shares $6,288,983.12
76.35
Savings and Investment Shares
$10,962,995.33 77.1*3
Advances from Federal Home Loan Bank i,ol*7,Soo.oo 12.71 Advances from Federal Home Loan Bank None .00
Loans in Process
389,323.1*3 U.73
Loans in Process 2,581*, 189.90 18.26
Miscellaneous Liabilities ll*,930.06 .18 Miscellaneous Liabilities 51*,030.38
.39
Specific Reserves 6,572.30 .09 Specific Reserves
709.85
.01
General Reserves and Surplus
1*89,670.59 5.91* General Reserves and Surplus 553,320.30
3.91
Total Liabilities
1,236,979*50 100.00 Total Liabilities $H*,l55,2[*5.76 100.00
"Investments and Securities" include holdings of United States Government securities and Federal Home Loan obligations. .
SOURCE; Balance sheets of Southern Federal Savings and Loan Association and Wilshire Federal Savings and Loan Association of Los Angeles.
99
S o u th e rn F e d e r a l S a v in g s and Loan A s s o c ia t io n * s a s s e t s
ap p ea r t o h ave a g r e a t e r e a r n in g c a p a c it y th a n t h o s e o f
W ils h ir e F e d e r a l S a v in g s and Loan A s s o c i a t i o n o f Los
A n g e le s , b u t t h a t the l a t t e r a s s o c i a t i o n i s i n a more
l i q u i d p o s i t i o n th a n th e fo r m e r . M easu rin g l i q u i d i t y by
th e amount o f c a sh and U n ite d S t a t e s Government o b l i g a
tions-*-® t o t o t a l a s s e t s , i t a p p e a r s t h a t th e a s s e t s o f
S o u th e r n F e d e r a l S a v in g s and Loan A s s o c i a t i o n are 9.^-7 p er
c e n t l i q u i d , w h erea s th e a s s e t s o f W ils h ir e F e d e r a l S a v
i n g s and Loan A s s o c i a t i o n o f Los A n g e le s a r e 3 0 . lj.5 p e r
c e n t l i q u i d . A n oth er m ajor d i f f e r e n c e a p p a re n t in th e
co m p a riso n o f t h e s e b a la n c e s h e e t s i s th e p e r c e n ta g e d i f
f e r e n c e s i n th e l i a b i l i t y ite m , " lo a n s i n p r o c e s s . ” T h is
ite m r e p r e s e n t s th e amount o f money com m itted but n o t y e t
d is b u r s e d t o b o r r o w e r s. Such f u n d s , i f com m itted t o lo a n s
18
The b a la n c e s h e e t s i n T a b le I I I , page 9 ®> do n o t
d i f f e r e n t i a t e b etw een U n ite d S t a t e s Government o b l i g a t i o n s
and F e d e r a l Home Loan Bank o b l i g a t i o n s . T h ese ite m s are
grou p ed t o g e t h e r on t h e s e b a la n c e s h e e t s a s " in v e s tm e n ts
and s e c u r i t i e s . ” S in c e U n ite d S t a t e s Government o b l i g a
t i o n s a re n o t l i s t e d s e p a r a t e l y , and s i n c e i t i s assum ed
t h a t " in v e s tm e n ts and s e c u r i t i e s ” are p r im a r ily U n ite d
S t a t e s Government o b l i g a t i o n s , f o r th e p u rp o se o f t h i s
d i s c u s s i o n o f l i q u i d i t y , th e am ounts o f " in v e s tm e n ts and
s e c u r i t i e s ” a re r e f e r r e d t o a s " U n ited S t a t e s Government
o b l i g a t i o n s . ” W hile i t i s r e a l i z e d t h a t t h i s i s n o t
e n t i r e l y a c c u r a t e , su ch in a c c u r a c y seem s u n a v o id a b le i n
v ie w o f th e in a d eq u a c y o f in f o r m a t io n .
1 0 0
on e x i s t i n g s t r u c t u r e s may b e d is b u r s e d a lm o st Im m e d ia te ly ;
and i f c o n s t r u c t i o n lo a n com m itm ents, w i l l p r o b a b ly be
d is b u r s e d i n from 60 t o 9 0 d a y s , d ep en d in g on th e tim e
n e c e s s a r y f o r c o n s t r u c t i o n . ^ I f th e am ounts r e p r e s e n t e d
i n lo a n s In p r o c e s s w ere d is b u r s e d im m e d ia te ly a f t e r th e
p r e p a r a t io n o f t h e s e b a la n c e s h e e t s , assum ing t h a t such
d is b u r s e m e n ts w ould be made from c a sh on hand o r e a sh
o b ta in e d from th e c o n v e r s io n o f U n ite d S t a t e s Government
s e c u r i t i e s , th e l i q u i d i t y p o s i t i o n ( a s m easured by ca sh
and U n ite d S t a t e s Governm ent o b l i g a t i o n s to t o t a l a s s e t s )
o f S o u th e r n F e d e r a l S a v in g s and Loan A s s o c i a t i o n w ould be
lo w ered t o I 4 . . 7I 4 . p e r c e n t and t h a t o f W estern F e d e r a l S av
i n g s and Loan A s s o c i a t i o n o f Los A n g e le s lo w e re d t o l6*i^3
p e r c e n t . I t seems Im p ortan t t o d ed u ct th e amount o f
lo a n s In p r o c e s s from th e t o t a l amount o f c a sh and U n ite d
S t a t e s Government o b l i g a t i o n s i n o r d e r t o have a more
a c c u r a te p i c t u r e o f th e l i q u i d i t y p o s i t i o n o f a g i v e n s a v
i n g s and lo a n a s s o c i a t i o n . ^0
I t a p p ea rs t h a t W ils h ir e F e d e r a l S a v in g s and Loan
19
Funds f o r c o n s t r u c t i o n le n d in g a r e d is b u r s e d to
th e b orrow er a s c o n s t r u c t i o n p r o g r e s s e s .
20
I f fu n d s t o m eet lo a n com m itm ents w ere d e r iv e d
from b o r r o w in g s from th e F e d e r a l Home Loan Bank, t h i s
w ould i n c r e a s e " ad van ces from th e F e d e r a l Home Loan Bank"
and th u s d e c r e a s e th e amount w h ich th e a s s o c i a t i o n c o u ld
borrow from t h i s so u rc e a t a l a t e r t im e .
1 0 1
A s s o c i a t i o n o f Los A n g e le s w ould be i n a p o s i t i o n t o m eet
w ith d r a w a l r e q u e s t s more p ro m p tly i n th e e v e n t t h a t such
r e q u e s t s e x c e e d e d th e a s s o c i a t i o n 1s a b i l i t y to m eet them
th r o u g h th e i n f lo w o f new s a v in g s and incom e from paym ents
on m ortgage lo a n s , th a n would S o u th e r n F e d e r a l S a v in g s and
Loan A s s o c ia t io n * T h is seem s l o g i c a l s i n c e th e form er
a s s o c i a t i o n h a s a h ig h e r p e r c e n ta g e o f i t s a s s e t s i n a
l i q u i d form and h a s no F e d e r a l Home Loan Bank a d v a n ce s
o u ts ta n d in g * On th e o t h e r hand, th e a s s e t s o f S o u th e rn
F e d e r a l S a v in g s and Loan A s s o c i a t i o n have a g r e a t e r earn in g
c a p a c ity * T h is may b e n e f i t i n v e s t o r s th r o u g h h ig h e r
d i v i d e n d s , l a r g e r a d d i t i o n s to r e s e r v e s f o r l o s s e s , or
l a r g e r a d d i t i o n s to u n d iv id e d p r o f i t s ^ w h ich may be u sed
to su pp lem en t e a r n in g s i n o r d e r to pay d iv id e n d s a t a
l a t e r tim e . W ith a l a r g e r p e r c e n ta g e o f i t s a s s e t s i n
v e s t e d i n l o a n s , th e a s s e t s o f S o u th e r n F e d e r a l S a v in g s
and Loan A s s o c i a t i o n are m ore v u ln e r a b le to l o s s e s th an
a re th o s e o f W ils h ir e F e d e r a l S a v in g s and Loan A s s o c i a t i o n
o f Los A n g e le s ; t h e r e f o r e , th e r e s e r v e s o f th e form er
a s s o c i a t i o n sh o u ld be h ig h e r i n o r d e r t o e f f e c t a compa
r a b le m easure o f s a f e t y , assum ing t h a t th e r i s k e le m e n t
21
U n d iv id e d p r o f i t s a r e shown on th e b a la n c e
s h e e t s i n T a b le I I I a s ” s u r p l u s .”
University ot bouthern California U br£f^
102
i n e a c h lo a n p o r t f o l i o i s th e sam e. In e f f e c t , th e r e
s e r v e s o f S o u th e r n F e d e r a l S a v in g s and Loan A s s o c i a t i o n
a re s l i g h t l y h ig h e r th a n th o s e o f W ils h ir e F e d e r a l S a v in g s
and Loan A s s o c i a t i o n o f Los A n g ele s* W ith ou t kn ow led ge
o f th e m ortgage lo a n p o r t f o l i o s o f e a c h , one can n ot assum e
t h a t th e d i f f e r e n c e i n t h e s e in v e s tm e n t p o r t f o l i o s e x i s t s
b e c a u se one management s t r e s s e s s a f e t y above e a r n in g s ,
b u t , r a t h e r , t h a t th e management o f one a p p e a r s to s t r e s s
l i q u i d i t y , w h ile th e management o f th e o t h e r a p p ea rs t o
s t r e s s e a r n in g s*
The r e l a t i o n s h i p e x i s t i n g betw een t h e demand f o r
' m o rtgag e fu n d s and th e su p p ly o f lo a n a b le fu n d s a t any
p a r t i c u l a r tim e and i n any p a r t i c u l a r a r e a may be more
im p o r ta n t i n d e te r m in in g th e p r o p o r t io n o f th e fu n d s w h ich
a g iv e n s a v in g s and lo a n a s s o c i a t i o n i n v e s t s i n m ortgage
lo a n s th a n i n th e im p o rta n ce w h ich i t s management p l a c e s
on m a in t a in in g a h ig h d e g r e e o f l i q u i d i t y * D u ring World
War I I , th e amount o f s a v in g s i n s a v in g s and lo a n a s s o c i a
t i o n s r o s e , b u t th e demand f o r m ortgage lo a n s d e c li n e d
l a r g e l y due t o b u i ld in g r e s t r i c t i o n s * T a b le IV , page 1 0 3 ,
shows how t h i s s i t u a t i o n a f f e c t e d th e p r o p o r t io n a t e amounts
o f m o r tg a g e s h e l d by s a v in g s and lo a n a s s o c i a t i o n s . S a v
in g s and lo a n a s s o c i a t i o n h o ld in g s o f m ortgage lo a n s were
s u b s t a n t i a l l y lo w e r d u r in g th e y e a r s o f W orld War I I th a n
103
TABLE IV
COMPARISON OF SAVINGS AND LOAN ASSOCIATIONS IN LOS ANGELES
COUNTY AND SAVINGS AND LOAN ASSOCIATIONS OPERATING
THROUGHOUT THE UNITED STATES AS TO THE PERCENTAGE
OF FIRST MORTGAGE LOANS TO TOTAL ASSETS, 19U1-1950
End of
Year
Los Angeles County savings
and loan association m em
bers of the Federal H om e
Loan Bank System
All United States savings
and loan association m em
bers of the Federal H om e
Loan Bank System
191+1 89. 8$ 81. 7$
191+2 85.8
79.1+
191+3
79.8
73.1
19W + 69.8
66.5
191+5 65.7 62.8
191+6 75.8
71.9
191+7 80.8
77.1+
191+8 85.1+ 80. 1 +
191+9 86.3 80.5
1950
87.1 81.9
SO U R C E : Trends in the Savings and Loan Field (Washington, D.C.: Horne
Loan Bank Board, 1951), Page 6, Table 3. Data for the above
table also made available by the Eleventh District Federal
Home Loan Bank.
xoi).
d u r in g th e y e a r s p r e c e d in g or f o l l o w i n g th e War. C onse
q u e n t ly , th e r e l a t i v e l y h ig h d e g r e e o f l i q u i d i t y m ain
t a in e d by s a v in g s and lo a n a s s o c i a t i o n s d u r in g th e W orld
War I I p e r io d was l a r g e l y due to a low demand f o r m ortgage
fu n d s r e l a t i v e t o th e amount o f fu n d s h e l d by s a v in g s and
lo a n a s s o c i a t i o n s . T h e r e f o r e , th e r e t u r n p a id on w it h -
pp
draw ab le a c c o u n ts dropped d u r in g th e War p e r io d . T h is
was d u e, i n p a r t , t o th e f a c t t h a t s a v in g s and lo a n a s s o c i
a t i o n e a r n in g s d e c li n e d a s m o rtg a g e lo a n s r e p r e s e n t e d a
s m a lle r p e r c e n ta g e o f t o t a l a s s e t s . T h is was a l s o c a u se d
by th e f a c t t h a t s a v in g s and lo a n a s s o c i a t i o n s had l e s s
d e s i r e to a t t r a c t f u r t h e r s a v i n g s 5 a s a r e s u l t o f th e h ig h
l e v e l o f s a v in g s accom panying th e War p e r io d , s a v in g s
flo w e d i n t o a s s o c i a t i o n s a t a h ig h e r r a t e th a n fu n d s c o u ld
p r o f i t a b l y be em ployed i n m ortgage le n d in g *
A n oth er r e f l e c t i o n o f th e s i g n i f i c a n c e o f th e
demand f o r m ortg age fu n d s i n a g iv e n a r e a t o th e p r o p o r
t i o n o f fu n d s i n v e s t e d i n m ortga ge lo a n s by s a v in g s and
lo a n a s s o c i a t i o n s i n t h a t a r e a i s a l s o i n d i c a t e d i n T ab le
O ', page 103. T h is t a b l e shows t h a t s a v in g s and lo a n
a s s o c i a t i o n s i n th e Los A n g e le s a r e a have h e ld a h ig h e r
—
John C. C le n d e n in , I n t r o d u c t io n t o I n v e s tm e n ts
(New Y ork: M cG raw -H ill Book C o ., I n c . , 1 9 ^ 0 ), P* 516*
p r o p o r t io n o f t h e i r a s s e t s i n m ortgage lo a n s th a n have
s a v in g s and lo a n a s s o c i a t i o n s i n th e r e s t o f t h e U n ite d
S t a t e s . T h is i s p r im a r ily b e c a u se th e i n c r e a s e i n p o p u la
t i o n h a s b een g r e a t e r i n th e Los A n g e le s a r e a th a n i n th e
r e s t o f th e U n ite d S t a t e s . ^3 C o n s e q u e n tly , t h e r e h a s b e e n
a g r e a t e r demand i n t h i s a r e a f o r fu n d s t o be u se d f o r th e
c o n s t r u c t io n o r p u rc h a se o f hom es. As a r e s u l t , s a v in g s
and lo a n a s s o c i a t i o n s i n Los A n g e le s have m a in ta in e d a
low er d e g r e e o f l i q u i d i t y , have had h ig h e r e a r n in g s , and
have more a g g r e s s i v e l y a tte m p te d to s e c u r e a d d i t i o n a l
s a v in g s th a n have s a v in g s and lo a n a s s o c i a t i o n s i n th e
r e s t o f th e c o u n tr y . T h e r e f o r e , s a v in g s and lo a n a s s o c i a
t i o n s i n t h i s a r e a have p a id a h ig h e r a v e r a g e r e tu r n on
i n v e s t e d s a v in g s th a n have s a v in g s and lo a n a s s o c i a t i o n s
l o c a t e d i n m ost o t h e r p a r t s o f th e U n ite d S t a t e s .
The low d e g r e e o f l i q u i d i t y m a in ta in e d by s a v in g s
and lo a n a s s o c i a t i o n s i n th e Los A n g e le s a r e a a s a r e s u l t
o f c o n c e n t r a t in g m ost o f t h e i r fu n d s i n m ortgage lo a n s h a s
23
B etw een I 9 I 4 .O and 1 9 5 0 , th e p o p u la t io n i n Los
A n g e le s C ounty in c r e a s e d lf.8.1 p e r c e n t , w h ile th e p o p u la
t i o n o f th e U n ite d S t a t e s in c r e a s e d ll^.O p e r c e n t .
P o p u la t io n , R e se a r c h D ep a rtm en t, S e c u r i t y - F i r s t N a t io n a l
Bank o f Los A n g e le s , March 1 3 , 1 950.
2 1+
P e r s o n a l i n t e r v i e w w it h M. F . B. MacBan, A s s i s t
a n t V i c e - P r e s i d e n t , C a l i f o r n i a S a v in g s and Loan L eagu e.
106
not im paired t h e ir a b i l i t y to meet withdrawal r e q u e sts
promptly* T his has been accom plished through the in flo w
o f new sa v in g s, payments on lo a n s , and borrowings from the
F ed era l Home Loan Bank*
C h a r a c te r !s tic s o f mortgage loan s made by sa v in g s
and loan a s s o c i a t i o n s * Savin gs and loan a s s o c ia t io n s do
not always make the maximum lo a n s p erm itted by law f o r
the fo llo w in g rea so n s: (1) borrowers may not req u est
maximum lo a n s , and (2) the management of an a s s o c ia t io n
may lim it the ty p e , amounts, and le n g th o f terms o f loan s
in order to e f f e c t a d d itio n a l m easures o f s a fe t y and
l i q u i d i t y . I t appears th a t th ere i s a g r e a t d eal o f v a r i
a tio n which e x i s t s regardin g the lend in g p o l i c i e s of sav
in g s and loan a s s o c ia t io n s in the Los A ngeles a rea . Some
sa v in g s and loan a s s o c ia t io n s make maximum loan s p erm itted
by law; o th e rs lend on a much more c o n se r v a tiv e b a s is .
U n less o th erw ise s p e c if i e d , the fo llo w in g c h a r a c t e r is t ic s
o f mortgage loan s apply to th o se which are made by most
sa v in g s and loan a s s o c ia t io n s in t h i s area.
W hile both F ed er a l and C a lifo r n ia S ta te -c h a r te r e d
sa v in g s and loan a s s o c ia t io n s may make loan s exten d ing fo r
a p eriod o f 20 y e a r s , the t y p ic a l loan i s made to extend
107
f o r a p e r io d o f 11 y e a r s . A s T ab le V, page 1 0 8 , i n d i
c a t e s , th e c o s t o f th e lo a n t o th e b o r r o w e r , i n term s o f
th e i n t e r e s t he p a y s , i n c r e a s e s s i g n i f i c a n t l y w it h the
le n g t h o f tim e f o r w h ich th e lo a n i s w r i t t e n . O b v io u s ly ,
one o f th e r e a s o n s many lo a n s are n o t mad© t o e x te n d f o r
a 20 y e a r p e r io d i s b e c a u se some b o r r o w er s r e c o g n iz e th e
economy w h ich can be e f f e c t e d by m aking h ig h e r m o n th ly
paym ents and th u s d e c r e a s e th e n e c e s s a r y l e n g t h o f tim e
o v e r w h ic h th e lo a n m ust e x te n d and th e t o t a l i n t e r e s t
p a id .
Another reason lo a n s may not be w r itte n to extend
fo r 20 years i s th a t the management o f a sa v in g s and loan
a s s o c ia t io n may s t r e s s the elem ent o f s a fe ty in sh o rter
lo a n s above the a d d itio n a l earn in gs which may r e s u lt from
lo n g er lo a n s. As the p erio d of tim e fo r which a loan i s
w r itte n in c r e a s e s , there i s a ls o an in c r e a se in the chance
th a t th ere may be changes in economic c o n d itio n s or oth er
c o n d itio n s which may a f f e c t the a b i l i t y or d e s ir e o f the
borrower to con tin u e making payments on h is lo a n . A lso ,
th ere i s a g r e a te r chance th a t th ere may be a change in
g e n e r a l economic c o n d itio n s or in the ch a ra cter o f the
25
P ersonal in te r v ie w w ith W illiam Purmort, A s s i s t
ant to the V ic e -P r e s id e n t, E lev en th D i s t r i c t F ed eral Home
Loan Bank.
j neighborhood in which the prop erty which se cu res the loan j
! ;
] i s lo c a te d ; th u s, the value o f such prop erty may d e c lin e
sh a rp ly . In the event th a t the borrower does not con tinu e !
j payments and the p rop erty i s fo r e c lo s e d and so ld by the
i
| savin gs and loan a s s o c ia t io n , the p r ic e which may be ob- ;
i
l i
i ta in e d from t h is s a le may be l e s s than the amount o f th e I
i
i
j d eb t. T h erefore, the lon ger the p eriod fo r which a g iv e n
! loan i s w r it te n , the g r e a te r i s the r is k in h eren t in such !
i
i
| a lo a n . |
j The len g th o f time f o r which a g iv en loan i s w ritten ;
; a lso in flu e n c e s the amount o f l i q u i d i t y i t p ro v id es to the
i
! a s s o c ia t io n . As the p eriod o f time f o r which a g iv e n loan '
j i s w r itte n d e c r e a se s, requ ired m onthly payments on the lo a n ’
i
| must in c r e a s e . Thus, as the p erio d o f time fo r which a
i
1 g iv e n loan d e c r e a s e s , the l i q u i d i t y i t w i l l provide to the
i
! a s s o c ia t io n in c r e a s e s . S avings and loan a s s o c ia t io n j
managements may s t r e s s the g r e a te r l i q u i d i t y provided by j
i ,
i sh o rter loan s than the g r e a te r earning c a p a c ity o f lon ger
! lo a n s.
i i
i Even though the t y p ic a l mortgage loan made by sav- j
; in g s and loan a s s o c ia t io n s i s w r itte n to extend fo r 11 (
| y e a r s , the average l i f e of such a loan i s u s u a lly found to :
i
i
, be between th ree and fou r y e a r s. Loans are o fte n prepaid
i
because o f in c r e a se d incomes or because borrowers may be
I 110
I
* a b le t o r e f in a n c e lo a n s w it h fu n d s borrow ed a t lo w e r i n t e r -
i
\ e s t r a te s from oth er len d in g i n s t i t u t i o n s . When loan s made
l
j by s a v in g s and lo a n a s s o c i a t i o n s a re p a id i n f u l l b e f o r e
j m a t u r it y , th e r e i s o f t e n a prepaym ent c h a r g e , a lth o u g h i n
i .
] many c a s e s , b o r r o w er s a re p e r m itt e d t o pay b e tw e en 5 p er
i
! c e n t and 20 p e r c e n t p e r m onth e x t r a w it h no p e n a l t y . I f
j b o rro w ers a re c h a rg ed f o r p r e p a y in g l o a n s , th e ch a r g e
j u s u a l l y r a n g e s from payment o f n i n e t y d a y s ’ i n t e r e s t t o
j paym ent o f 3 p e r c e n t o f th e amount o f th e lo a n .
; Most mortgage loan s made by sa v in g s and loan a s s o c i-
! a t i o n s , a s a re m ost m o rtga ge lo a n s made by o t h e r le n d in g
I I
| i n s t i t u t i o n s , are am ortized lo a n s. Amortized loan s increase'
. •
: the s a fe ty o f the mortgage loan p o r t f o li o because the
p r in c ip a l amounts o f th e se loan s are c o n s ta n tly reduced.
Amortized loan s a lso add li q u i d i t y to the mortgage loan
p o r t f o l i o by b r in g in g i n a c o n s t a n t stream o f paym ents o f ■
! |
! i n t e r e s t and p r i n c i p a l t o th e le n d in g i n s t i t u t i o n . The j
1 a m o r tiz e d lo a n i s a l s o a d v a n ta g e o u s to th e b orrow er i n |
!
i
terms o f convenience and s a f e t y . Undoubtedly i t i s e a s ie r {
i r
f o r m ost i n d i v i d u a l s to b e r e q u ir e d to make r e g u la r p a y -
i 1
! m en ts tow ard th e r e d u c t io n o f a d eb t th a n v o l u n t a r i l y sa v e ■
! i
i r e g u la r ly tow ard th e a c c u m u la tio n o f a sum e q u a l to th e
I
| t o t a l amount of the d eb t. There are probably many more
in d iv id u a ls who e v e n tu a lly own d e b t-fr e e homes because of
I l l
b e in g o b l i g a t e d t o make r e g u la r paym ents th a n t h e r e w ould
be i f payment o f th e f u l l p r i c e a t th e end o f a c e r t a i n
p e r io d o f y e a r s w ere r e q u ir e d .
W hile s a v in g s and lo a n a s s o c i a t i o n s may make m o r t
gage lo a n s up t o 8 0 p e r c e n t o f th e a p p r a is e d v a lu e o f th e
p r o p e r ty , th e a v e r a g e lo a n - v a lu e r a t i o i s b elo w 80 p e r
c e n t . The a c t u a l amount lo a n e d d epend s upon th e a g e ,
l o c a t i o n , and c o n d i t i o n o f th e p r o p e r ty ; th e b o r r o w e r 1s
c r e d i t s t a n d in g ; and th e judgm ent o f th e management c o n
c e r n in g th e g e n e r a l econom ic o u t lo o k and t r e n d s i n th e
p r i c e o f r e a l e s t a t e . ^7 i n o t h e r w o r d s, th e amount lo a n e d
on a g iv e n p i e c e o f p r o p e r ty i s r e l a t e d t o th e d e g r e e o f
r i s k in v o lv e d i n th e lo a n a s i t i s c a l c u l a t e d by th e
management o f th e a s s o c i a t i o n , and th e d e g r e e o f r i s k
w h ich th e management w is h e s t o assu m e.
The lo a n - v a lu e r a t i o i s a v i t a l e lem en t i n th e
s a f e t y o f th e m ortgage lo a n p o r t f o l i o . The d i f f e r e n c e
e x i s t i n g b e tw e en th e a c t u a l amount o f a lo a n and th e
— g
In 1 9 5 0 , th e a v e r a g e r a t i o o f o r i g i n a l lo a n s to
a p p r a i s a l s i n C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n
a s s o c i a t i o n s was 6 6 .7 3 p e r c e n t . F i f t y - s e v e n th A nnual
R eport o f th e B u ild in g and Loan C o m m issio n er, S t a t e o f
C a l i f o r n i a ( C a l i f o r n i a : S t a t e o f C a l i f o r n i a P r in t in g
O f f i c e , I ^ 5 l) 9 P. 9* I t i s p r o b a b le t h a t th e a v e r a g e
l o a n - v a lu e o f lo a n s made by F e d e r a l S a v in g s and Loan A s
s o c i a t i o n s i s n o t s i g n i f i c a n t l y d i f f e r e n t from t h a t o f
C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s .
_________ ^7 D i s t e l h o r s t , o p . c i t . , p . 1 3 6 .
112
ap praised value o f the p roperty se cu rin g the loan d e te r
m ines the ex ten t to which the valu e o f such p rop erty cou ld
d ecrease w ithout im pairing the s e c u r ity of the lo a n . The
im portance of t h i s r e la tio n s h ip i s seen in the event th a t
the borrower d e f a u lt s on loan payments and i t becomes
n ece ssa r y fo r the lender to fo r e c lo s e and s e l l the proper
t y . The g r e a te r the margin between the amount loaned and
the v alu e of the p ro p erty , the g r e a te r i s the lender* s
p r o te c tio n a g a in st lo s s in the even t o f a d e fa u lt by the
borrower.
I t seems obvious th a t i f the lo a n -v a lu e r a t io i s
an im portant elem ent in the s a f e t y o f the mortgage loan
p o r t f o l i o , the ap praised ff v a lu e ” o f p r o p e r tie s secu rin g
lo a n s i s even more s i g n i f i c a n t . Because p r e se n t s e l l i n g
p r ic e s o f r e a l e s t a t e are abnormally high and may d ecrease
s i g n i f i c a n t l y in the event o f a change in economic co n d i
t i o n s , i t i s im portant to the s a f e t y of loan s th a t a p p r a is
a l s be made s u b s t a n t ia lly below a c tu a l s e l l i n g p r ic e s .
That the mortgage loan p o r t f o li o s o f savin gs and loan
a s s o c ia t io n s are p r o te c te d to some ex ten t a g a in st the p os
s i b i l i t y o f a decrease in prop erty v a lu e s i s in d ic a te d ;
p rop erty has been appraised below a c tu a l s e l l i n g p r ic e s ,
and loan s have been made s u b s t a n t ia lly below s e l l i n g
113
p o
p r i c e s .
In c o n t r a s t to com m ercial banks and in s u r a n c e com
p a n i e s , m ost m ortgage lo a n s made and h e ld by s a v in g s and
lo a n a s s o c i a t i o n s are c o n v e n t io n a l lo a n s r a t h e r th a n FHA
and VA l o a n s . ^9 FHA and VA lo a n s have maximum i n t e r e s t
r a t e s o f lj..5 p e r c e n t and i |.0 p er c e n t r e s p e c t i v e l y . The
28
In 1 9 5 0 , th e a v e r a g e a p p r a i s a l - s e l l i n g p r i c e
r a t i o o f lo a n s made by C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s
and lo a n a s s o c i a t i o n s was 7 6 .2 1 p e r c e n t . The a v e r a g e
l o a n - s e l l i n g p r i c e r a t i o o f lo a n s made by t h e s e a s s o c i a
t i o n s was 5 0 .8 6 p e r c e n t . F i f t y - s e v e n th A nnual R ep ort o f
th e B u ild in g and ho an C o m m issio n er, S t a t e o f C a l i f o r n i a ,
p . 9 * I t i s p r o b a b le t h a t t h e s e r a t i o s a r e n o t s i g n i f i
c a n t l y d i f f e r e n t from t h o s e o f lo a n s made by F e d e r a l S av
i n g s and Loan A s s o c i a t i o n s . U n d ou b ted ly one o f th e
r e a s o n s why th e a v e r a g e l o a n - s e l l i n g p r i c e r a t i o i s so low
i s t h a t a g r e a t many lo a n s made by s a v in g s and lo a n a s s o c i
a t i o n s a re s e c u r e d by o ld e r d w e l l i n g s , th e s e l l i n g p r i c e .
o f w h ic h , e v e n i f p r e s e n t econom ic c o n d i t i o n s c o n t in u e ,
w ould be e x p e c te d to d e c r e a s e a t a f a s t e r r a te th a n w ould
t h e s e l l i n g p r i c e s o f new d w e l l i n g s . A l s o , i n th e e v e n t
o f a g e n e r a l d e c l i n e i n r e a l e s t a t e p r i c e s , s e l l i n g p r i c e s
o f o ld e r h o u s e s w ould p r o b a b ly d e c r e a s e more th a n w ould
th o s e o f new d w e l l i n g s . T h e r e fo r e , i t i s p o s s i b l e t h a t
s a v in g s and lo a n a s s o c i a t i o n s 1 m ortgage p o r t f o l i o s may n o t
be so w e l l p r o t e c t e d a g a i n s t a p o s s i b l e d e c l i n e i n r e a l
e s t a t e p r i c e s a s th e above f i g u r e s w ould seem t o i n d i c a t e .
29
At th e end o f 1 9 5 0 , 23*7 p e r c e n t o f t o t a l m o rt
gage lo a n s h e ld by s a v in g s and lo a n a s s o c i a t i o n s i n
C a l i f o r n i a w ere VA or FHA l o a n s . S t a t i s t i c a l Summary,
1951 (W ash in g ton , D .C .: Home Loan Bank B o a rd , 1951)>
p . llj., T ab le 1 2 . In 1 9 5 0 , lj.1.0 p e r c e n t o f th e home lo a n s
h e ld by com m ercial banks i n th e U n ite d S t a t e s , and 61^.0
p e r c e n t o f th e home lo a n s h e ld by in s u r a n c e com p an ies i n
th e U n ite d S t a t e s were VA or FHA l o a n s . W. J . L. Ray,
f,The Home F in a n c in g B u s in e s s i n a P a r t i a l l y M o b iliz e d
E conom y,” Com m ercial and F i n a n c i a l C h r o n ic le , A ugust 9>
1 9 5 1 , P . 521^
Ill*
The c o s t o f m ost o f th e lo a n a b le fu n d s o f a s a v in g s and
lo a n a s s o c i a t i o n i s from 3 .0 p e r c e n t to 3*5 P©** c e n t
( th e a v e r a g e r e t u r n p a id on w ith d r a w a b le a c c o u n t s ) . I t
i s g e n e r a l l y f e l t t h a t a 2 p e r c e n t m argin b etw een th e
c o s t o f fu n d s and th e r e t u r n on fu n d s i s r e q u ir e d to c o v e r
o p e r a t io n e x p e n s e s i n s a v in g s and lo a n a s s o c i a t i o n s .
T h e r e f o r e , s a v in g s and lo a n a s s o c i a t i o n s are l i m i t e d i n
th e amount o f FHA and VA lo a n s w h ich th e y ean p r o f i t a b l y
h o ld .
The p r e s e n c e o f FHA and VA lo a n s le n d s an ele m en t
o f s a f e t y and l i q u i d i t y to th e m ortgage lo a n p o r t f o l i o .
FHA and VA lo a n s add s a f e t y t o th e m ortg age lo a n p o r t f o l i o
b e c a u se m ost o f th e r i s k o f l o s s on t h e s e lo a n s i s b o rn e
by a Government a g en cy r a t h e r th a n by th e le n d in g i n s t i t u
t i o n . 30 fhA and VA lo a n s a l s o add a p o s s i b l e so u r c e o f
l i q u i d i t y t o th e m ortgage lo a n p o r t f o l i o b e c a u se c e r t a i n
o f t h e s e may be s o ld t o th e F e d e r a l N a t io n a l M ortgage
30
FHA I n su r a n c e c o v e r s th e e n t i r e amount o f th e
l o a n . In c a s e o f d e f a u l t on an FHA lo a n , th e l o s s to th e
le n d in g i n s t i t u t i o n i s p a id i n FHA d e b e n tu r e s b e a r in g
2 . 5 p e r c e n t i n t e r e s t . S tr u n k , o p . c i t . , p p . 185-18& .
The V e te r a n s A d m in is t r a t io n g u a r a n te e s 6 0 .0 p e r c e n t o f
th e amount o f a VA l o a n . In c a s e o f d e f a u l t on a VA lo a n ,
th e l o s s t o th e le n d in g i n s t i t u t i o n i s p a id by th e V e t e r
an s A d m in is t r a t io n o n ly to th e e x t e n t o f 6 0 .0 p e r c e n t
o f th e o r i g i n a l amount o f th e l o a n . I b i d . , p . 18 8 .
115
A s s o c i a t i o n , an a g en cy o f th e F e d e r a l Government e s t a b
l i s h e d f o r th e p u rp o se o f o p e r a t in g a s a se co n d a r y m arket
f o r VA and FHA lo a n s and th u s i n c r e a s e th e s u p p ly o f lo w -
p r i c e d e r e d i t f o r home f i n a n c i n g . 31 W hile t h i s p o t e n t i a l
so u r c e o f l i q u i d i t y i s n o t p o s s i b l e a t th e p r e s e n t tim e
due t o th e c u r r e n t r e s t r i c t i o n o f th e F e d e r a l N a t io n a l
M ortgage A s s o c i a t i o n program , i t i s p r o b a b le t h a t t h i s
r e s t r i c t i o n i s o f a tem p orary n a tu r e and t h a t th e F e d e r a l
N a t io n a l M ortgage A s s o c i a t i o n w i l l a g a in , a s i n th e p a s t ,
p r o v id e a p o t e n t i a l so u rc e o f l i q u i d i t y t o m ortgage lo a n
p o r t f o l i o s .
M ost m ortgage lo a n s made by s a v in g s and lo a n a s s o c i
a t i o n s i n the Los A n g e le s a r e a a r e f o r th e p u rc h a se or
c o n s t r u c t i o n o f s i n g l e f a m ily d w e l l i n g s .3^ T h is seem s
E r n e s t M. F i s h e r , "C hanging P a t te r n s o f M ortgage
L en d in g ," The J o u r n a l o f F in a n c e , D ecem ber, 1 9 5 0 , p . 3 1 3 .
U n t i l th e o u tb re a k o f K orean h o s t i l i t i e s , FHA and VA lo a n s
c o u ld be r e a d i l y s o ld t o th e F e d e r a l N a t io n a l M ortgage
A s s o c i a t i o n . S in c e t h i s o c c u r r e n c e , th e fu n d s o f th e
F e d e r a l N a t io n a l M ortgage A s s o c i a t i o n have b e e n s u b s t a n
t i a l l y r e d u c e d . S tr u n k , o p . c i t . , p . 1 9 1 . A t th e p r e s e n t
t im e , t h i s a g e n c y i s b u y in g o n ly t h o s e lo a n s made i n a r e a s
q u a l i f y i n g a s " c r i t i c a l d e f e n s e a r e a s ." Loans made i n th e
Los A n g e le s a r e a a re n o t b e in g p u rc h a sed by th e F e d e r a l
N a t io n a l M ortgage A s s o c i a t i o n a t th e p r e s e n t t im e . D ata
o b ta in e d from t h e F e d e r a l N a t io n a l M ortgage A s s o c i a t i o n ,
Los A n g e le s r e g i o n a l o f f i c e .
32
At th e p r e s e n t t im e , a p p r o x im a te ly 95 c e n t
o f a l l m ortga ge lo a n s h e ld b y s a v in g s and lo a n a s s o c i a t i o n s
i n th e Los A n g e le s a r e a a re se c u r e d by s i n g l e f a m ily
d w e l l i n g s . P e r s o n a l i n t e r v i e w w it h W illia m P urm ort.
n a t u r a l sine© F e d e r a l S a v in g s and Loan A s s o c i a t i o n s are
l a r g e l y r e s t r i c t e d i n t h e i r le n d in g p ow ers t o le n d in g on
s i n g l e o r m u l t i p l e f a m ily d w e l l in g s and C a l i f o r n i a S t a t e -
c h a r te r e d s a v in g s and lo a n a s s o c i a t i o n s can make t h e i r
m ost l i b e r a l lo a n s on s i n g l e f a m ily r e s i d e n c e s . Loans
on f i v e t o s i x f a m i ly d w e l l in g s a re n e x t i n v o lu m e, f o l
low ed by lo a n s on se v e n to 12 f a m ily d w e l l i n g s . 33
The s a f e t y o f th e m ortgage lo a n p o r t f o l i o of a
s a v in g s and lo a n a s s o c i a t i o n i s l a r g e l y d e te r m in e d by th e
p r o p o r t io n o f i t s lo a n s s e c u r e d by o w n e r -o c c u p ie d hom es.
T h is i s b a se d on th e a ssu m p tio n t h a t a b o rro w er w i l l u se
th e f u l l e x t e n t o f h i s a b i l i t y t o m eet paym ents to a v o id
l o s i n g h i s p la c e o f s h e l t e r . As more lo a n s a re s e c u r e d
b y m u l t i p l e u n i t d w e l l i n g s , ap artm en t h o u s e s , and b u s i n e s s
p r o p e r t i e s , r e s p e c t i v e l y , th e d e g r e e o f r i s k i n th e m o r t
gage lo a n p o r t f o l i o i n c r e a s e s b e c a u se th e a b i l i t y and
d e s i r e o f th e b orrow er t o make paym ents i s l a r g e l y d ep en d
e n t on th e p r o f i t a b i l i t y o f th e p r o p e r ty r a t h e r than upon
th e n e c e s s i t y o f s h e l t e r .
The c h a r a c t e r i s t i c s o f c o n v e n t io n a l m ortgage lo a n s
made on one t o f o u r f a m i ly d w e l l in g s by s a v in g s and lo a n
a s s o c i a t i o n s d i f f e r , i n many c a s e s t o a la r g e e x t e n t , from
c o n v e n t io n a l lo a n s made by b a n k s and in s u r a n c e c o m p a n ie s.
33
L oc. c i t .
117
T h is i s a r e s u l t o f th e l e g a l r e s t r i c t i o n s under w h ich
t h e s e i n s t i t u t i o n s m ust o p e r a t e , 3^ and th e le n d in g p o l i c i e s
f o l lo w e d by su ch i n s t i t u t i o n s * W hile t h e r e a re s u b s t a n t i a l
d i f f e r e n c e s i n th e le n d in g p o l i c i e s o f i n d i v i d u a l b a n k s,
in s u r a n c e c o m p a n ie s, and s a v in g s and lo a n a s s o c i a t i o n s due
t o th e d i f f e r e n c e s i n t h e i r r e s p e c t i v e m anagem ents, t h e r e
are c e r t a i n le n d in g p o l i c i e s f e l t t o be c h a r a c t e r i s t i c
o f t h e s e i n s t i t u t i o n a l grou p s*
In g e n e r a l , in s u r a n c e com p an ies r e s t r i c t t h e i r co n
v e n t i o n a l m o rtg a g e le n d in g t o m aking l a r g e r lo a n s and
lo a n s on new er homes l o c a t e d i n more r e c e n t l y d e v e lo p e d
and more e x c l u s i v e s e c t i o n s th a n lo a n s made by b an k s or
s a v in g s and lo a n a s s o c i a t i o n s * F u r t h e r , in s u r a n c e com
p a n ie s make lo a n s p r im a r ily upon e x i s t i n g s t r u c t u r e s r a th e r
th an p r o v id in g fu n d s f o r c o n s t r u c t io n p u r p o s e s . In c o n
t r a s t , b o th banks and s a v in g s and lo a n a s s o c i a t i o n s make
m ortga ge lo a n s on o l d e r homes l o c a t e d i n o ld e r and l e s s
d e s i r a b l e s e c t i o n s * S a v in g s and lo a n a s s o c i a t i o n s te n d to
make lo a n s r e l a t i v e l y h ig h e r i n lo a n - v a lu e r a t i o and to
3k
N a t io n a l banks are p e r m it te d t o make r e a l e s t a t e
lo a n s up t o 60 p e r c e n t o f th e a p p r a is e d v a lu e o f th e
p r o p e r ty , and f o r a p e r io d o f te n y e a r s* R ich ard IT *
R a t c l i f f , op . c i t *, p . 2ij.7« C a l i f o r n i a l i f e in s u r a n c e
com p an ies may make r e a l e s t a t e lo a n s up t o 6 6 - 2 / 3 p e r c e n t
o f th e a p p r a is e d v a lu e o f th e p r o p e r ty . In su r a n c e C ode,
S t a t e o f C a l i f o r n i a ( C a l i f o r n i a : S t a t e o f C a l i f o r n i a
P r i n t i n g D i v i s i o n , 195>Q)» A r t i c l e 3> S e c t i o n 1176.____________
1 1 8
w rit© lo a n s t o e x te n d f o r a lo n g e r p e r io d o f tim e th a n do
b a n k s. A l s o , i t i s g e n e r a l l y f e l t t h a t m ost ban ks plae©
more im p o rta n ce upon th e c r e d i t s ta n d in g o f th e b orrow er
th a n do m ost s a v in g s and lo a n a s s o c i a t i o n s .
The p r i n c i p a l p u rp o se f o r w h ich m ortgage lo a n s a re
made by s a v in g s and lo a n a s s o c i a t i o n s i n C a l i f o r n i a i s f o r
th e c o n s t r u c t i o n o f d w e l l i n g s . ^ 5 As p r e v i o u s l y s t a t e d ,
in s u r a n c e co m p an ies p r i m a r i ly r e s t r i c t t h e i r m ortgage
le n d in g t o m aking lo a n s on e x i s t i n g d w e l l i n g s . W hile some
banks i n th e L os A n g e le s a r e a a r e a c t i v e i n c o n s t r u c t i o n
le n d i n g , many do n o t make any c o n s t r u c t i o n l o a n s . M ost
s a v in g s and lo a n a s s o c i a t i o n s i n th e Los A n g e le s a r e a do
c o n s t r u c t i o n l e n d i n g . S a v in g s and lo a n a s s o c i a t i o n s are
b e l i e v e d t o be more a c t i v e than any o t h e r le n d in g i n s t i t u
t i o n i n f in a n c in g th e c o n s t r u c t i o n o f homes i n th e Los
A n g e le s a r e a .
I n g e n e r a l , s a v in g s and lo a n a s s o c i a t i o n s h ave more
l i b e r a l le n d in g p o l i c i e s w it h r e g a r d t o c o n v e n t io n a l
le n d in g th a n do banks or in s u r a n c e c o m p a n ie s. T h is i s a
n a t u r a l o u tg r o w th o f th e d i f f e r e n c e s i n t h e r e s p o n s i b i l i
t i e s w h ich t h e s e i n s t i t u t i o n s have to t h e i r i n v e s t o r s .
35
S t a t i s t i c a l Summary> 1 9 5 1 , p . 2 3 , T ab le 1 7 .
119
S avings and loan a s s o c ia t io n s have p r im a r ily shareholder
l i a b i l i t i e s , whereas banks and insu rance companies have
p rim a rily c r e d ito r l i a b i l i t i e s . As a r e s u l t , sa v in g s and
loan a s s o c ia t io n s are ab le to take more r is k in t h e ir
len d in g p o l i c i e s than can e it h e r banks or in su ran ce com
p a n ie s , Due to the d iff e r e n c e s in the w ithdraw al p r i v i
le g e s o f in v e s t o r s in savin gs and loan a s s o c ia t io n s and
banks, sa v in g s and loan a s s o c ia t io n s are ab le to make
co n v en tio n a l loan s w r itte n to extend over a lon ger p erio d
o f time than can banks. Since sa v in g s and loan a s s o c ia
t io n s pay a h igh er retu rn to t h e ir in v e s to r s than do
e it h e r banks or in su ran ce com panies, i t i s n ecessa ry fo r
sa v in g s and loan a s s o c ia t io n s to earn a h ig h er retu rn on
t h e ir in v e ste d fu n d s. The rate o f retu rn which a len d in g
i n s t i t u t i o n must earn i s n a tu r a lly r e f l e c t e d in i t s len d
in g p o l i c i e s .
The r a te o f in t e r e s t charged on co n v en tio n a l loan s
i s p r im a r ily determ ined by the c a lc u la te d r is k in v o lv ed
in the lo a n . The c a lc u la te d r i s k , as has been m entioned
p r e v io u s ly , i s dependent upon such f a c t o r s as the loan -
v alu e r a t io ; the age, appearance, and neighborhood in
which the prop erty secu rin g the loan i s lo c a te d ; and the
le n g th o f term fo r which the loan i s w r it t e n . Hence,
in t e r e s t r a te s vary according to in d iv id u a l lo a n s. In te r e st
120
r a t e s c h a r g ed on m ortgage lo a n s te n d t o be lo w e s t i n i n s u r
ance c o m p a n ie s, s l i g h t l y h ig h e r i n b a n k s , and s t i l l h ig h e r
i n s a v in g s and lo a n a s s o c i a t i o n s . ^ T h is i s p r im a r ily due
t o th e amount o f r i s k w h ich t h e s e i n s t i t u t i o n s w i l l assum e
i n m ortgage le n d in g * H ow ever, i t i s p r o b a b le t h a t on a
g iv e n lo a n , s a v in g s and lo a n a s s o c i a t i o n s w ould c h a r g e a
h ig h e r i n t e r e s t r a t e th a n w ould e i t h e r in s u r a n c e com p an ies
or b a n k s , s i n c e s a v in g s and lo a n a s s o c i a t i o n s m ust e a r n a
h ig h e r r e t u r n on t h e i r fu n d s th a n m ust banks or in s u r a n c e
com panies* S in c e th e r e i s a w ide d i f f e r e n c e w it h r e g a r d
t o t h e d e g r e e s o f r i s k in v o lv e d i n lo a n s made by i n d iv i d u a l
s a v in g s and lo a n a s s o c i a t i o n s , th e r e i s a l s o a d i f f e r e n c e
i n th e i n t e r e s t r a t e s c h a rg ed by i n d i v i d u a l a s s o c i a t i o n s .
T ab le V I, page 1 2 1 , shows how v a r io u s i n t e r e s t r a t e s
i n f l u e n c e th e c o s t o f lo a n s t o b o r r o w e r s.
The t o t a l c o s t o f th e lo a n to th e b orrow er i n c lu d e s
At th e p r e s e n t tim e i n th e Los A n g e le s a r e a ,
i n t e r e s t r a t e s c h a r g ed by in s u r a n c e com p an ies and banks are
I|.. 75 pei* c e n t and 5 p e r c e n t r e s p e c t i v e l y . I n t e r e s t r a t e s
ch a rg ed by s a v in g s and lo a n a s s o c i a t i o n s range b e tw e en
5 p e r c e n t and 6 .5 p e r c e n t , d ep en d in g upon th e p a r t i c u l a r
lo a n and th e p a r t i c u l a r a s s o c i a t i o n t h a t g r a n t s t h e lo a n .
The m ost f r e q u e n t i n t e r e s t r a t e s ch a rg ed by s a v in g s and
lo a n a s s o c i a t i o n s i n t h i s a r e a a r e 5 * 5 P© ** c e n t and 6 .0
p e r c e n t . I n t e r e s t r a t e s c i t e d above a p p ly o n ly t o c o n
v e n t i o n a l l o a n s .
TABLE VI
M O N T H L Y P A Y M E N T S A N D T O T A L IN TER EST PAID O N A N $8*000 L O A N , A SSU M IN G A T E N Y E A R
A M O R T IZ A T IO N PE R IO D A N D V A R Y IN G IN TER EST R A T E S
t.O Per cent t.5 Per cent 5.0 Per cent 5.5 Per cent 6.0 Per cent
Monthly Payments3 , $ 81.00 $ 82.91
$ 8U.85
$ 86.82 $ 88.82
Interest paid 1, 720.00 l,9t9.20 2, 182.00 2, t l 8 .tO 2, 658.tO
a
Principal and interest*
SO U R C E; Monthly Payments and Total Interest Paid on a H om e Purchase Assuming Varying Down
Payments, Interest Rates, and Amortization Periods, Research Department, Security-
First National Bank of Los Angeles, July 6, 1956,"'p* 3*
H
fV >
H
122
n o t o n ly th e i n t e r e s t r a t e , b u t a l s o th e f e e s ch a rg ed by
th e le n d in g i n s t i t u t i o n * Such c h a r g e s in c lu d e a "com m is
s i o n ” or "premium” c h a r g ed th e b orrow er f o r th e p r i v i l e g e
o f r e c e i v i n g th e lo a n and a " s e r v ic e fe e " w h ich c o v e r s th e
c o s t s o f a p p r a i s a l s , draw ing th e lo a n p a p e r s , and p r o c e s s
in g th e lo a n . T h ese c h a r g e s ten d t o be h ig h e r i n s a v in g s
and lo a n a s s o c i a t i o n s th a n i n banks or in s u r a n c e com
p a n i e s . S e r v ic e f e e s and co m m issio n s ch a rg ed by s a v in g s
and lo a n a s s o c i a t i o n s v a r y a c c o r d in g t o p a r t i c u l a r lo a n s
and t o th e p o l i c i e s o f i n d i v i d u a l a s s o c i a t i o n s * S e r v ic e
f e e s u s u a l l y ch a rg ed by s a v in g s and lo a n a s s o c i a t i o n s i n
th e Los A n g e le s a r e a ran ge b etw een $ 2 5 and $ 5 0 . In some
c a s e s t h e r e i s no co m m issio n ch a rg ed on lo a n s made on
e x i s t i n g d w e l l in g s ; h o w ev e r, c o m m issio n s on lo a n s made on
e x i s t i n g d w e l l in g s may amount t o from 1 .0 p e r c e n t t o 1*5
p e r c e n t o f th e t o t a l amount o f th e l o a n . As a r e s u l t o f
37
As maximum i n t e r e s t r a t e s w h ich may be c h a r g ed
on PHA and VA lo a n s are s t i p u l a t e d by th e G-overnment
a g e n c y i n s u r in g or g u a r a n t e e in g t h e s e l o a n s , so maximum
c h a r g e s , i n a d d i t i o n to i n t e r e s t r a t e s , w h ich may be made
i n c o n n e c t io n w it h m aking su ch lo a n s a re a l s o s t i p u l a t e d
by t h e s e a u t h o r i t i e s * As c h a r g e s i n c o n n e c tio n w it h making
c o n v e n t io n a l lo a n s v a r y a c c o r d in g t o th e le n d in g i n s t i t u
t i o n , so c h a r g e s i n c o n n e c t io n w it h m aking fhA and VA
lo a n s v a r y a c c o r d in g t o th e p o l i c y o f th e le n d in g i n s t i t u
t i o n .
123
th e a d d i t i o n a l work c o n n e c te d w it h m aking c o n s t r u c t io n
l o a n s , i n c lu d i n g p e r i o d i c c h e c k in g o f th e p r o g r e s s o f con
s t r u c t i o n , d is b u r s in g fu n d s p e r i o d i c a l l y , and th e a d d i
t i o n a l r i s k w h ich may be in v o lv e d i n c o n s t r u c t io n l e n d in g ,
th e co m m issio n ch a rg ed on su ch lo a n s i s u s u a l l y h ig h e r
th an t h a t c h a r g ed on lo a n s made on e x i s t i n g d w e l l i n g s .
C om m issions ch a rg ed on c o n s t r u c t i o n lo a n s made by s a v in g s
and lo a n a s s o c i a t i o n s i n th e Los A n g e le s a r e a range b e
tw een 1 .0 p e r c e n t and 3 .0 p e r c e n t o f th e t o t a l amount
o f th e lo a n .
T hat c h a r g e s a s id e from i n t e r e s t r a t e s a r e an
im p o r ta n t so u rc e o f incom e to s a v in g s and lo a n a s s o c i a
t i o n s i s shown by th e f a c t t h a t i n 1 9 5 0 , t h e s e c h a r g e s ,
*
com bined w it h c h a r g e s made f o r p r e p a y in g l o a n s , am ounted
t o 2 0*9 p e r c e n t o f th e g r o s s o p e r a t in g incom e o f s a v in g s
and lo a n a s s o c i a t i o n s . 39
I n summary, t h e r e are s i g n i f i c a n t d i f f e r e n c e s b e
tw een th e m ortgage le n d in g p o l i c i e s o f s a v in g s and lo a n
a s s o c i a t i o n s and t h o s e o f b an k s and in s u r a n c e co m p a n ie s:
38
I n t e r e s t r a t e s a l s o te n d to be h ig h e r on c o n
s t r u c t i o n lo a n s th a n on lo a n s made on e x i s t i n g d w e l l i n g s .
39
^ C a lcu la ted from f i g u r e s from Combined F i n a n c i a l
S ta te m e n ts o f Members o f th e F e d e r a l Home Loan Bank S y stem ,
1 950 (W a sh in gto n , B.C.: Home Loan Bank B oa rd , 1 9 5 1 ) ,
p T S k > T ab le Ho. 2 2 .
12k
( 1 ) s a v in g s and lo a n a s s o c i a t i o n s make p r o p o r t i o n a t e l y more
c o n v e n t io n a l lo a n s th a n do in s u r a n c e com p an ies and b an k s;
( 2 ) s a v in g s and lo a n a s s o c i a t i o n s a r e more a c t i v e i n c o n
s t r u c t i o n le n d in g th a n a r e in s u r a n c e com p an ies o r b a n k s;
( 3 ) s a v in g s and lo a n a s s o c i a t i o n s le n d on o l d e r and l e s s
d e s i r a b l e p r o p e r t i e s th an do in s u r a n c e c o m p a n ie s, and te n d
t o r e q u ir e lo w er down paym ents and lo w e r m o n th ly paym ents
on su ch p r o p e r t i e s th a n do b a n k s; ( k ) s a v in g s and lo a n
a s s o c i a t i o n s are s a id t o p la c e l e s s im p o rta n ce upon th e
c r e d i t s t a n d in g o f th e b orrow er th a n do b a n k s; and ( 5 ) on
c o n v e n t io n a l l o a n s , s a v in g s and lo a n a s s o c i a t i o n s r e q u ir e
lo w e r down paym ents th a n do banks or in s u r a n c e c o m p a n ie s,
and r e q u ir e lo w e r m o n th ly paym ents th a n do b a n k s. C onse
q u e n t ly , i t i s p r o b a b le t h a t s a v in g s and lo a n a s s o c i a t i o n s
make i t p o s s i b l e f o r i n d i v i d u a l s who, i f i t w ere n e c e s s a r y
to r e l y on fu n d s from banks o r in s u r a n c e c o m p a n ie s, m igh t
n o t be a b le t o p u r c h a se o r c o n s t r u c t c e r t a i n d w e l l in g s
w h ich t h e y d e s i r e . As a r e s u l t o f p r o v id in g more c o n
v e n i e n t le n d in g term s th a n b an k s or in s u r a n c e c o m p a n ie s,
s a v in g s and lo a n a s s o c i a t i o n s te n d to ch a rg e more f o r lo a n s
th a n do t h e s e o t h e r i n s t i t u t i o n s , i n ter m s o f h ig h e r
i n t e r e s t r a t e s and h ig h e r a d d i t i o n a l c h a r g e s f o r m aking
lo a n s .
1 25
S a f e t y . Th© s a fe t y o f a sa v in g s and loan a s s o c ia
t io n may be measured by the degree o f r is k to which i t s
a s s e t s are su b jec t and the amount o f r e s e r v e s i t has b u il t
up to s u s ta in l o s s e s .
Th© degree o f r is k to which a sa v in g s and loan
a s s o c ia t io n 1s a s s e t s are su b je c t depends on the degree o f
r is k which accom panies th© a s s o c ia t io n 1s in v estm en ts. The
degree o f r is k accompanying the t y p ic a l sav in g s and loan
a s s o c ia t io n 1s in v estm en ts i s dependent to some e x te n t on
th© p rop ortion of i t s funds in v e ste d in s e c u r i t i e s guaran
teed as to p r in c ip a l and in t e r e s t by the U nited S ta te s
Government* T his w i l l determ ine the p ro p o rtio n o f a sav
in g s and loan a s s o c ia t io n 1© a s s e t s which are r i s k - f r e e .
T h e o r e t ic a lly , i f th© mortgage loan p o r t f o li o s of two
a s s o c ia t io n s carry the same r i s k , th© one having the
g r e a te r percen tage o f a s s e t s in v e ste d in s e c u r i t i e s guaran
teed as to p r in c ip a l and in t e r e s t by the U nited S ta t e s
Government i s su b jec t to the le a s t r is k of l o s s . There
f o r e , the p rop o rtio n o f i t s a s s e t s not in v e s te d in U nited
S t a t e s Government guaranteed s e c u r i t i e s d eterm ines th a t
p ro p o rtio n o f a sa v in g s and loan a s s o c ia t io n 1s a s s e t s which!
are su b ject to r is k .
With most o f a t y p ic a l savin gs and loan a s s o c ia
t i o n ^ a s s e t s in v e ste d in m ortgage lo a n s, the ch ara cter o f
126
I t s mortgage loan p o r t f o li o p r im a r ily determ ines the degree
o f r is k to which i t s a s s e t s are su bject* T h erefore, the
p rec a u tio n s i t takes to provide fo r th e s a f e t y o f i t s
loan s i s of primary im portance in determ ining the s a f e t y
o f a savin gs and loan a s s o c ia tio n * Future economic con
d it i o n s a f f e c t in g the a b i l i t y o f borrowers to make payments
on d eb ts and the fu tu r e tren d of r e a l e s ta t e v a lu e s prima
r i l y determ ine the s a fe ty of the a s s e t s o f the t y p ic a l
savin gs and loan a s s o c ia t io n , s in e e most o f i t s funds are
in v e s te d in r e a l e s t a t e m ortgages.
program of a sa v in g s and loan a s s o c ia t io n , because i t
in v e s t s most o f i t s funds in r e a l e s t a t e m ortgages d iv e r
s i f i e d n e ith e r as to type of p rop erty nor lo c a t io n , i s
somewhat o f f s e t i f the incomes o f i t s borrowers are de
r iv e d from a v a r ie t y o f sou rces which would not a l l become
u n p r o fita b le from a g iv e n economic change* The elem ent
o f s a fe ty which may be la ck in g because o f the co n cen tra
t io n o f a sa v in g s and lo a n a s s o c ia t io n 1s a s s e t s in one
,f D iver s i f i cat io n 1 1 i s a p o lic y o fte n fo llo w e d by
in v e s to r s by which c a p it a l i s in v e s te d in v a rio u s ty p e s
o f s e c u r i t i e s and thu s the s ig n if ic a n c e o f any one d e c i
s io n i s reduced. Investm ent p o r t f o li o s are o fte n d i v e r s i
f ie d according to c l a s s e s o f s e c u r i t i e s , e .g ., m ortgages,
s to c k s , and bonds; ty p es o f r is k s in v o lv ed ; and g eograp h i
c a l lo c a tio n s in which in vestm en ts are made. Through
The la c k of d i v e r s i f i c a t i o n ^ in the investm ent
12?
p a r t i c u l a r ty p e o f in v e s t m e n t i s somewhat o f f s e t by the
f a c t t h a t , in so fa r a s th e lo n g -te r m m o rtgag e lo a n i s
c o n c e r n e d , th e s i n g l e f a m i l y , o w n e r -o c c u p ie d home i s
p r o b a b ly th e s a f e s t s e c u r i t y fo r such a lo a n . T h is seem s
l o g i c a l b e c a u s e the d e s i r e and a b i l i t y o f th e owner t o
c o n tin u e paym ents on h i s home i s n o t c o n t in g e n t upon th e
p r o f i t a b i l i t y o f th e p r o p e r t y , a s i s u s u a l l y th e c a s e o f
th e owner o f r e n t a l or i n d u s t r i a l p r o p e r t y . D e s i r a b i l i t y
o f l i v i n g in h i s own hom e, p r id e o f o w n e r sh ip , and th e
n e c e s s i t y o f s h e l t e r , w ould seem to be s t i m u l a t i n g f o r c e s
to en co u ra g e an i n d i v i d u a l b u y in g a home to make e v e r y
p o s s i b l e e f f o r t to c o n t in u e p a y m e n ts. On th e o th e r h an d,
s h e l t e r may be r e n te d and an i n d i v i d u a l may l o s e th e
d e s i r e a n d /o r a b i l i t y to c o n tin u e paym ents on h i s home.
W h ile e v e r y s i n g l e f a m i l y , o w n e r -o c c u p ie d home ca n n o t be
p r e c lu d e d to be s a f e r than o th e r s e c u r i t y f o r th e lo n g
term m o rtg a g e lo a n , i t i s p r o b a b le t h a t , a s a c l a s s , th e
form er p r o v id e s th e s a f e r s e c u r i t y . To th e e x t e n t t h a t
t h i s i s t r u e , a s a v in g s and lo a n a s s o c i a t i o n m aking lo a n s
p r im a r ily on s i n g l e f a m i l y , o w n e r -o c c u p ie d homes h a s th u s
added a d e g r e e o f s a f e t y to i t s m ortgage lo a n p o r t f o l i o .
t h e s e and o th e r means o f d i v e r s i f i c a t i o n , i n v e s t o r s a t
tem pt to sp rea d th e r i s k and th u s p r o t e c t th e m s e lv e s
a g a i n s t h ea v y l o s s e s .
128
As p r e v i o u s l y m e n tio n e d , th e s a f e t y o f th e m o rtgag e
lo a n p o r t f o l i o i s l a r g e l y d ep en d en t on th e e x t e n t t o w h ich
i t s lo a n s a re a m o r tiz e d lo a n s ; th e p r o p o r t io n a t e amount o f
in s u r e d or g u a r a n te e d lo a n s ; th e lo a n - v a lu e r a t i o ; th e
le n g t h o f tim e f o r w h ich lo a n s are m ade; and th e c h a r a c t e r
o f th e p r o p e r ty on w h ic h lo a n s are m ade.
I n c o n t r a s t t o com m ercial b a n k s , the r e s e r v e s o f a
s a v in g s and lo a n a s s o c i a t i o n a re n o t n e c e s s a r i l y h e ld i n
c a s h , bank d e p o s i t s , o r Governm ent s e c u r i t i e s . S a v in g s and
lo a n a s s o c i a t i o n s a r e n o t r e q u ir e d t o h o ld r e s e r v e s i n any
p a r t i c u l a r ty p e o f a s s e t e x c e p t , a s p r e v i o u s l y s t a t e d ,
s a v in g s and lo a n a s s o c i a t i o n members o f th e F e d e r a l Home
Loan Bank S y stem are r e q u ir e d t o h o ld c a sh and U n ite d
S t a t e s Government s e c u r i t i e s i n th e amount o f 6 p e r c e n t
o f t o t a l w ith d r a w a b le s h a r e s . Funds h e l d by a s a v in g s and
lo a n a s s o c i a t i o n i n c a s h and U n ite d S t a t e s G overnm ent
s e c u r i t i e s may be r e f e r r e d to a s th e a s s o c i a t i o n * s 1 1 l i q u i d
r e s e r v e s . 1 * As s a v in g s and lo a n a s s o c i a t i o n s u se th e term
" r e s e r v e s , ” t h e s e may be e i t h e r l i q u i d r e s e r v e s , or r e
s e r v e s i n v e s t e d i n o t h e r a s s e t s .
I n s u r e d s a v in g s and lo a n a s s o c i a t i o n s are r e q u ir e d
t o make p r o v i s i o n s f o r a r e s e r v e to be u s e d e x c l u s i v e l y
f o r a b s o r b in g l o s s e s to w h ich r e g u la r c r e d i t s m ust be made
u n t i l i t s amount e q u a ls 5 pei* c e n t o f i t s sh a r e s and
129
in v e s tm e n t c e r t i f i c a t e s . ^ C a l i f o r n i a S t a t e - c h a r t e r e d
s a v in g s and lo a n a s s o c i a t i o n s , w h eth er or n o t th e y a r e
in s u r e d , a r e r e q u ir e d by law to have r e s e r v e s f o r i n v e s t
ment c e r t i f i c a t e s , th e s p e c i f i c amount o f w h ic h v a r i e s from
3 p e r c e n t t o 19 p e r c e n t d ep en d in g on th e v a lu e o f o u t
s ta n d in g in v e s tm e n t c e r t i f i c a t e s and r e s e r v e s e q u a l t o 2
p e r c e n t o f o u t s t a n d in g w ith d ra w a b le s h a r e s . ^ F e d e r a l
S a v in g s and Loan A s s o c i a t i o n s are r e q u ir e d t o make a l l o c a
t i o n s t o l o s s r e s e r v e s u n t i l t h e t o t a l amount o f such
r e s e r v e s e q u a ls 10 p e r c e n t o f th e c a p i t a l o f th e a s s o c i a
t i o n . ^
On th e t y p i c a l b a la n c e s h e e t o f a F e d e r a l S a v in g s
and Loan A s s o c i a t i o n , r e s e r v e s a re u s u a l l y s p e c i f i e d a s
" g e n e r a l r e s e r v e s , ” w h ic h a r e r e s e r v e s f o r l o s s e s , and
" u n a llo c a t e d r e s e r v e s ” or " u n d iv id e d p r o f i t s , " w h ich r e p r e
s e n t fu n d s a v a i l a b l e f o r th e paym ent o f d iv i d e n d s . The
r e s e r v e s o f a C a l i f o r n i a S t a t e - c h a r t e r e d g u a r a n t e e - s t o c k
s a v in g s and lo a n a s s o c i a t i o n in c lu d e " n o n -w ith d r a w a b le
^ R u le s and R e g u la t io n s f o r In su r a n c e o f A c c o u n t s ,
S e c t i o n l 6 3 . l l .
1+2
1951 E d i t i o n , B u ild in g and Loan A c t , S t a t e o f
C a l i f o r n i a , A r t i c l e I I , S e c t i o n 2 . 1 0 .
W
R ule s and R e g u la t io n s f o r th e F e d e r a l S a v in g s
and Loan S y s te m , S e c t i o n II4 .Z + . 1.
1 3 0
c a p i t a l , M w s u r p l u s , ’1 and 1 1 r e s e r v e s . ” M 4- I n m ea su r in g
s a f e t y a s p r o v id e d by th e r e s e r v e s o f a s a v in g s and lo a n
a s s o c i a t i o n , th e r a t i o o f th e a s s o c i a t i o n * s r e s e r v e s t o
i t s t o t a l m o rtg a g e lo a n s i s s i g n i f i c a n t i n d e te r m in in g th e
e x t e n t t o w h ich r e s e r v e s may c o v e r p o s s i b l e l o s s e s , and
th e r a t i o o f i t s r e s e r v e s t o th e t o t a l o f sh a re a c c o u n ts
a n d /o r in v e s tm e n t c e r t i f i c a t e s i s s i g n i f i c a n t i n d e t e r
m in in g th e e x t e n t t o w h ich r e s e r v e s c o v e r th e c la im s o f
th e members o f th e a s s o c i a t i o n *
At th e end o f 1950 th e r e s e r v e s o f F e d e r a l S a v in g s
and Loan A s s o c i a t i o n s o p e r a t in g i n C a l i f o r n i a were e q u a l
t o 8*9 pei* c e n t o f t o t a l share a c c o u n ts and 8 . 1 p er c e n t
o f t o t a l m ortgage l o a n s . ^ At th e end o f 1950 C a l i f o r n i a
S t a t e - c h a r t e r e d S a v in g s and Loan A s s o c i a t i o n members o f
t h e F e d e r a l Home Loan Bank S ystem had r e s e r v e s e q u a l to
1 1 .1 p e r c e n t o f t o t a l s h a r e s and in v e s tm e n t c e r t i f i c a t e s
B oth F e d e r a l S a v in g s and Loan A s s o c i a t i o n s and
C a l i f o r n i a S t a t e - c h a r t e r e d s a v in g s and lo a n a s s o c i a t i o n s
may have r e s e r v e a c c o u n t s f o r s p e c i f i c p u r p o se s su ch a s
th e paym ent o f u n c o l l e c t e d d iv id e n d s a n d /o r i n t e r e s t .
S in c e su ch r e s e r v e s ca n n o t be u sed f o r a b s o r b in g l o s s e s
or f o r p a y in g d iv id e n d s a n d /o r i n t e r e s t a t a l a t e r d a t e ,
th e y a r e d is r e g a r d e d a s b e in g a p a r t o f r e s e r v e s a s th e
term i s u se d i n t h i s s tu d y .
1 + 5
C a lc u la t e d from f i g u r e s from Combined F i n a n c i a l
S ta te m e n ts o f Members o f th e F e d e r a l Home Loan Bank
S y stem , p . 2~3, T a b le No. 9*
131
and 10*5 p e r c e n t o f t o t a l m o rtg a g e lo a n s . ^
W hile o p in io n d i f f e r s a c c o r d in g t o what r e s e r v e
r a t i o sh o u ld be m a in ta in e d -b y s a v in g s and lo a n a s s o c i a t i o n s ,
Edward H* L e e t e , D ep u ty S u p e r in te n d e n t o f Banks i n New
Y o rk , i n a m essa ge i n S ep tem b er, 1951* r e l a t i n g t o th e low
r e s e r v e and l i q u i d i t y p o s i t i o n s o f some s a v in g s and lo a n
a s s o c i a t i o n s i n t h a t s t a t e , i n d i c a t e d 5 p e r c e n t r e s e r v e s
t o t o t a l s a v in g s c a p i t a l t o be th e minimum r e s e r v e p o s i t i o n
c o n s i s t e n t w it h s a f e t y . w h ile a 10 p er c e n t r e s e r v e
p o s i t i o n i s o f t e n recom m ended, W illia m E. D i v e r s , Chairman
o f th e Home Loan Bank B oard, recommends t h a t r e s e r v e s
sh o u ld e q u a l 15 p e r c e n t o f s a v in g s c a p i t a l.^ ® i n 1950
t h e r e was a p r o p o s a l t o C o n g r e s s , S e c t i o n 2 o f S 2325* to
r e v i s e t h e r e s e r v e r e q u ir e m e n ts f o r s a v in g s and lo a n
a s s o c i a t i o n s in s u r e d by th e F e d e r a l S a v in g s and Loan I n s u r
ance C o r p o r a tio n t o p r o v id e f o r a l l o c a t i o n s to l o s s r e
s e r v e s u n t i l such r e s e r v e s e q u a lle d 10 p e r c e n t o f in s u r e d
L o e. c i t .
k7
"T hin I c e f o r S & L s ,” B u s in e s s Week, Sep tem b er
2 2 , 1 9 5 1 , p . 1 5 2 .
W illia m Ke D i v e r s , " L i q u i d i t y , R e s e r v e s , D i v i
d e n d s ,1 1 S a v in g s and Loan N ew s, D ecem ber, 1951* P* 37*
132
a c c o u n t s .^-9 T h is p r o p o s a l was n o t p a s s e d . A t th e p r e s e n t
tim e , a s p r e v i o u s l y s t a t e d , in s u r e d a s s o c i a t i o n s m ust make
a l l o c a t i o n s t o r e s e r v e s u n t i l r e s e r v e s e q u a l 5 p e r T c e n t o f
in s u r e d a c c o u n t s .
Due to th e grow th o f th e a s s e t s o f s a v in g s and lo a n
a s s o c i a t i o n s i n C a l i f o r n i a , a la r g e p r o p o r t io n o f e a r n in g s
h a s b e e n n e c e s s a r i l y a l l o c a t e d t o r e s e r v e s . In 1951
C a l i f o r n i a s a v in g s and lo a n a s s o c i a t i o n members o f th e
F e d e r a l Home Loan Bank System a l l o c a t e d I 4 .I 4 .* 1 4 . p e r c e n t o f
n e t incom e t o re s e r v e s ; ^ t h i s was a lm o st 10 p e r c e n t
above th e a v e r a g e p e r c e n ta g e o f incom e a l l o c a t e d to
r e s e r v e s b y a l l members o f th e F e d e r a l Home Loan Bank
S y s t e m . ^
A lth o u g h th e amount o f i t s r e s e r v e s a r e im p o r ta n t
t o th e s a f e t y o f a s a v in g s and lo a n a s s o c i a t i o n , th e
amount o f r i s k in h e r e n t i n th e m o rtg a g e lo a n p o r t f o l i o o f
an a s s o c i a t i o n seem s ev en more im p o r ta n t. T h is seem s
l o g i c a l f o r two r e a s o n s . F i r s t , th e amount o f r i s k
S a v in g s and Loan A n n a ls , 1950 (W a sh in g to n , D .C .:
U n ite d S t a t e s S a v in g s and Loan L e a g u e , 1951)* P* 2 3 3 .
50
Combined F i n a n c i a l S ta te m e n ts o f Members o f th®
F e d e r a l Home Loan Bank S y ste m , 1 9 5 0 , p p . 6 ^ -6 5 , T a b le Ho.
22.
Z 1 /
I b i d . , p p . 6 0 - 6 l , T ab le No. 2 1 .
133
in h eren t in th® mortgage loan p o r t f o li o w i l l determ ine the
amount of r e se r v e s which w i l l be n ece ssa r y fo r absorbing
futu re l o s s e s . Second, r e s e r v e s are not n e c e s s a r ily h eld
in cash or in v e s te d in U nited S ta te s Government s e c u r it ie s ;
co n seq u en tly , r e s e r v e s may be in v e s te d in mortgage lo a n s .
I f some of the r e s e r v e s o f a savin gs and loan a s s o c ia t io n
are in v e s te d in mortgage lo a n s , the r is k in h eren t in the
mortgage loan p o r t f o li o w i l l determ ine the degree o f sa fety
which r e s e r v e s w i l l p rovid e to the a s s o c ia t io n . T herefore,
a p o t e n t ia l in v e s t o r concerned w ith the r e l a t i v e s a fe ty
of sa v in g s and lo a n a s s o c ia t io n s should in v e s t ig a t e th®
re se r v e p o s it io n o f th e se a s s o c ia t io n s , but he should a ls o
in v e s t ig a t e the len d in g p o l i c i e s o f th e se a s s o c ia t io n s in
order to a c c u r a te ly determ ine t h e ir r e l a t i v e d egrees of
s a f e t y .
L iq u id ity . W hile sa v in g s and loan a s s o c ia t io n s are
not o b lig a te d to meet withdraw al r e q u e sts on demand, from
1 9 ^ 1 to the p r e se n t tim e, savin gs and loan a s s o c ia t io n s
in th e Los A ngeles area have been doing so . I f p resen t
economic c o n d itio n s c o n tin u e , i t i s probable th a t t h is
p r a c tic e w i l l be con tinu ed sin c e the a v a i l a b i l i t y o f funds
i s an im portant elem ent in a t t r a c t in g a d d itio n a l sa v in g s
in to savin gs and loan a s s o c ia t io n s .
The e x t e n t o f th e a b i l i t y o f a s a v in g s and lo a n
a s s o c i a t i o n to m eet w ith d r a w a l r e q u e s t s p r o m p tly dep en d s
on th e l i q u i d i t y o f i t s a s s e t s and th e e x t e n t o f i t s un
u se d b o rro w in g c a p a c it y from i t s F e d e r a l Home Loan Bank,
a s w e l l a s on th e amount o f fu n d s w h ic h f lo w i n t o th©
a s s o c i a t i o n from new s a v in g s and from paym ents on m ortgage
l o a n s .
The l i q u i d i t y o f th© a s s e t s o f a s a v in g s and lo a n
a s s o c i a t i o n i s u s u a l l y m easured by i t s su p p ly o f c a sh and
U n ite d S t a t e s Government s e c u r i t i e s i n r e l a t i o n to i t s
s a v in g s c a p i t a l . As p r e v i o u s l y s t a t e d , s a v in g s and lo a n
a s s o c i a t i o n members o f th e F e d e r a l Home Loan Bank S ystem
a r e r e q u ir e d to h o ld c a s h and U n ite d S t a t e s Government
s e c u r i t i e s i n th e amount o f 6 p e r c e n t o f t o t a l s a v in g s
c a p i t a l . A t th e end o f 1 9 5 0 , th e r a ti© o f c a sh and U n ite d
S t a t e s Governm ent s e c u r i t i e s t o t o t a l s a v in g s c a p i t a l i n
C a l i f o r n i a s a v in g s and lo a n a s s o c i a t i o n members o f th©
F e d e r a l Home Loan Bank S ystem was II3..8 p e r c e n t .^ 2 T h is
r a t i o was lo w er i n s a v in g s and lo a n a s s o c i a t i o n s o p e r a tin g
i n th© Los A n g e le s a r e a p r im a r ily a s a r e s u l t o f th©
C a lc u la t e d from f i g u r e s from Combined F i n a n c i a l
S ta te m e n ts o f Members o f t h e F e d e r a l Home Loan Bank S y ste m ,
1 9 5 o , p . 2 3 , T a b le Ho. 9«
g r e a t e r demand f o r m ortg a g e fu n d s i n t h i s a r e a ; i t was ,
h ig h e r w it h r e g a r d t o a l l s a v in g s and lo a n a s s o c i a t i o n
members o f th e F e d e r a l Home Loan Bank System o p e r a t in g
th r o u g h o u t th e U n ite d S t a t e s p r im a r ily b e c a u se th e demand
f o r m ortg age fu n d s was g r e a t e r i n C a l i f o r n i a th a n i n th e
U n ite d S t a t e s a s a w h o le .53 As p r e v i o u s l y s t a t e d , i n
m e a su r in g th e l i q u i d i t y o f a s a v in g s and lo a n a s s o c i a t i o n ,
i t i s im p o r ta n t t o c o n s id e r th e amount o f fu n d s w h ich th e
a s s o c i a t i o n h a s o b l i g a t e d i t s e l f to d is b u r s e i n m aking
m ortg a g e l o a n s , t h i s amount shown on th e b a la n c e s h e e t a s
lo a n s i n p r o c e s s . An a s s o c i a t i o n w h ich a p p ea r s t o be i n
a r e l a t i v e l y h ig h l i q u i d p o s i t i o n when one c o n s i d e r s o n ly
i t s r a t i o o f c a s h and U n ite d S t a t e s Government s e c u r i t i e s
t o i t s t o t a l s a v in g s c a p i t a l , may a p p ea r t o be i n a su b
s t a n t i a l l y lo w e r l i q u i d p o s i t i o n when one c o n s i d e r s th e
amount o f i t s lo a n s i n p r o c e s s . D e d u c tin g lo a n s i n p r o c e s s
from th e t o t a l s o f c a s h and U n ite d S t a t e s Government
s e c u r i t i e s , i n 1950 th e l i q u i d i t y r a t i o s o f C a l i f o r n i a
s a v in g s and lo a n a s s o c i a t i o n members o f th e F e d e r a l Home
Loan Bank S ystem and a l l s a v in g s and lo a n a s s o c i a t i o n
53 ~
The r a t i o o f c a s h and U n ite d S t a t e s Government
s e c u r i t i e s to t o t a l s a v in g s c a p i t a l f o r a l l members o f th e
F e d e r a l Home Loan Bank S ystem i n 1950 was 1 7 .5 e e n t .
I b i d . , p . 1 2 , T a b le No. 2 .
136
members o f th e F e d e r a l Home Loan Bank S y stem o p e r a tin g i n
th e U n ite d S t a t e s w ere 7*2 p e r c e n t and l l f . 5 p e r c e n t ,
r e s p e c t i v e l y
The amount o f l i q u i d i t y w h ich a s a v in g s and lo a n
a s s o c i a t i o n n e e d s i n o r d e r t o f a c i l i t a t e i t to pay w it h
d raw al r e q u e s t s p r o m p tly d u r in g norm al c o n d i t i o n s dep en d s
on i t s u s u a l w ith d r a w a l r a t i o ,5 5 To a la r g e e x t e n t t h i s
i s d ep en d en t on t h e ty p e o f s a v e r s w hose fu n d s t h e a s s o c i
a t i o n h a s a t t r a c t e d * O b v io u s ly an a s s o c i a t i o n h o ld in g th e
fu n d s o f i n d i v i d u a l s , m ost o f whom lo o k upon su ch fu n d s a s
lo n g -te r m i n v e s t m e n t s , w i l l have a lo w e r w ith d r a w a l r a t i o
th a n an a s s o c i a t i o n h o ld in g th© fu n d s o f i n d i v i d u a l s , m ost
o f whom lo o k upon su ch fu n d s i n th e same way a s t h e y w ould
lo o k upon d e p o s i t s i n banks* S in c e th e a v e r a g e w ith d r a w a l
r a t i o i n s a v in g s and lo a n a s s o c i a t i o n s h a s b een c o n s i d e r
a b ly g r e a t e r d u r in g r e c e n t y e a r s , 56 s u p e r v is o r y o f f i c i a l s
^ I b i d . , p . 1 2 , T a b le Ho. 2 , and p . 2 3 , T ab le Ho. $
The ”w ith d r a w a l r a t i o ” i s th e r e l a t i o n s h i p w h ich
e x i s t s d u r in g a g i v e n p e r io d b e tw e en new s a v in g s and w it h
d raw als*
56
B e fo r e World War I I , th e w ith d r a w a l r a t i o a v e r
aged ab ou t 5 0 .0 p e r c e n t* Norman S tr u n k , 1 1 The Im proved
In v e s tm e n t P o s i t i o n o f S a v in g s and Loan A s s o c i a t i o n s , ” The
J o u r n a l o f F in a n c e , 1 1 : 2 : 6 , O c to b e r , 19if7* The w ith d r a w a l
r a t i o d u r in g th© p a s t f o u r y e a r s h a s ra n g ed b e tw e en 6 7 *if
p e r c e n t and 7 2 .0 p e r c e n t . " S a v in g s and Loan A s s o c i a t i o n s
Boom ,” B u s in e s s Week, May 17* 1 9 5 2 , p . 1 5 2 .
137
have s t r o n g l y recommended h ig h e r l i q u i d i t y r a t i o s * I t i s
u s u a l l y recommended t h a t an a s s o c i a t i o n s h o l d in g s o f c a s h
and U n ite d S t a t e s Government s e c u r i t i e s e q u a l 10 p e r c e n t
t o lf> p e r c e n t o f i t s t o t a l s a v in g s c a p i t a l .
S a v in g s and lo a n a s s o c i a t i o n s may g a i n a d d i t i o n a l
l i q u i d i t y from th e sal© o f l o a n s . 57 As p r e v i o u s l y s t a t e d ,
b e f o r e th© K orean c o n f l i c t w h ich b e g a n d u rin g th e m id d le
o f 1 9 5 0 , PEA, and VA lo a n s c o u ld r e a d i l y be s o l d to th e
P e d e r a l N a t io n a l M ortgage A s s o c i a t i o n . I t i s p r o b a b le
t h a t t h e P e d e r a l N a t io n a l M ortgage A s s o c i a t i o n w i l l soon
resume I t s b u y in g o p e r a t i o n s . U n t i l 1951* in s u r a n c e com
p a n ie s a l s o p r o v id e d a se c o n d a r y m arket f o r PHA and VA
l o a n s . 58 w h ile th e se c o n d a r y m arket f o r PHA and VA lo a n s
A s id e from g a in in g l i q u i d i t y , a s a v in g s and lo a n
a s s o c i a t i o n , a f t e r c o l l e c t i n g f e e s c h a rg ed f o r m aking
l o a n s , may s e l l lo a n s and u se th e p r o c e e d s t o make o th e r
l o a n s , th u s i n c r e a s i n g th e amount w h ich i t s fu n d s e a r n .
I t i s s a id t h a t d u r in g t h e p e r io d i n w h ieh PHA and VA loan s
c o u ld be r e a d i l y s o l d , s a v in g s and lo a n a s s o c i a t i o n s i n
th e Los A n g e le s a r e a made a g r e a t d e a l o f p r o f i t i n t h i s
w ay. Loans s o ld to th e F e d e r a l N a t io n a l M ortgage A s s o c i a
t i o n c o n tin u e to b e s e r v i c e d by th e s e l l i n g i n s t i t u t i o n .
A f e e o f o n e - h a l f o f 1 p e r c e n t p e r annum i s p a id by th e
F e d e r a l N a t io n a l M ortgage A s s o c i a t i o n to th e le n d in g i n
s t i t u t i o n f o r su ch s e r v i c i n g . T h is p r o v id e s a n o th e r source
o f incom e to many s a v in g s and lo a n a s s o c i a t i o n s and was
a n o th e r s t im u lu s to m aking lo a n s f o r th e p u rp o se o f s e l li n g
them f o r p r o f i t r a t h e r th a n h o ld in g them a s in v e s t m e n t s .
58
D u rin g 1951* th e i n t e r e s t r a t e on lo n g -te r m
U n ite d S t a t e s Government bonds was a llo w e d to r i s e from
2 . 5 p er c e n t to 2 .7 5 p e r c e n t . T h is c a u se d th e a v e r a g e
y i e l d on new g ra d e AAA c o r p o r a te b on ds to r i s e ab ou t
138
mad© i n t h e Los A n g e le s a r ea i s p r a c t i c a l l y n o n - e x i s t e n t
a t th e p r e s e n t tim e , t h e r e i s a se co n d a r y m arket f o r co n
v e n t i o n a l lo a n s c o n s id e r e d by .o th e r le n d in g i n s t i t u t i o n s
t o b e sound in v e s tm e n ts * T h is m ark et i s to some e x t e n t
p r o v id e d by banks b u t more p a r t i c u l a r l y by in s u r a n c e com
p a n ie s *
S a v in g s and lo a n a s s o c i a t i o n s a re l i m i t e d w i t h
r e g a r d t o th e e x t e n t to w h ic h th e y can r e l y on a se co n d a r y
m arket f o r lo a n s and th e r e b y g a i n l i q u i d i t y . F i r s t , i n
su red s a v in g s and lo a n a s s o c i a t i o n s are l e g a l l y l i m i t e d t o
s e l l i n g , d u r in g a g i v e n y e a r , 20 p e r c e n t o f th e t o t a l
d o l l a r amount o f lo a n s h e ld a s o f January 1 o f t h a t y e a r .-^
S e c o n d , s a v in g s and lo a n a s s o c i a t i o n s ca n n o t r e l y on
s e l l i n g lo a n s d u r in g a l l p e r i o d s , f o r a se c o n d a r y m ark et
f o r su ch lo a n s may n o t a lw a y s e x i s t . T h ir d , e v e n th o u g h
o n e - h a l f o f 1 p e r c e n t . As a r e s u l t , Government bon ds and
h ig h g ra d e c o r p o r a t e bonds became more a t t r a c t i v e i n v e s t
m en ts f o r in s u r a n c e company f u n d s . A ls o i n 1 9 5 1 $ th e
p r i c e su p p o r t f o r lo n g -te r m U n ite d S t a t e s Governm ent :bonds
was d is c o n t i n u e d . As a r e s u l t , i t was no lo n g e r n e c e s s a r
i l y p o s s i b l e t h a t su ch bonds c o u ld be c o n v e r te d a t p a r or
b e t t e r , and i t was no lo n g e r p r o f i t a b l e t o c o n v e r t su ch
bon ds i n t o fu n d s t o be u sed f o r in v e s tm e n t i n m o r tg a g e s
y i e l d i n g !|. 0 p e r c e n t t o I+.5 p e r c e n t . T h u s, c h a n g e s
w h ic h o c c u r r e d i n 1951 s u b s t a n t i a l l y r ed u c ed th© a t t r a c
t i v e n e s s o f in v e s tm e n t by in s u r a n c e com p an ies i n FHA and
VA m o rtg a g e l o a n s . W. J . L. R ay, o p . c i t . , p . 5 2 5 .
59
R u le s and R e g u la t io n s f o r In su r a n c e o f A c c o u n t s ,
S e c t i o n 1 6 3 . 2 3 .
139
a se c o n d a r y m arket f o r lo a n s d o e s e x i s t , w h e th e r o r n o t
t h e r e w i l l be a m arket f o r th e lo a n s o f a g i v e n a s s o c i a t i o n
i s l a r g e l y d e p e n d en t on t h e le n d in g p o l i c i e s o f th e a s s o c i
a t i o n . O b v io u s ly , an a s s o c i a t i o n w h ich h a s made lo a n s
a c c o r d in g t o c o n s e r v a t i v e le n d in g p o l i c i e s w i l l f i n d i t
e a s i e r to s e l l lo a n s th a n one whose le n d in g p o l i c i e s a r e
n o t so c o n s e r v a t i v e .
There are th r ee o th er so u r c e s, a sid e from th ose
which have been m entioned above, which a id a sa v in g s and
lo a n a s s o c ia t io n to meet w ithdraw al r e q u e s ts prom ptly:
(1 ) th e a s s o c i a t i o n s u n used b o rro w in g c a p a c i t y from i t s
F e d e r a l Home Loan Bank, (2 ) fu n d s w h ich f lo w i n t o th e
a s s o c i a t i o n from new s a v i n g s , and (3 ) fu n d s w h ich flo w i n t o
th e a s s o c i a t i o n from paym ents on m ortg a g e l o a n s . The e x
t e n t o f an a s s o c i a t i o n 1s unused b orrow in g c a p a c it y from
i t s F e d e r a l Home Loan Bank i s l a r g e l y d ep en d en t on t h e
p o l i c y o f i t s m anagem ent. Some s a v in g s and lo a n a s s o c i a
t i o n s p r e s e r v e th e t o t a l amount o f t h e i r b o rro w in g c a p a c it y
f o r p a y in g w it h d r a w a ls , w h ereas o t h e r s u s e t h i s s o u r c e o f
fu n d s i n m aking m ortg age l o a n s . S i n c e , a s p r e v i o u s l y
s t a t e d , 50 p e r c e n t o f an a s s o c i a t i o n * s F e d e r a l Home Loan
Bank b o rro w in g c a p a c i t y may be u s e d f o r le n d in g p u r p o s e s ,
a g r e a t d e a l o f d i f f e r e n c e may e x i s t w it h r e g a r d t o th e
amount o f su ch b o rro w in g c a p a c it y a g iv e n a s s o c i a t i o n may
llj.0
d e l e g a t e to th e p u rp o se o f p a y in g w ith d r a w a ls*
The amount o f fu n d s w h ich f lo w i n t o a s a v in g s and
lo a n a s s o c i a t i o n from new s a v in g s and from paym ents on
m ortgage lo a n s i s d ep en d en t on econ om ic c o n d i t i o n s , on th e
a b i l i t y o f th e management o f th e s a v in g s and lo a n a s s o c i a
t i o n t o o p e r a te th e a s s o c i a t i o n p r o f i t a b l y and th u s a t t r a c t
new s a v i n g s , and on th e a b i l i t y o f management t o make lo a n s
t o th o s e who w i l l c o n t in u e t o make paym ents on l o a n s .
W h ile s a v in g s and lo a n a s s o c i a t i o n s h ave b e e n m e e t
in g w ith d r a w a l r e q u e s t s p r o m p tly , i n v e s t o r s sh o u ld be
aware o f th e f a c t t h a t t h i s p r a c t i c e may n o t a lw a y s be
c o n t in u e d . A ch an ge i n econ om ic c o n d i t i o n s w h ich m ig h t
sh a r p ly i n c r e a s e th e demand f o r w ith d r a w a ls , d e c r e a s e th e
in f lo w o f new s a v i n g s , and d e c r e a s e th e a b i l i t y o f b o r
row ers t o m eet paym ents on m ortgage l o a n s , w ou ld u n dou bted
l y make i t im p o s s ib le f o r many s a v in g s and lo a n a s s o c i a
t i o n s to m eet w ith d r a w a l r e q u e s t s p ro m p tly o r w i t h i n a
s h o r t p e r io d o f tim e* W h ile s a v in g s and lo a n a s s o c i a t i o n s
d id c o n tin u e t o m eet w ith d r a w a l r e q u e s t s p r o m p tly i n J u ly
1 9 5 0 , when th e w ith d r a w a l r a t i o was 111 p e r c e n t , ^0 i t i s
d o u b t f u l w h eth er t h i s p r a c t i c e w ould have b e e n c o n t in u e d
£5
C a lc u la t e d from f i g u r e s from S t a t i s t i c a l Summary,
1 2 5 1 , p . 1 0 , T ab le 6 .
i f su ch a w ith d r a w a l r a t i o had c o n t in u e d o v e r a lo n g e r
p e r io d o f tim e , o r i f econ om ic c o n d i t i o n s w ould h a v e im
p a ir e d th e a b i l i t y o f b o rro w ers t o c o n tin u e m o rtgag e lo a n
paym ents*
W hether or n o t a s a v in g s and lo a n a s s o c i a t i o n w i l l
c o n tin u e t o m eet w ith d r a w a l r e q u e s t s p ro m p tly d ep en d s n o t
o n ly on i t s a b i l i t y to do so b u t on th e e x t e n t o f i t s
w ith d r a w a l r e q u e s t s . E ven i f a s a v in g s and lo a n a s s o c i a
t i o n were a b le to m eet a l l o f i t s w ith d r a w a l r e q u e s t s , i t
i s c o n c e iv a b le t h a t su ch r e q u e s t s m ig h t be a t a l e v e l
w h ich w ou ld r e q u ir e a lm o st c o m p le te l i q u i d a t i o n o f th e
a s s o c i a t i o n . In su ch a c a s e , th e a s s o c i a t i o n w ould un
d o u b te d ly r e q u ir e n o t i c e o f i n t e n t i o n t o w ith d raw s a v in g s
i n o r d e r t o c o n tin u e o p e r a t i o n s .
S in c e th e p o t e n t i a l i n v e s t o r h a s no c o n t r o l o v e r
f u t u r e econ om ic c o n d i t i o n s w h ich may a f f e c t a s a v in g s and
lo a n a s s o c i a t i o n 1s a b i l i t y t o m eet w ith d r a w a l r e q u e s t s
p r o m p tly , th e b e s t he can do t o p r o v id e f o r th e r e a s o n a b le
a v a i l a b i l i t y o f h i s fu n d s i s t o i n v e s t i g a t e th e p r o b a b i li t y
t h a t a s a v in g s and lo a n a s s o c i a t i o n w i l l be a b le t o m eet
w ith d r a w a l r e q u e s t s w i t h i n a r e a s o n a b le l e n g t h o f t im e .
T h is w i l l r e q u i r e an i n v e s t i g a t i o n o f l i q u i d i t y a s m ea s
u red by c a s h and U n ite d S t a t e s Government s e c u r i t i e s and
t h e u n u sed b o r r o w in g c a p a c it y o f th e a s s o c i a t i o n from i t s
ll*2
F e d e r a l Home Loan Bank. The i n v e s t i g a t i o n w i l l a l s o
r e q u ir e in q u ir y i n t o th e r e l a t i v e a b i l i t y o f management to
make sound lo a n s w h ich m ig h t be s o l d i f a d d i t i o n a l l i q u i d
i t y i s n e e d e d , t o make lo a n s w h ich i n a l l p r o b a b i l i t y w i l l
be p a id a c c o r d in g t o c o n t r a c t e d term s i f h e l d , and t o
o p e r a te th e a s s o c i a t i o n p r o f i t a b l y i n o r d e r t h a t i t may
c o n tin u e t o a t t r a c t f u r t h e r s a v i n g s .
i
C o n c lu s io n s . The c h a r a c t e r i s t i c s o f a s a v in g s and
lo a n a s s o c i a t i o n a s an o u t l e t f o r s a v in g s and a s a so u rc e
o f fu n d s f o r home f i n a n c i n g a r e l a r g e l y d e te r m in e d by th e
f i n a n c i a l p o l i c i e s o f i t s m a n a g em en t.w ith r e g a r d t o th e
im p o rta n ce p la c e d on s a f e t y , l i q u i d i t y , and e a r n in g s . I t
a p p e a r s t h a t a g r e a t d e a l o f v a r i a t i o n e x i s t s among i n d i
v i d u a l a s s o c i a t i o n s a s a r e s u l t o f t h e i r r e s p e c t i v e manage
m e n ts. H ow ever, c e r t a i n f i n a n c i a l p o l i c i e s seem t o be
common among m ost s a v in g s and lo a n a s s o c i a t i o n s .
A lth o u g h th e fram ew ork f o r th e in v e s tm e n t and o t h e r
f i n a n c i a l p o l i c i e s o f a s a v in g s and lo a n a s s o c i a t i o n l i e s
i n th e l e g a l r e s t r i c t i o n s a c c o r d in g t o w h ich i t m ust o p e r
a t e , th e management o f th e a s s o c i a t i o n seem s t o be th e
more s i g n i f i c a n t f a c t o r i n d e te r m in in g th e a c t u a l p o l i c i e s
f o l lo w e d .
The m o rtg a g e le n d in g p o l i c i e s o f s a v in g s and lo a n
lit-3
a s s o c i a t i o n s d i f f e r from th o s e o f banks and in s u r a n c e com
p a n ie s p r i m a r i ly b e c a u s e o f d i f f e r e n c e s w h ich e x i s t among
t h e s e i n s t i t u t i o n s w ith r e g a r d t o th e e o s t o f fu n d s , l e g a l
r e s p o n s i b i l i t i e s to i n v e s t o r s , and l e g a l r e s t r i c t i o n s
a c c o r d in g t o w h ich e a c h m ust o p e r a t e . I n m ortgage le n d in g
p o l i c i e s , in s u r a n c e com p an ies te n d t o ta k e l e s s r i s k th a n
do e i t h e r b an k s or s a v in g s and lo a n a s s o c i a t i o n s ; b an ks
te n d t o s t r e s s l i q u i d i t y more th a n do e i t h e r o f th e o t h e r
i n s t i t u t i o n s , to em p h a size e a r n in g s more th a n do in s u r a n c e
c o m p a n ie s, and to assum e l e s s r i s k th a n do s a v in g s and
lo a n a s s o c ia t io n s ; ; and s a v in g s and lo a n a s s o c i a t i o n s te n d
t o p la e e more im p o r ta n c e on e a r n in g s th a n do e i t h e r o f
t h e s e o t h e r i n s t i t u t i o n s . S a v in g s and lo a n a s s o c i a t i o n s
i n v e s t p r o p o r t i o n a t e l y more o f t h e i r fu n d s i n m ortgage
lo a n s th a n do e i t h e r banks o r in s u r a n c e c o m p a n ie s, r e s t r i c t
m ortga ge le n d in g to c o n v e n t io n a l lo a n s more th a n do e i t h e r
o f th e o t h e r i n s t i t u t i o n s , le n d more fu n d s f o r th e p u rp o se
o f c o n s t r u c t i o n th a n do e i t h e r o f th e o th e r two i n s t i t u
t i o n s , on c o n v e n t io n a l lo a n s r e q u ir e lo w e r down paym ents
th a n do banks or in s u r a n c e com p an ies and r e q u ir e lo w e r
m o n th ly paym ents th a n do b a n k s, le n d on o ld e r and l e s s
d e s i r a b l e p r o p e r ty th a n do in s u r a n c e c o m p a n ie s, and app ear
t o p la c e l e s s im p o rta n ce on th e c r e d i t s ta n d in g o f th e
b orrow er th a n do b a n k s. T hus, s a v in g s and lo a n a s s o c ia tic n s
p r o v id e a somewhat d i f f e r e n t ty p e o f m ortgage le n d in g th a n
do t h e o t h e r im p o r ta n t m ortgag e le n d in g i n s t i t u t i o n s , banks
and in s u r a n c e c o m p a n ie s. F o r c o n v e n t io n a l l o a n s , s a v in g s
and lo a n a s s o c i a t i o n s te n d t o ch a r g e s u b s t a n t i a l l y h ig h e r
i n t e r e s t r a t e s and lo a n f e e s th a n do in s u r a n c e com p an ies
and s l i g h t l y more th a n do b a n k s. B orrow ers a r e w i l l i n g
t o p a y t h i s h ig h e r c o s t b e c a u se b an k s or in s u r a n c e com
p a n ie s may n o t be a b le t o m eet t h e i r p a r t i c u l a r n e e d s f o r
m o rtg a g e fu n d s or b e c a u s e s a v in g s and lo a n f i n a n c i n g may
be deemed more c o n v e n ie n t . I t i s a l s o p o s s i b l e t h a t
b o r r o w er s may n o t be aware o f th e a d d i t i o n a l c o s t o f s a v
in g s and lo a n f i n a n c i n g . S a v in g s and lo a n a s s o c i a t i o n s
m ust c h a rg e more th a n do banks or in s u r a n c e com p an ies f o r
lo a n s b e c a u se s a v in g s and lo a n a s s o c i a t i o n s m ust e a rn a
h ig h e r r e t u r n on t h e i r i n v e s t e d f u n d s , and b e c a u s e , i n
m ost c a s e s , i t a p p e a r s t h a t s a v in g s and lo a n a s s o c i a t i o n s
assum e more r i s k i n t h e i r lo a n s .
The s a f e t y o f o w n ersh ip c la im s i n a s a v in g s and
lo a n a s s o c i a t i o n i s d ep en d en t on th e s a f e t y o f th e a s s o c i
a t i o n 1 s in v e s t m e n t s and t h e ad eq u acy o f I t s r e s e r v e s t o
ab so rb l o s s e s . The s a f e t y o f i t s in v e s t m e n t s i s d ep en d en t
on th e p r o p o r t io n o f i t s fu n d s w h ich a re i n v e s t e d i n m o rt
gage lo a n s and t h e r i s k s in v o lv e d In i t s m ortg a g e lo a n
p o r t f o l i o . The r i s k s in v o lv e d i n i t s m o rtg a g e lo a n p o r t -
ii+5
f o l i o in v o l v e su ck f a c t o r s a s th e tim e f o r w h ic h lo a n s are
w r i t t e n to e x te n d ; th e p r o p o r t io n a t e amount o f a m o r tiz e d
l o a n s , FHA and VA l o a n s , and lo a n s s e c u r e d by s i n g l e
f a m ily d w e l l i n g s ; th e c h a r a c t e r o f th e n e ig h b o r h o o d s i n
w h ic h se c u r e d p r o p e r ty i s l o c a t e d ; th e r e l a t i v e a b i l i t i e s
o f b o rro w ers t o m eet lo a n p aym en ts; and the lo a n - v a lu e
r a t i o . W hile th e a v e r a g e lo a n - v a lu e r a t i o o f s a v in g s and
lo a n a s s o c i a t i o n s i n C a l i f o r n i a i n d i c a t e s t h a t th e m o r t
g a g e lo a n p o r t f o l i o s o f su ch a s s o c i a t i o n s seem t o be p r o
t e c t e d a g a i n s t a d e c l i n e i n th e m arket p r i c e o f se c u r e d
p r o p e r t y , t h e r e i s r e a s o n t o b e l i e v e t h a t a g r e a t d e a l o f
v a r i a t i o n e x i s t s among i n d i v i d u a l a s s o c i a t i o n s w it h r e g a r d
t o t h e amount lo a n e d i n r e l a t i o n t o th e v a lu e o f th e
p r o p e r ty w h ich s e c u r e s th e lo a n , and t h a t i n many e a s e s
m ortg a g e lo a n p o r t f o l i o s are n o t a d e q u a te ly p r o t e c t e d
a g a i n s t a p o s s i b l e change i n econ om ic c o n d i t i o n s .
A g r e a t d e a l o f v a r i a t i o n seem s to e x i s t among
s a v in g s and lo a n a s s o c i a t i o n s w it h r e g a r d t o t h e i r r e s e r v e
r a t i o s . A lth o u g h r e s e r v e s are im p o rta n t t o th e s a f e t y o f
s a v in g s and lo a n a s s o c i a t i o n s , i t seem s t h a t th e r e l a t i v e
r i s k s i n v o lv e d i n m ortgage lo a n p o r t f o l i o s are e v e n more
im p o r ta n t. T h is a p p e a r s tr u e b e c a u s e r e s e r v e s may be
i n v e s t e d i n m o rtgag e lo a n s and b e c a u se th e r e l a t i v e s a f e t y
o f t h e m o rtg a g e lo a n p o r t f o l i o w i l l d e te r m in e th e amount
114.6
o f r e s e r v e s n e c e s s a r y t o a b so rb l o s s e s .
W hile s a v in g s and lo a n a s s o c i a t i o n s i n th e Los
A n g e le s a r e a have b een m e e tin g w ith d r a w a l r e q u e s t s on
demand, w h eth er or n o t t h i s p r a c t i c e i s c o n tin u e d depend s
t o a la r g e e x t e n t on th e c o n t in u a t io n o f p r e s e n t econ om ic
c o n d i t i o n s . W hether or n o t a p a r t i c u l a r s a v in g s and lo a n
a s s o c i a t i o n w i l l c o n tin u e to m eet w ith d r a w a l r e q u e s t s on
demand d ep en d s p r im a r ily on i t s su p p ly o f c a sh and U n ite d
S t a t e s Government s e c u r i t i e s , i t s unused b o rro w in g c a p a c i
t y from th e F e d e r a l Home Loan Bank, i t s su p p ly o f m a rk et
a b le l o a n s , th e c o n t i n u a t i o n o f paym ents by b o r r o w e r s , and
th e c o n t i n u a t i o n o f new s a v in g s i n v e s t e d i n th e a s s o c i a
t i o n . I t i s p r o b a b le t h a t a ch an ge i n econ om ic c o n d i t i o n s
w ould f o r c e many a s s o c i a t i o n s t o r e q u ir e n o t i c e o f i n t e n
t i o n to w ith d raw s a v in g s b e f o r e fu n d s w ou ld be r e tu r n e d
t o s a v e r s .
W h ile s a v in g s and lo a n a s s o c i a t i o n s i n th e Los
A n g e le s a r e a ap p ear a t th e p r e s e n t tim e t o be s a f e and
l i q u i d o u t l e t s f o r s a v i n g s , w h e th e r or n o t th e y c o n tin u e
a s su ch i s l a r g e l y d ep en d en t on th e f i n a n c i a l p o l i c i e s o f
t h e i r i n d i v i d u a l m anagem en ts. The lo n g -te r m p r o f i t a b i l i t y
o f an in v e s tm e n t i n a s a v in g s and lo a n a s s o c i a t i o n i s
o f t e n n e i t h e r c o n s i s t e n t w ith p r e s e n t h ig h e a r n in g s o f th e
a s s o c i a t i o n n o r th e p r e s e n t h ig h r a te o f r e t u r n r e c e i v e d
on su ch in v e s t m e n t . The s a f e t y o f an in v e s tm e n t i n an
u n in s u r e d a s s o c i a t i o n i s e n t i r e l y d ep en d en t on f u t u r e e c o
nomic c o n d i t i o n s and th e a b i l i t y o f i t s management to
o p e r a te th e a s s o c i a t i o n s u c c e s s f u l l y . The l i q u i d i t y o f an
in v e s tm e n t i n a s a v in g s and lo a n a s s o c i a t i o n , w h eth er or
n o t in s u r e d , i s d ep en d en t on t h e s e same f a c t o r s . T h ere
f o r e , p o t e n t i a l i n v e s t o r s s e e k in g lo n g -te r m p r o f i t a b i l i t y
f o r s a v in g s and lo a n in v e s t m e n t s sh o u ld i n v e s t i g a t e th e
f i n a n c i a l s t a n d in g s o f a s s o c i a t i o n s , a s m igh t be r e v e a le d
v
by t h e i r b a la n c e s h e e t s , and th e f i n a n c i a l p o l i c i e s and
r e l a t i v e a b i l i t i e s o f t h e i r r e s p e c t i v e m anagem ents.
CHAPTER IV
THE QUANTITATIVE IMPORTANCE OF SAVINGS AND LOAN
ASSOCIATIONS IN LOS ANGELES COUNTY
P u r p o se s o f th e c h a p t e r . The c h a r a c t e r i s t i c s o f
s a v in g s and lo a n a s s o c i a t i o n s , t h e i r econ om ic and l e g a l
e n v ir o n m e n t, and t h e i r m a n a g e r ia l p o l i c i e s w ere i n v e s t i
g a t e d i n p r e v io u s c h a p te r s # T h is was done to p r o v id e a
b a s i s f o r a c l e a r e r u n d e r s ta n d in g o f th e c o n t e n t s o f
C h apter IV . The p u r p o s e s o f t h i s c h a p te r a re t o exam ine
th e q u a n t i t a t i v e im p o rta n ce o f s a v in g s and lo a n a s s o c i a
t i o n s i n th e f i e l d s o f s a v in g s and home f in a n c e i n Los
A n g e le s C ounty from 19I 4 .I th r o u g h 1951» a s w e l l a s t o an a
l y z e th e p r o b a b le r e a s o n s f o r t h e I n c r e a s e d q u a n t i t a t i v e
im p ortan ce o f s a v in g s and lo a n a s s o c i a t i o n s i n th e f i e l d s
o f s a v in g s and home f i n a n c e i n t h i s a r e a .
The grow th o f s a v in g s i n s a v in g s i n s t i t u t i o n s i n
Los A n g e le s C o u n ty . As T a b le V I I , page lij.9 , i n d i c a t e s ,
th e t o t a l amount o f s a v in g s i n Los A n g e le s C ounty in c r e a se d
s u b s t a n t i a l l y d u rin g th e 19^4-1 th r o u g h 1951 p e r io d . A
number o f f a c t o r s c a u se d t h i s i n c r e a s e . F i r s t , th e popu
l a t i o n i n Los A n g e le s County in c r e a s e d a lm o st 50 p e r c e n t
d u r in g t h e d eca d e b e tw e en 19^-0 and 1 9 5 0 . T h is i s shown
i n T ab le V I I I , page 15 0 . S e c o n d , a h ig h l e v e l o f r e g i o n a l
1 1 * 9
TABLE V II
D O L L A R A M O U N T O F SAVINGS H ELD B Y INDIVIDUALS IN
LO S ANG ELES C O U N T Y A N D TH E PER C EN TA G E C H A N G E
FR O M 191*1 - 1951 A N D 191*5 - 1951
(M illions of Dollars)
Savings in
End
o f
year
Savings
deposits
in banks
Postal
Savings
United States
Savings Bonds
Series A-E
savings and
loan as
sociations
Life
insurance
eq u ities Total®
19kl $ 679 $ 1*6 $ 131* $ n*o $ 605 $1,605
19l*2 7l4l 55 305 153 655 1,909
191*3 935 75 615 181 720 2,527
191*1* 1,231*
101* 961 232 801*
3,335
191*5 1,557 129 1,098 287 9 09 3,981
191*6
l,7l*l
11*1 1,029 31*1
1,030 1*,281
19U7
1,802
ii*i
1,012 1*10
1,151 I*, 515
19l*8
1,765
131 981* 512 1,277
1*,668
19 k 9 l , 778
122
971*
6U8 1,391 1*,913
1950
l,7l*2 106 921*
769 1,512 5,052
1951 1,81*7 91 870
931 1,627 5,366
Percentage
change
19U 1-
1951 +172.0 +102.2 +51*9.2 +565*o +168.9 +231+.3
391* 5-
1951 + 18.6 - 29.3 - 20.8 +22U.0
+ 78.9 + 31*.8
aFigures do not add in a l l cases due to rounding.
SOURCE: Liquid Savings Held by Individuals in Los Angeles County,
Research Department, Security-F irst National Bank of
Los Angeles, April 17, 1952*
150 |
t
TABLE VIII I
i
PO PULATION IN LO S ANG ELES CO UNTY, CALIFORNIA, A N D j
i
TH E UNITED STATES, 19U0-1950
Los Angeles County California United States
19U0 2,785,61*3 6,907,387 131,669,275
19 £0 I*,125,161* 10,730,200 150,161,000
Per cent
increase + 1*8.1
+ 55.3 + 31*.0
i SOURCE; Population, Research Department, Security-F irst National
Bank o f Los Angeles, March 13, 19^0.
t
i
income p r e v a i l e d i n th e Los A n g e le s a r e a d u rin g t h i s p e r io d ,1
p r im a r ily b e c a u s e o f : (1 ) th e p r o d u c t io n i n t h i s a r e a o f
a la r g e p o r t i o n o f t h e m a t e r i a l s f o r W orld War I I and post**
war N a t io n a l d e f e n s e , (2 ) th e h ig h l e v e l o f N a t io n a l incom e
w h ich h e lp e d t o s t i m u l a t e econ om ic a c t i v i t y In th e Los
A n g e l e s ‘a r e a , and (3 ) econ om ic a c t i v i t y w h ich r e s u l t e d from
m e e tin g th e demands o f a r i s i n g p o p u la tio n * As a r e s u l t
o f t h e s e f a c t o r s , and d e s p i t e a h ig h l e v e l o f t a x e s and a
r i s i n g c o s t o f l i v i n g , w h ich made s a v in g d i f f i c u l t f o r
many p e o p le and made many p e o p le r e l u c t a n t t o s a v e , th e
t o t a l amount o f s a v in g s i n Los A n g e le s County i n c r e a s e d
s u b s t a n t i a l l y d u r in g t h e 19^1 th r o u g h 1951 p e r io d .
The grow th o f s a v in g s i n s a v in g s and lo a n a s s o c i a
t i o n s i n Los A n g e le s C ou n ty , As T a b le V I I , page l l \ S , i n d i
c a t e s , th e amount o f s a v in g s i n s a v in g s and lo a n a s s o c i a
t i o n s i n Los A n g e le s County in c r e a s e d more p e r c e n ta g e w is e
th a n d id s a v in g s i n v e s t e d i n o t h e r s a v in g s i n s t i t u t i o n s
i n t h i s a r e a d u rin g th e 1 9 i|l th ro u g h 1951 p e r io d . At th e
end o f 1 9 5 1 9 s a v in g s i n s a v in g s and lo a n a s s o c i a t i o n s were
g r e a t e r i n amount th a n w ere s a v in g s i n v e s t e d i n U n ite d
S t a t e s G overnm ent S a v in g s Bonds or P o s t a l S a v in g s , and
w ere ab ou t h a l f th e amount o f s a v in g s d e p o s i t s i n banks or
l i f e in s u r a n c e e q u i t i e s .
152
As T a b le IX , page 153 sh ow s, th e i n c r e a s e i n th e
t o t a l amount o f s a v in g s i n s a v in g s and lo a n a s s o c i a t i o n s
l a r g e l y r e s u l t e d from a r i s e i n th e number o f i n v e s t o r s
i n t h e s e a s s o c i a t i o n s , a lth o u g h t o some e x t e n t th e grow th
may be a t t r i b u t e d t o a s u b s t a n t i a l i n c r e a s e i n th e a v e r a g e
amount o f s a v in g s and lo a n a s s o c i a t i o n a c c o u n t s .
As a r e s u l t o f a t t r a c t i n g more i n v e s t o r s who, on
th e a v e r a g e , i n v e s t e d more fu n d s i n t h e s e i n s t i t u t i o n s ,
s a v in g s and lo a n a s s o c i a t i o n s i n Los A n g e le s C ounty more
th a n d o u b led t h e i r q u a n t i t a t i v e im p o r ta n c e r e l a t i v e to
t o t a l s a v in g s i n t h i s a r ea b etw een 19^1 and th e end o f
1951* T h is i s shown i n T a b le X, page 15^* T h is t a b l e
a l s o i n d i c a t e s t h a t a t th e end o f 1951 > s a v in g s and lo a n
I a s s o c i a t i o n s i n Los A n g e le s County w ere i n t h i r d p la c e a s
an o u t l e t f o r s a v in g s i n t h i s a r e a .
S u g g e s te d r e a s o n s f o r th e grow th o f s a v in g s i n
s a v in g s and lo a n a s s o c i a t i o n s i n Los A n g e le s C ou n ty .
W hile t h e r e may be o t h e r s , i t seem s t h a t th e r e are two
. im p o rta n t and p r o b a b le r e a s o n s why s a v in g s and lo a n a s s o c i
a t i o n s h ave c la im e d a r e l a t i v e l y la r g e p r o p o r t io n o f sa v
in g s i n th e Los A n g e le s a r e a . F i r s t , s a v in g s and lo a n
a s s o c i a t i o n s have p a id a h ig h e r r a t e o f r e t u r n on i n v e s t e d
s a v in g s and have p r o v id e d many o f th e a d v a n ta g e s o f f e r e d
TABLE IX
N U M B E R O F INVESTORS, D O L L A R A M O U N T O F INVESTM ENTS,
A N D PER C EN TA G E C H A N G E S IN N U M B E R O F INVESTORS A N D
D O L L A R A M O U N T O F INVESTM ENTS IN SAVINGS A N D L O A N
ASSOCIATIONS3” IN LOS ANG ELES CO UNTY, 19Ul - 1950
End of Year
Number of
investors Savings accounts’ * 1
Average amount
of account per
investor
191*1 105,380 $120,373,169 $1,11*2.27
191*2
112,799
131*,1*98,610
1,192.37
191*3 121*, 158 167,777,018 1,351.32
1 9 k h 11*3,013 221,1*31,395 1,51*8.33
19l*5 161,3 6 9 278,072,290 1,723.21
191*6 1 9 9 ,0 7 5 331,91*3,310 1,667.1*3
1 9 k 7
229,1*12
1*05,71*1*, 663 1, 768.63
19U8
21*1,223 507, 898,763 2,105.52
19 k 9 298,1*66 618, 078,263 2, 070.86
1 9 5 0 361,028 71*0,785,553 2,051.87
Percentage change:
191*1-1950 + 211* .12 + 515.1* + 79.6
Members of the Federal Home Loan Bank System,
b
Savings share accounts and investment c e r tific a te s .
SO U R C ES Calculated from data made available by the Eleventh D istr ic t j
I Federal Home Loan Bank* I
151*
TABLE X
DOLLAR AMOUNT OF, AND PERCENTAGE CHANGES IN, SAVINGS IN SAVINGS AND
LOAN ASSOCIATIONS IN LOS ANGELES COUNTY AND TOTAL SAVINGS'* OF
INDIVIDUALS IN LOS ANGELES COUNTY FROM 191*1-1951 AND 191*5-1951
(Millions of Dollars)
End of
year
Savings in savings
and loan
associations in
Los Angeles County
Total savings
of individuals
in Los Angeles
County
Percentage of savings
in savings and loan
associations to
total earnings
191*1 $11*0 $1,605 6.7$
19*2 153 1,909
8 .0
19*3 181
2,527 7.1
19** 232
3,335 6.7
19*3 287 3,981 7.1*
19*6
31*1 *,281
7.9
19*7
1*10
*,515
9.0
19*8 512 *,668 10.9
19*9 61*8
*,913
13.0
1930
769 5,052 15.2
1931 931 5,366 17.3
Percentage change;
19*1-1931
+565.0
+23*.3
19*3-1931 +221*.0 + 3*.8
-
"Total savings include savings deposits in banks, Postal Savings,
United States Savings Bonds, Series A-E, life insurance equities,
and savings in savings and loan associations.
SOURCEs Liquid Savings Held by Individuals in Los Angeles County,
Research Department, Security-First National Bank of Los
Angeles, April 17, 1952.
155
by s i m i la r s a v in g s i n s t i t u t i o n s . Second, s a v in g s and lo a n
a s s o c i a t i o n s have c a r r ie d on r e l a t i v e l y a g g r e s s i v e s e l l i n g
cam paigns.
U ndoubtedly the b a s i c r e a so n why an in c r e a s e d p r o
p o r t i o n of i n d i v i d u a l s a v in g s has flo w ed i n t o sa v in g s and
lo a n a s s o c i a t i o n s during t h e p a s t decade i s th a t th e s e
i n s t i t u t i o n s have p a id a h ig h e r r e t u r n on s a v in g s th an
have o th e r s a v in g s i n s t i t u t i o n s . 1 I t i s p rob ab le t h a t th e
r a t e o f r e tu r n which a s a v in g s i n s t i t u t i o n p ays on i n v e s t
ed s a v in g s has become an i n c r e a s i n g l y im portant elem en t
in th e c h o ic e o f a s a v in g s o u t l e t as i n d i v i d u a l s have
become more aware o f th e d e c l i n i n g p u rc h a sin g power of th e
d o l l a r . T able X I, page l5&, i n d i c a t e s t h a t the p u rc h a sin g
power o f the d o l l a r d e c li n e d s t e a d i l y and s i g n i f i c a n t l y
d u rin g the I 9J 4 .I through 1951 p e r io d .
W hile r e tu r n i s a str o n g elem en t in an in d iv id u a l* s
I
D uring t h i s p e r io d th e i n t e r e s t on P o s t a l S a v in g s
h as b een 2 . 0 p er c e n t and 2 ,9 p e r c en t on U n ited S t a t e s
Government Bonds S e r i e s ffE" i f h e l d to m a t u r ity . From
I 9 I 4 -I to I 9 I 4 .9 , i n t e r e s t r a t e s on s a v in g s a c c o u n ts i n com
m e r c ia l banks i n the Los A n g e le s area ranged from t h r e e -
e ig h t h s of 1 p e r cen t to 1 .5 p er c e n t and from 19^9 - 1 9 5 2
ranged b etw een 1 .0 per c e n t to 2 . 0 per c e n t . P e r s o n a l
i n t e r v i e w w ith L. E. F r i e s e , V i c e - P r e s i d e n t , S e c u r i t y -
F i r s t N a t io n a l Bank o f Los A n g e le s . Between 19^-1 and
19lj.6, s a v in g s and lo a n a s s o c i a t i o n s i n t h i s area p a id b e
tween 2 . 0 p e r c en t and 2 . 5 p e r c e n t r e tu r n on i n v e s t e d
s a v in g s , and b etw een 19i|7 and 1 9 5 2 , 3 .0 per c e n t t o 3*5
p er c e n t . P e r s o n a l i n t e r v i e w w it h M .F.B. MacBan, A s s i s t
ant V i c e - P r e s i d e n t , C a l i f o r n i a S a v in g s and Loan League.
TABLE XI
CONSUMER'S
■
PRICE INDEX AND VALUES OF THE
LOS ANGELES FROM 19U1 - 1951
(Yearly Averages)
1935 - 1939 = 100
DOLLAR IH
i
Year
Consumer's price
index
Value of the
dollar (cents)
191*1 106.2
.9k
191*2
119.1* •8U
191*3 123.1*
.80
191*1* 127.1* .78
191*3 131.1 .76
191*6
11*1.3 .71
191*7 139.3
.63
191*8
171.1 .58
191*9 170.6 .58
1930
171.7 .58
1931
. ...
186.1*
.5U
|SOURCE5 Calculated from data made available by the Research Department, \
' Security-First National Bank of Los Angeles. I
157
c h o ic e o f a s a v in g s i n s t i t u t i o n , i t i s p rob ab le t h a t th e
apparent s a f e t y and l i q u i d i t y w hich a s a v in g s i n s t i t u t i o n
can p r o v id e fo r h i s s a v in g s are ev en more im portant e l e
m en ts. The in c r e a s e i n sa v in g s i n s a v in g s and lo a n a s s o c i
a t i o n s i n d i c a t e s th a t t h e r e has b e e n in c r e a s e d p u b lic
c o n fid e n c e i n the s a f e t y o f i n v e s t i n g i n s a v in g s and lo a n
a s s o c i a t i o n s . I t i s probable th a t a g r e a t d e a l o f t h i s
c o n fid e n c e i s based on the f a c t t h a t most s a v in g s and loan
a s s o c i a t i o n s are in s u r e d by the F e d e r a l S a v in g s and Loan
In su ra n ce C o r p o r a tio n .
As i n d i v i d u a l s have become aware o f the d e c l i n i n g
p u rch a sin g power o f th e d o l l a r , and as a r e s u l t o f the
sh o r ta g e o f many consumer goods during World War I I , i t
i s p rob ab le t h a t l i q u i d i t y h as become an i n c r e a s i n g l y
im portant elem en t i n th e c h o ic e o f a s a v in g s i n s t i t u t i o n .
As a r e s u l t o f e x p e r i e n c e , m ost p e o p le are a n x io u s t o have
t h e i r s a v in g s r e a d i l y a v a i l a b l e i n order to p u rch ase goods
w hich may become sc a r c e a n d /o r t o purchase goods b e fo r e
p r i c e s r i s e f u r t h e r . W hile l i q u i d i t y i s more im p orta n t
to some i n d i v i d u a l s than t o o t h e r s , i t i s probab le t h a t i f
s a v in g s and lo a n a s s o c i a t i o n s had n ot been m eetin g w it h
drawal r e q u e s t s on demand, few er i n d i v i d u a l s would have
i n v e s t e d t h e i r s a v in g s i n t h e s e i n s t i t u t i o n s . S in c e sa v
i n g s and lo a n a s s o c i a t i o n s have been m e e tin g w ith d raw al
153
r e q u e s t s on demand, t h e s e i n s t i t u t i o n s have a p p ea le d to
i n v e s t o r s who seek l i q u i d i t y f o r t h e i r s a v in g s a s w e l l as
to t h o s e t o whom l i q u i d i t y i s a l e s s im portant c o n s i d e r a
t i o n .
While th e l e g a l r i g h t s of i n v e s t o r s i n s a v in g s and
lo a n a s s o c i a t i o n s i n d i c a t e t h a t i n d i v i d u a l s who i n v e s t i n
s a v in g s and loan a s s o c i a t i o n s sh ould lo o k upon s a v in g s and
lo a n a s s o c i a t i o n s as an o u t l e t f o r fu n d s o f a lo n g -te r m
n a t u r e , an i n c r e a s i n g l y la r g e r p r o p o r tio n o f th e fun ds
w hich have flo w e d i n t o s a v in g s and lo a n a s s o c i a t i o n s
a p p a r e n tly a re o f a tem porary n a t u r e .2 i s p rob ab le
t h a t becau se s a v in g s and lo a n a s s o c i a t i o n s have p a id w it h
drawal r e q u e s t s on demand, many i n d i v i d u a l s who have funds
i n s a v in g s and lo a n a s s o c i a t i o n s a r e unaware t h a t t h e y may
n o t r e l y oh th e c o n t i n u a t i o n o f t h i s p r a c t i c e .
U ndoubtedly, th e b a s ie r e a so n why s a v in g s i n sav in gs
and lo a n a s s o c i a t i o n s have in c r e a s e d p r o p o r t i o n a t e ly to
2
B e fo r e World War I I , the tu r n o v e r o f s a v in g s i n
s a v in g s and lo an a s s o c i a t i o n s as m easured by th e r a t i o of
w ith d ra w a ls to th e in f lo w o f new s a v in g s averaged about
5 0 .0 p e r c e n t . Norman S tr u n k , "The Improved In v estm en t
P o s i t i o n o f S a v in g s and Loan A s s o c i a t i o n s , ” J o u rn a l o f
F in a n c e , 1 1 : 2 : 6 , O ctob er, 191+7* The w ith d raw al r a t i o
du rin g th e p a s t fo u r y e a r s has ranged betw een 6 7 .^ p er
cen t and 7 2 .0 per c e n t . " S a v in g s and Loan A s s o c i a t i o n s
Boom,” B u s in e s s Week, May 17, 1952, p . 152.
159
s a v in g s i n v e s t e d i n o th e r s a v in g s i n s t i t u t i o n s i s t h a t
s a v in g s and lo a n a s s o c i a t i o n s have p r o v id e d a h ig h e r r e tu r n
than t h a t o f o th e r s a v in g s i n s t i t u t i o n s w ith com parable
sh o r t-r u n d e g r e e s o f l i q u i d i t y and s a f e t y .
In a d d it io n to th e s a v in g s w h ich s a v in g s and loan
a s s o c i a t i o n s would have a t t r a c t e d by m er ely sta n d in g p a s
s i v e l y a s a s a v in g s o u t l e t , an a d d i t i o n a l p r o p o r t io n o f
s a v in g s h as been a t t r a c t e d as a r e s u l t o f an a g g r e s s i v e
s e l l i n g campaign w hich has been c a r r ie d on by members o f
s a v in g s and lo a n in d u s t r y . The U n ited S t a t e s S a v in g s and
Loan League, th e N a t io n a l S a v in g s and Loan League, and th e
C a l i f o r n i a S a v in g s and Loan League, a l l o f w h ich are tr a d e
a s s o c i a t i o n s i n th e s a v in g s and lo a n f i e l d , have su p p le
m ented th e p r o m o tio n a l a c t i v i t i e s o f i n d i v i d u a l s a v in g s
and lo a n a s s o c i a t i o n s . By th e use o f v a r io u s a d v e r t i s i n g
m ed ia, t h e s e i n s t i t u t i o n s have' a ttem p ted to e d u c a te the
p u b lic t o th e m e r i t s o f sa v in g and to a d v e r t i s e th e ad
v a n ta g e s o f i n v e s t i n g funds i n s a v in g s and lo a n a s s o c i a
t i o n s •
The m er ch a n d isin g campaign w hich h as been c a r r ie d
on app ears t o have se r v e d to make th e p u b lic more aware
o f th e r e l a t i v e l y h ig h r a t e o f r e t u r n a v a i l a b l e on sa v in g s
i n v e s t e d i n sa v in g and lo a n a s s o c i a t i o n s than t o make th e
p u b lic f u l l y aware o f th e la c k o f a ssu r a n c e o f the
im m ediate l i q u i d i t y o f such fu n d s . As a r e s u l t o f such
a d v e r t i s i n g , and b eca u se d u rin g t h i s p e r io d s a v in g s and
lo a n a s s o c i a t i o n s have p r o v id e d im m ediate l i q u i d i t y f o r
♦
i n v e s t e d fu n d s, many p e o p le have come to look upon s a v in g s
and lo a n a s s o c i a t i o n s as ban ks. U ndoubtedly a la r g e p r o
p o r t io n o f sa v in g s w hich m ight have been i n v e s t e d i n banks
during the 19^-1 through 1951 p e r io d was i n v e s t e d i n sa v
in g s and lo a n a s s o c i a t i o n s . T h is seems l o g i c a l b e c a u se :
(1) i t i s prob ab le t h a t most i n v e s t o r s have n ot b een
aware o f the s i g n i f i c a n t d i f f e r e n c e s w hich e x i s t betw een
banks and s a v in g s and lo a n a s s o c i a t i o n s which may in flu e n c e
the c h a r a c t e r i s t i c s o f in v e s tm e n ts made i n t h e s e i n s t i t u
t i o n s ; and (2) during the 19i | l through 1 9 5 1 p e r io d s a v in g s
and lo a n a s s o c i a t i o n s p r o v id e d s a f e t y and l i q u i d i t y to
s a v in g s eq u a l to t h a t p r o v id e d by b a n k s, and s a v in g s and
lo a n a s s o c i a t i o n s p a id h ig h e r r e tu r n s on s a v in g s th a n d id
bank s .
W hile i t i s u n la w fu l f o r s a v in g s and lo a n a s s o c i a
t i o n s to r e p r e s e n t th e m se lv e s as b a n k s ,3 s a v in g s and lo a n
T h is a p p l i e s to C a l i f o r n i a S t a t e - c h a r t e r e d s a v
in g s and lo a n a s s o c i a t i o n s as w e l l as F e d e r a l S a v in g s and
Loan A s s o c i a t i o n s . 1951 E d i t i o n , B u ild in g and Loan A c t ,
S t a t e o f C a l i f o r n i a , A r t i c l e X I I, S e c t i o n s T§To5 and
l 2 .6 6 ; R u le s and R e g u la tio n s fo r In su ran ce of A c c o u n t s ,
(W ashington, D.C. : Home Loan Bank Board, l 9 5 l) > S e c t i o n
1 6 3 .2 7 .
1 6 1
a s s o c i a t i o n s , as a w h ole, have not a ttem p ted to c o r r e c t
*
th e g e n e r a l p u b lic m is c o n c e p tio n t h a t th e s e i n s t i t u t i o n s
are b an k s. Some sa v in g s and lo a n a s s o c i a t i o n s , on th e
o th e r hand, have r e c o g n iz e d t h a t an u n h e a lth y s i t u a t i o n
cou ld d ev e lo p i n t h e f u t u r e i f : (1) i n v e s t o r s e x p e c t the
same l i q u i d i t y from t h e i r a c c o u n ts i n s a v in g s and lo a n
a s s o c i a t i o n s as t h e y e x p e c t from an acco u n t i n a bank, and
(2) i t becomes im p o s s ib le f o r s a v in g s and lo a n a s s o c i a t i o n s
t o c o n tin u e t o p r o v id e such l i q u i d i t y . O b v io u s ly , sueh a
s i t u a t i o n would n o t be fa v o r a b le to i n v e s t o r s or to sa v
in g s and lo a n a s s o c i a t i o n s . At l e a s t two a s s o c i a t i o n s i n
the Los A n g ele s a r ea r e c o g n iz in g t h i s have a ttem p ted t o
make th e p u b lic aware t h a t in v e s tm e n ts i n s a v in g s and loa n
a s s o c i a t i o n s a re n o t th e same a s s a v in g s a c c o u n ts i n banks.
In one o f i t s a d v e r t i s i n g b r o c h u r e s, S o u th e rn C a l i f o r n i a
B u ild in g and Loan A s s o c i a t i o n s t a t e s : "This A s s o c i a t i o n
i s n o t a bank. W e do n o t r e p r e s e n t o u r s e l v e s as a bank.
Money i s i n v i t e d and a c c e p te d h e r e f o r in v e s tm e n t— n o t fo r
d e p o s i t . 1 1
As p r e v io u s l y s t a t e d , an o th er s a v in g s and lo a n a s
s o c i a t i o n i n th e Los A n g ele s a rea f o r a p e r io d o f tim e
In vestm en t C e r t i f i c a t e s (Los A n g e le s : S ou thern
C a l i f o r n i a B u ild in g and Loan A s s o c i a t i o n , 1 9 5 2 ), p . 5*
1 6 2
made i t n e c e s s a r y f o r i n v e s t o r s to g i v e n o t i c e o f i n t e n
t i o n to withdraw fun ds b e fo r e i t p a id such r e q u e s t s .
While i t was p o s s i b l e f o r t h i s a s s o c i a t i o n to m eet w i t h
drawal r e q u e s t s on demand, th e p e r io d o f n o t i c e was i n
voked i n order t o ed u cate i n v e s t o r s t o lo o k upon t h e i r
a c c o u n ts in t h i s a s s o c i a t i o n as lo n g -te r m in v e s tm e n ts
r a th e r than a s th e y would lo o k upon d e p o s i t s i n a bank.
There h a s been c o n s id e r a b le h o s t i l i t y betw een banks
and s a v in g s and lo a n a s s o c i a t i o n s b e c a u se th e p u b lic has
come to lo o k upon s a v in g s and lo a n a s s o c i a t i o n s as ban ks,
and b e c a u se m ost s a v in g s and loan a s s o c i a t i o n s have n ot
a ttem p ted to c o r r e c t t h i s s i t u a t i o n . In 195l> a c a se was
brought a g a in s t Coast F e d e r a l S a v in g s and Loan A s s o c i a
t i o n by M aurice C. S p a r l i n g , S u p e r in te n d e n t o f Banks i n
C a l i f o r n i a . The p l a i n t i f f con ten d ed t h a t t h i s a s s o c i a t i o n
was r e p r e s e n t in g i t s e l f to be a banking i n s t i t u t i o n and,
t h e r e f o r e , was v i o l a t i n g c e r t a i n s e c t i o n s o f the C a lif o r n ia
Banking Code w hich make i t u n la w fu l f o r an i n s t i t u t i o n to
o p e r a te a banking b u s i n e s s or to r e p r e s e n t i t s e l f as
o p e r a tin g such a b u s i n e s s when n o t o r g a n iz e d f o r such a
p u r p o se . I t was p o in t e d out t h a t s ig n s i n fo u r a d j o in in g
windows o f C oast F e d e r a l S a v in g s and Loan A s s o c i a t i o n read:
163
1. COAST F e d e r a l
2 . FEDERALLY in s u r e d
3 . SAVING-S a c c o u n ts
Ij.. Member o f th e F e d e r a l Home Loan BANK
I t was contended t h a t such a d v e r tis e m e n t appeared from a
d i s t a n c e to read 1 1 C oast F e d e r a l S a v in g s B an k .” I t was
a ls o con ten d ed t h a t t h i s sa v in g s and lo a n a d v e r t i s e d
” i n t e r e s t ” r a t h e r than ” d iv id e n d s .
The c o u r t h e ld t h a t F e d e r a l l y c h a r te r e d s a v in g s
and lo a n a s s o c i a t i o n s were n o t under th e j u r i s d i c t i o n of
th e S u p e r in te n d e n t o f Banks and t h a t s t a t e s t a t u t e s r e g u
l a t i n g banking a c t i v i t i e s e o u ld n o t c o n s t i t u t i o n a l l y be
6
a p p lie d t o i n s t i t u t i o n s c r e a te d by a F e d e r a l law.
I t i s l i k e l y th a t s u p e r v is o r y a u t h o r i t i e s h avin g
j u r i s d i c t i o n over C oast F e d e r a l Savings and Loan A s s o c i a
t i o n to o k some a c t i o n to p r e v e n t t h i s a s s o c i a t i o n from
c o n t in u in g such a d v e r t i s i n g , s in c e such a d v e r t i s i n g would
seem t o v i o l a t e th e r e g u l a t i o n s r e l a t i n g t o a d v e r t i s i n g as
is s u e d by the F e d e r a l S a v in g s and Loan In su ran ce Corpora
t i o n , W hile a t th e p r e s e n t tim e Coast F e d e r a l S a v in g s and
^ Judge James M. G a rte r on S a v in g s and Loan A s s o c i - i
a t i o n s , The Los A n g e le s D a i l y Jo u rn a l R e p o r ts, V o l. I I ,
No. 7 , J u l y , H ^ 5 1 , PP." 2 2 0 -2 2 1 .
6
" S ta te Abandons A ppeal i n S u it f o r Power o v e r
Loan A s s o c i a t i o n d o es not seem to be a tte m p tin g to s t r e s s
th e f a c t t h a t i t i s n o t a bank, i t s a d v e r t i s i n g became
c o n s id e r a b ly more c o n s e r v a t i v e a f t e r i t became in v o lv e d
i n t h i s l e g a l d i s p u t e .
U ndoubtedly th e p r o m o tio n a l a c t i v i t i e s w hich have
been c a r r ie d on i n th e sa v in g s and lo a n f i e l d have been
r e s p o n s ib l e f o r p a r t of th e in c r e a s e o f s a v in g s i n s a v in g s
and lo a n a s s o c i a t i o n s i n Los A n g ele s County. I t i s p ro b
a b l e , how ever, t h a t such p r o m o tio n a l a c t i v i t i e s have been
more s u c c e s s f u l i n a t t r a c t i n g fun ds o f a tem porary n atu re
than o f a lo n g -te r m n a t u r e , s in c e th e y have n o t em phasized
th e f a c t t h a t s a v in g s i n s a v in g s and lo a n a s s o c i a t i o n s do
n ot have a ss u r e d l i q u i d i t y .
Growth o f h o u sin g f a c i l i t i e s and home ow nership i n
th e Los A n g e le s a r e a . As a r e s u l t o f an in c r e a s i n g popula
t i o n and, s u b s e q u e n t ly , an in c r e a s e i n the number o f
f a m ily u n i t s , p lu s th e h ig h income l e v e l e x i s t i n g i n the
Los A n g e le s a r e a from 19ifl through 1951? an in c r e a s in g need
f o r a d d i t i o n a l h o u sin g f a c i l i t i e s a ro se i n t h i s area dur
in g t h i s p e r io d . Due to new c o n s t r u c t io n and c o n v e r s io n ,
r e s u l t i n g i n an in c r e a s e i n th e number o f u n i t s i n e x i s t i n g
F e d e r a l Loan C om panies,1 1 The Los Angele s D a ily J o u r n a l,
June 6 , 1952, p . 1.
s t r u c t u r e s , th e e x p a n s io n o f the h o u sin g su p p ly i n Los
A n g e le s h as been p r o p o r t i o n a t e ly g r e a t e r than the p o p u la
t i o n grow th of t h i s area d u rin g th e p a s t d e c a d e .7 The
developm ent o f th e h o u sin g su p p ly i n Los A n g e le s o ccu rred
p r im a r ily du rin g th e p ostw ar y e a r s , b e c a u se b u ild in g
r e s t r i c t i o n s i n e x i s t e n c e du rin g World War I I c u r t a i l e d
new c o n s t r u c t i o n d u rin g th e War p e r io d .
At the p r e s e n t t im e , th e h o u sin g sh o r ta g e e v id e n t
i n th e Los A n g e le s area d u rin g , and f o r some y e a r s f o l l o w
i n g , World War I I , seems t o be o v e r . There i s some b a s i s
f o r b e l i e v i n g t h a t an u n d e r ly in g su rp lu s o f h o u sin g may
have d e v e lo p e d a s a r e s u l t o f th e b u i ld in g boom w hich has
o ccu rr ed i n t h i s a r ea d u rin g th e postw ar y e a r s . Lacking
l e s s f a v o r a b le economic c o n d i t i o n s , i . e . , th e p r e s e n t
u n u s u a lly h ig h l e v e l s o f employment, in com es, and g e n e r a l
b u s i n e s s a c t i v i t y , a s u r p lu s of h o u sin g m igh t now be e v i
den t in t h i s area.®
A la r g e p r o p o r tio n o f the fu n d s f a c i l i t a t i n g the
e x p a n sio n o f th e h ou sin g su p p ly i n Los A n g ele s has come
-
Conrad C. Jam ison, wP o p u la tio n Trends in th e Los
A n g e le s Are a , 1 1 R e s i d e n t i a l R esearch R e p o r t, F ou rth
Q u a r te r , 195? 1 (Los A n g e le s : R e s i d e n t i a l R esearch Com
m i t t e e , 1 9 5 2) , p . 1 3 .
8
166
from le n d in g i n s t i t u t i o n s such as in su r a n c e com p anies,
b an k s, and s a v in g s and lo a n a s s o c i a t i o n s . Sine© i t i s
b e l i e v e d t h a t s a v in g s and loan a s s o c i a t i o n s have been more
a c t i v e i n le n d in g funds f o r the c o n s t r u c t io n o f one t o
fo u r fa m ily d w e l l in g s than have e i t h e r banks or in su r a n c e
com panies and, sine© th e h o u sin g supply i n t h i s a r ea has
in c r e a s e d t o a la r g e e x t e n t as a r e s u l t of the c o n s t r u c
t i o n of one to f o u r f a m ily d w e l l i n g s , i t i s p rob ab le th a t
a la r g e p r o p o r tio n o f the fu n d s through w hich the h o u sin g
su p p ly i n the Los A n g e le s a rea h as in c r e a s e d has come
from s a v in g s and lo a n a s s o c i a t i o n s .
I n c r e a s e i n th e p r o p o r tio n o f homes o c cu p ied by
owners i s one o f th e m ost s i g n i f i c a n t changes i n th e fu n
dam ental h ou sin g c h a r a c t e r i s t i c s o c c u r r in g during the p a s t
decade i n th e Los A n g e le s a r e a . In 191+0, ^0 per cen t o f
the homes In th e Los A n g e le s stan dard m e t r o p o lit a n a r ea
were o w n er -o cc u p ie d . T h is f i g u r e was in c r e a s e d t o P©r
c e n t by 19f?0.9 T h is was th e d i r e c t r e s u l t o f the new
The Los A n g e le s stan dard m e t r o p o lit a n a r ea i n
c lu d e s b o th Los A n g e le s and Orange C o u n t ie s , "Housing
C h a r a c t e r i s t i c s of th e Los A n g e le s , C a l i f o r n i a , Standard
M e tr o p o lita n Area: A p r il 1, 1 9 5 0 ,” 195>Q Census o f H ousing
P r e lim in a r y R eports (W ashington, D . C . : U n ite d S t a t e s
Departm ent o f Commerce, 1 9 5 1 ), p . 2 .
c o n str u c tio n , and the s a l e o f e x i s t i n g r e n t a l s f o r owner-
occupancy# The i n c r e a s e i n home ow nership i n t h i s area
was th e i n d i r e c t r e s u l t o f th e demand f o r h o u sin g ; the
a v a i l a b i l i t y of fun ds f o r home o w n ersh ip , i n many c a s e s a t
low er m onth ly payments than th e l e v e l o f r e n t s ; and th e
a b i l i t y o f many, through in c r e a s e d in co m es, to sa v e funds
f o r n e c e s s a r y down paym ents.
Growth o f r e a l e s t a t e le n d in g by s a v in g s and lo a n
a s s o c i a t i o n s i n Los A n g e le s C ounty# As Table X II, page
l6 8 , i n d i c a t e s , s a v in g s and lo a n a s s o c i a t i o n s p a r t i c i p a t e d
to an i n c r e a s i n g e x t e n t i n r e a l e s t a t e le n d in g i n Los
A n g ele s County from 19^-3 through 1951* In 1951 $ sa v in g s
and lo a n a s s o c i a t i o n s made a lm ost o n e - t h i r d o f th e t o t a l
r e a l e s t a t e lo a n s i n t h i s area#
S u g g e ste d r e a s o n s f o r th e in c r e a s e d p a r t i c i p a t i o n
o f r e a l e s t a t e le n d in g by s a v in g s and lo a n a s s o c i a t i o n s
in Los A n g e le s C ounty# W hile th e r e may be o t h e r s , i t
seems p ro b a b le th a t th e r e are two probab le and im p ortan t
r e a so n s f o r the in c r e a s e d p a r t i c i p a t i o n o f s a v in g s and
lo a n a s s o c i a t i o n s i n r e a l e s t a t e le n d in g i n Los A n g ele s
County. F i r s t , the in c r e a s e i n s a v in g s i n v e s t e d i n sa v
i n g s and lo a n a s s o c i a t i o n s has in c r e a s e d th e a b i l i t y o f
t h e s e i n s t i t u t i o n s to make r e a l e s t a t e l o a n s . Second,
168
TABLE XII
REAL ESTATE LOANS MADE AND HELD BY SAVINGS AND LOAN ASSOCIATIONS
IN LOS ANGELES COUNTY, 19h3 - 19$1*
Yearly
totals
Real estate loans made
Humber Amount
Per cent of
a ll loans
Amount held
end of period
191*3
19,1*52 $ 61,5ol*,960 17.6 $170,1*01,561*
191*1* 21,830 77,999,269 17.1
191*, 680,162
19U5 21*, 583
101,51*3,606 18.0 222,253,51*1
191*6 31,051 165,266,020 ll*.2 312,151,1*60
19l*7 38,851* 228,1*71*,1*10*
18.2 1 *21,901,216
191*8 1*3,370
21*6,01*1,31*2
21.7 51*1*,960, 698
191*9 51,801 326,903,31*0 30.1 682,112,31*3
1950
67,713 511,797,177 29.5 81*9,386,119
1951 58,673 1 *68,91*6,656 30.3 969,51*3,091
Includes all Federally Insured Savings and Loan Associations in
Los Angeles County.
SOURCE: Eleventh District Federal Home Loan Bank.
I
169
th e le n d in g p o l i c i e s o f s a v in g s and lo a n a s s o c i a t i o n s have
\
been such t h a t th ey have met a la r g e p r o p o r tio n o f th e
demand w hich has e x i s t e d f o r m ortgage fu n d s .
S a v in g s and lo a n a s s o c i a t i o n s , on th e w h o le , have
been more a n x io u s to len d funds f o r c o n s t r u c t io n than have
the two o th e r im p ortan t le n d in g i n s t i t u t i o n s , in su r a n c e
com panies and ban ks. As p r e v io u s l y s t a t e d , in su r a n c e com
p a n ie s c o n fin e t h e i r m ortgage le n d in g p r im a r ily to le n d in g
on e x i s t i n g s t r u c t u r e s . W hile some banks make c o n s tr u c t io n
l o a n s , many do n o t . On the o th e r hand, most s a v in g s and
lo a n a s s o c i a t i o n s len d fu n d s f o r c o n s t r u c t i o n p u r p o se s.
W hile a g r e a t d e a l o f new c o n s t r u c t io n h as been
fin a n c e d w ith FHA and VA lo a n s made by i n s t i t u t i o n a l
l e n d e r s , a g r e a t deal has b een f in a n c e d w ith c o n v e n t io n a l
j lo a n s made by such le n d e r s . To some e x t e n t t h i s i s because
c o n v e n tio n a l lo a n s u s u a l l y p r o v id e more c o n v e n ien ce to the
b u i ld e r than do FHA or VA l o a n s . ^ In m ost c a s e s much
l e s s tim e i s r e q u ir e d betw een th e loan a p p l i c a t i o n and the
g r a n tin g o f the lo a n when the a p p l i c a t i o n i s f o r a con
v e n t i o n a l lo a n than f o r a Government g u a r a n te ed or in s u r e d
VA l o a n s , o f c o u r s e , are g r a n te d o n ly to v e te r a n s
o f World War I I . An i n d i v i d u a l e l i g i b l e f o r such a lo an
i s e n t i t l e d o n ly t o a $7>5>00 g u a r a n te e . These l i m i t a t i o n s
make such lo a n s a v a i l a b l e o n ly to c e r t a i n i n d i v i d u a l s , and
f o r o n ly a l i m i t e d amount o f f i n a n c i n g . Thus, such lo a n s
are n o t u sed f o r f i n a n c i n g the c o n s t r u c t io n o f t r a c t s o f
home s . ___________________ _ _______________________________________
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lo a n . A ls o , b u i ld in g r e s t r i c t i o n s are u s u a l l y more r i g i d
on FHA and VA lo a n s than on c o n v e n t io n a l l o a n s . Thus, i n
many c a s e s , c o n v e n t io n a l lo a n s are more c o n v e n ie n t than
are FHA or VA l o a n s .
On c o n v e n t io n a l l o a n s , s a v in g s and lo a n a s s o c i a
t i o n s can, and u s u a l l y d o, len d a h ig h e r amount of the
a p p r a is e d v a lu e and f o r a lo n g e r p e r io d o f tim e; c o n s e
q u e n t ly , s a v in g s and lo a n a s s o c i a t i o n s r e q u ir e low er down
payments and lo w er m onthly payments th an do ban ks. S av
in g s and lo a n a s s o c i a t i o n le n d in g term s are p a r t i c u l a r l y
11
a t t r a c t i v e t o s p e c u l a t i v e b u i l d e r s , most o f whom o p e r a te
alm ost e n t i r e l y w i t h borrowed fu n d s . Such le n d in g term s
are a l s o a t t r a c t i v e t o many i n d i v i d u a l s who engage b u ild e r s
| t o c o n s tr u c t d w e llin g s f o r t h e i r u s e .
T h e r e fo r e , one o f the r e a so n s f o r th e in c r e a s e d
p a r t i c i p a t i o n o f s a v in g s and lo a n a s s o c i a t i o n s i n m ortgage
le n d in g i n the Los A n g e le s area i s due t o the h ig h demand
fo r funds w ith w hich t o c o n s t r u c t d w e l l i n g s , and b ecau se
th e le n d in g p o l i c i e s of s a v in g s and lo a n a s s o c i a t i o n s have
been su ch t h a t th e y have met the n eeds o f a la r g e p r o p o r
t i o n o f i n d i v i d u a l s d e s i r i n g such fu n d s .
^ ,fS p e c u l a t i v e b u i l d e r s 1 * are i n d i v i d u a l s who b u i ld
i n d i v i d u a l d w e llin g s or t r a c t s o f d w e l l in g s f o r the pur
p ose of s e l l i n g t h e s e a f t e r c o m p le tio n f o r p r o f i t .
171
S a v in g s and lo a n a s s o c i a t i o n s have a l s o been a c t i v e
i n f i n a n c i n g th e purchase o f e x i s t i n g d w e l l i n g s . In p a r t
t h i s i s due to t h e i r p a r t i c i p a t i o n i n c o n s t r u c t i o n le n d
in g . In most c a s e s , c o n s t r u c t io n lo a n s are w r i t t e n on a
permanent r a th e r than a te m p o r a r y b a s i s . Most lo a n s made
to s p e c u l a t i v e b u i l d e r s f o r home c o n s t r u c t i o n are assumed
by i n d i v i d u a l s p u rc h a sin g ^ su ch homes. In many e a s e s
i n d i v i d u a l s may w ish to f in a n c e such p u rc h a ses w it h fun ds
to be borrowed a t a low er r a t e o f i n t e r e s t from o th e r
le n d in g i n s t i t u t i o n s . A ls o , i n d i v i d u a l s who have r e c e iv e d
c o n s t r u c t io n lo a n s and have engaged b u i l d e r s to c o n s t r u c t
t h e i r homes may w ish to f in a n c e such homes a f t e r com ple
t i o n w ith funds from o th e r le n d in g i n s t i t u t i o n s . As p r e
v i o u s l y s t a t e d , the charge w hich i s u s u a l l y made by savings
and loa n a s s o c i a t i o n s f o r p ayin g o f f c o n s t r u c t io n lo a n s
b e fo r e m a tu r ity i s betw een 1 per c e n t and 3 p er c e n t o f
th e amount o f th e lo a n . O b v io u sly i t i s d i f f i c u l t f o r
many i n d i v i d u a l s to pay such c h a r g e s. T h e r e fo r e , most
c o n s t r u c t io n lo a n s c o n tin u e to e x i s t lo n g a f t e r c o n s t r u c
t i o n h as been com p leted .
In many i n s t a n c e s , e x i s t i n g d w e llin g s are f in a n c e d
w ith c o n v e n t io n a l lo a n s r a th e r th a n FHA and VA lo a n s f o r
a number o f r e a s o n s . F i r s t , a s p r e v i o u s l y m en tio n ed , i t
u s u a l l y ta k e s a g r ea t d e a l more tim e to g e t an FHA or VA
172
lo a n than I t does to g e t a c o n v e n t io n a l lo a n . Second, FHA
and YA lo a n s are made o n ly on p r o p e r ty m eeting c e r t a i n
sta n d a r d s , and to i n d i v i d u a l s whose c r e d i t r a t i n g s are
c o n s id e r e d s a t i s f a c t o r y . VA lo a n s , o f c o u r s e , a r e not
g r a n ted to th o se who were n ot v e t e r a n s o f World War I I .
Thus, i t may be n e c e s s a r y or more c o n v e n ie n t t o o b t a in a
c o n v e n t io n a l lo a n r a th e r than an FHA or VA lo a n . W ith
regard t o c o n v e n tio n a l lo a n s on e x i s t i n g p r o p e r t i e s , the
le n d in g p o l i c i e s o f s a v in g s and loa n a s s o c i a t i o n s o f t e n
p r o v id e fun ds to i n d i v i d u a l s o th e r w is e unable to purchase
a g iv e n home. A lth o u g h b o th banks and s a v in g s and lo a n
a s s o c i a t i o n s lo a n fun ds on o ld e r and l e s s d e s i r a b l y l o
c a te d homes than do in su r a n c e com p anies, s a v in g s and loan
a s s o c i a t i o n s u s u a l l y r e q u ir e a low er down payment and
low er m onthly paym ents on such p r o p e r t i e s than do banks.
Thus, many i n d i v i d u a l s d e s ir o u s o f p u rc h a sin g o ld e r homes
and who r e q u ir e h ig h e r lo a n s and lo n g e r m a t u r i t i e s on such
lo a n s than banks w i l l p r o v id e have borrowed funds from
s a v in g s and lo a n a s s o c i a t i o n s . There has been some opinion
e x p r e ss e d th a t s a v in g s and lo a n a s s o c i a t i o n s are l e s s
concerned w it h the borrower* s c r e d i t r a t i n g than are banks
and t h a t , t h e r e f o r e , t h i s has made borrow ing w hich was
im p o s s ib le from b an k s, p o s s i b l e from s a v in g s and lo a n
a s s o c i a t i o n s . On p r o p e r ty w hich would be a c c e p ta b le f o r
173
c o n v e n tio n a l lo a n s by in su r a n c e co m p an ies, b a n k s, and
s a v in g s and lo a n a s s o c i a t i o n s , a low er down payment on
such p r o p e r t i e s i s u s u a l l y r e q u ir e d by s a v in g s and loan
a s s o c i a t i o n s than t h a t r e q u ir e d by e i t h e r banks or i n s u r
ance com panies, and in a d d i t i o n , s a v in g s and lo a n a s s o c i a
t i o n s u s u a l l y r e q u ir e low er m onthly payments th a n do banks.
In r e v ie w , th e n , th e m ost im portant r e a s o n s f o r the
i n c r e a s e d p a r t i c i p a t i o n o f s a v in g s and lo a n a s s o c i a t i o n s
i n m ortgage le n d in g i n the Los A n g e le s area seem to b e :
( 1 ) s a v in g s and lo a n a s s o c i a t i o n s have had more funds t o
le n d , and ( 2 ) th e le n d in g p o l i c i e s o f s a v in g s and lo a n
a s s o c i a t i o n s have made borrow ing from such i n s t i t u t i o n s
a t t r a c t i v e t o many i n d i v i d u a l s .
Part o f th e in c r e a s e d p a r t i c i p a t i o n o f s a v in g s and
lo a n a s s o c i a t i o n s i n m ortgage le n d in g i n the Los A n g ele s
i a rea may a l s o be due to th e a d v e r t i s i n g done by s a v in g s
and lo a n a s s o c i a t i o n s w hich may have cau sed f u r t h e r p u b lic
c o n s i d e r a t io n o f t h e s e i n s t i t u t i o n s a s a p o t e n t i a l source
o f m ortgage fu n d s . A nother f a c t o r which m ight have con
t r i b u t e d t o the in c r e a s e d p a r t i c i p a t i o n o f s a v in g s and
lo a n a s s o c i a t i o n s i n m ortgage le n d in g i n the Los A n g e le s
area i s th a t more i n d i v i d u a l s have used s a v in g s and loan
a s s o c i a t i o n s as o u t l e t s fo r t h e i r s a v in g s , and i t i s
p o s s i b l e t h a t some o f th e s e i n d i v i d u a l s who w ish to g e t
1 7 1 ) -
m ortgage lo a n s , a s a m a tte r o f c o n v e n ie n c e , may seek such
lo a n s from the i n s t i t u t i o n i n w hich th e y save*
C o n e lu s io n s . In r e c o g n i t i o n o f the l i m i t a t i o n s o f
a s t a t i s t i c a l p r e s e n t a t i o n i n p r o v id in g p r o o f f o r any
a ssu m p tio n , th e s t a t i s t i c a l p o r t i o n o f t h i s ch a p ter h as
a ttem p ted o n ly to p o in t ou t th a t s a v in g s and lo a n a s s o c i a
t i o n s i n Los A n g e le s County from 19^1 th rou gh 1951 i n
c r e a s e d t h e i r a c t u a l and r e l a t i v e q u a n t i t a t i v e p o s i t i o n
w it h reg a r d t o t h e i r h o ld in g s o f the s a v in g s o f i n d i v i d u
a l s and w ith reg a rd to t h e i r p a r t i c i p a t i o n i n r e a l e s t a t e
len d in g *
I t ap p ears t h a t from 19^4-1 through 1951 > s a v in g s i n
s a v in g s and lo a n a s s o c i a t i o n s i n Los A n g e le s County i n
c r e a s e d p r im a r ily as a r e s u l t o f : ( 1 ) an in c r e a s e i n
p o p u la t io n , ( 2 ) economic c o n d i t i o n s w hich were con d u cive
to h ig h incom es and h ig h s a v i n g s , ( 3 ) th e h ig h e r r a t e of
r e tu r n p a id by s a v in g s and loa n a s s o c i a t i o n s than r a t e s
p a id by o th e r s a v in g s i n s t i t u t i o n s , ( 1 ^.) the o p in io n o f
many s a v e r s th a t s a v in g s and lo a n a s s o c i a t i o n s p r o v id e d
s a f e t y and l i q u i d i t y e q u a l to o th e r s a v in g s i n s t i t u t i o n s ,
and ( 5 ) th e a d v e r t i s i n g done by th o s e i n the s a v in g s and
lo a n f i e l d .
I t i s p r o b a b le t h a t a g r e a t e r p r o p o r tio n o f s a v in g s
has been i n v e s t e d in s a v in g s and lo a n a s s o c i a t i o n s i n t h i s
175
area than would have, had n ot such a s s o c ia t io n s during
t h is p erio d provided s a fe ty and l i q u i d i t y fo r in v e ste d
fu n ds. A la r g e p ro p o rtio n o f funds in v e s te d in savin gs
and loan a s s o c ia t io n s seems to be o f a temporary n atu re.
There may be some p u b lic d isfa v o r regard ing sa v in g s and
loan a s s o c ia t io n s during a l a t e r p erio d i f th ey are unable
to con tinu e to o f f e r the immediate a v a i l a b i l i t y of funds.
Future growth o f savin gs and loan a s s o c ia t io n s w i l l prob
ab ly depend to a la r g e r e x te n t on the s a f e ty and li q u i d i t y
which they can provide to sav in g s than on a la rg e d i f f e r
ence in th e r a te o f retu rn paid by sa v in g s and loan a sso c i
a t io n s and th a t p aid by o th er sa v in g s i n s t i t u t i o n s .
I t seems th a t the p u b lic i s la r g e ly unaware o f the
e s s e n t i a l d if f e r e n c e s between banks and sa v in g s and loan
a s s o c ia t io n s . While t h i s m isco n cep tio n has probably
h elp ed to in c r e a se th e amount o f savin gs in v e ste d in sav-
in g s and loan a s s o c ia t io n s , i t does not seem th a t such
m isco n cep tio n i s in the b est in t e r e s t s o f in v e s to r s or
sa v in g s and loan a s s o c ia t io n s . Some a s s o c ia t io n s have
recogn ized the need to inform in v e s to r s th a t savin gs and
loan a s s o c ia t io n s are not banks, and have made some a t
tem pts to meet t h i s need. On the oth er hand, many savin gs
and loan a s s o c ia t io n s have made no e f f o r t to c o r r e c t t h is
m isco n ce p tio n . There i s reason to b e lie v e th a t c e r t a in
176
a s s o c i a t i o n s hav© mad© some e f f o r t to f o s t e r i t . T h is has
caused c o n s id e r a b le c o n tr o v e r s y betw een s a v in g s and lo a n
a s s o c i a t i o n s and banks i n t h i s a r e a .
I t app ears th a t th e p r i n c i p a l r e a so n s f o r the i n
c r e a se d p a r t i c i p a t i o n o f s a v in g s and lo a n a s s o c i a t i o n s
i n r e a l e s t a t e le n d in g i n th e Los A n g e le s a rea from 19^3
through 1951 a r e : ( 1 ) s a v in g s and lo a n a s s o c i a t i o n s have
had more fu n d s to i n v e s t , ( 2 ) t h e r e has been a h ig h demand
f o r m ortgage fu n d s , p a r t i c u l a r l y d u rin g the postw ar y e a r s ,
and ( 3 ) the le n d in g p o l i c i e s o f s a v in g s and lo a n a s s o c i a
t i o n s have been su ch th a t th ey have met a la r g e p o r t io n o f
th a t demand.
S in c e c o n s t r u c t i o n o f d w e llin g s r e q u ir e s m a t e r i a l s
and la b o r , and c o n s t r u c t io n o f d w e l l in g s has been a t a
h ig h l e v e l i n th e Los A n g e le s area d u rin g the postw ar
y e a r s , i t i s probab le t h a t c o n s t r u c t io n has b een a v i t a l
f a c t o r i n the economic a c t i v i t y whieh h as p r e v a il e d in
t h i s area' during t h e s e y e a r s . The c o n s t r u c t io n o f one to
fo u r f a m ily d w e l l in g s seems to have been l a r g e l y r e s p o n s i
b le f o r a l l e v i a t i n g the h o u sin g s h o r ta g e c h a r a c t e r i s t i c
o f th e Los A n g e le s area d u r in g , and f o r some y e a r s f o l l o w
i n g , World War I I . There i s some r e a s o n to b e l i e v e th a t
under l e s s f a v o r a b le economic c o n d i t i o n s , a su r p lu s of
h o u sin g m ight now be apparent i n t h i s a r e a . Such a surplus
177
as might be caused by a change in economic c o n d itio n s would
tend to d ep ress economic c o n d itio n s s t i l l f u r th e r . Savings
and loan a s s o c ia t io n s have been the most a c t iv e lend in g
agency fo r c o n str u c tio n funds used in the b u ild in g o f one
to fou r fa m ily d w e llin g s in the Los A ngeles area. I t
seems, th e r e fo r e , th a t th e se i n s t i t u t i o n s have been in
p art r e sp o n sib le fo r the economic a c t i v i t y o f t h i s area
during r e c e n t y e a r s , the a l l e v i a t i o n o f the housing sh o r t
age, and the housing surplus which may be apparent in the
f u tu r e •
Owner-occupancy of d w e llin g s has in c r e a se d in the
Los A ngeles area during the p a st decade. S ince the m ajor
i t y o f loan s made by sa v in g s and lo a n a s s o c ia t io n s in t h i s
area are secured by s in g le fam ily d w e llin g s , and due to
the q u a n tita tiv e im portance of sa v in g s and loan a s s o c ia
t io n s as a source o f home fin a n c in g in t h i s a re a , i t seems
probable th a t a t le a s t some o f the in c r e a se in home owner
ship in the Los A ngeles area can be a ttr ib u te d to financing
done by sa v in g s and loan a s s o c ia t io n s .
CHAPTER V
SUM M ARY AND CONCLUSIONS
Savings and loan a s s o c ia t io n s are unique as fin a n
c i a l i n s t i t u t i o n s in th a t th e y combine as t h e ir primary
purposes the fu n c tio n s o f servin g as an o u t le t fo r the
sav in g s of in d iv id u a ls and as a source o f funds fo r home
fin a n c in g . R ein v estin g most o f t h e ir funds in long-term
mortgage lo a n s, th e se i n s t i t u t i o n s provide a unique type
of o u t le t fo r s a v in g s . They a re able to pay a h ig h er
retu rn on savin gs than th a t paid by o th er sa v in g s i n s t i t u
tio n s because long-term mortgage lo a n s earn a h ig h e r
retu rn than do sh o rt-term and more liq u id in vestm en ts in
which o th er sa v in g s i n s t i t u t i o n s have the bulk o f t h e ir
funds co n cen tra ted . Savings and loan a s s o c ia t io n s are un
ab le to provide the degree of assurance of the immediate
a v a i l a b i l i t y o f sa v in g s as th a t provided by o th er savin gs
i n s t i t u t i o n s , because sa v in g s and loan a s s o c ia t io n s are
not l e g a l l y o b lig a te d to return sa v in g s upon demand nor
are t h e ir a s s e t s as liq u id as other sa v in g s i n s t i t u t i o n s .
The p u b lic o fte n co n fu ses sa v in g s and loan a s s o c ia
t io n s w ith banks. T his m iscon cep tion has probably r e s u l t
ed becau se: (1) sa v in g s and loan a s s o c ia t io n s provide
many o f the same s e r v ic e s to t h e ir custom ers as do banks;
179
( 2 ) th e r e has been a ten dency on th e p a r t o f s a v in g s and
lo a n a s s o c i a t i o n s t o change th e term d e s c r i b in g Investm ents
i n t h e s e i n s t i t u t i o n s from "share a c c o u n ts," a se em in g ly
more a p p r o p r ia te term , t o " s a v in g s a c c o u n ts ” ; ( 3 ) s a v in g s
and lo a n a s s o c i a t i o n s have p r o v id e d th e same l i q u i d i t y t o
share a c c o u n ts as banks have p r o v id e d t o s a v in g s a c c o u n ts;
and (I4 .) many s a v in g s and lo a n a s s o c i a t i o n s have n e g l e c t e d
t o Inform th e p u b lic o f the e s s e n t i a l d i f f e r e n c e s betw een
t h e i r i n s t i t u t i o n s and banks and, i n s t e a d , have em phasized
s i m i l a r i t i e s w hich e x i s t b etw een th e s e two f i n a n c i a l i n
s t i t u t i o n s . As a r e s u l t o f a g e n e r a l p u b lic unawareness
o f th e tr u e natu re o f s a v in g s and lo a n a s s o c i a t i o n s , many
i n d i v i d u a l s who have in v e s t e d i n t h e s e I n s t i t u t i o n s and
who e x p e c t from such in v e stm e n ts the same l i q u i d i t y as
t h a t p r o v id e d by a s a v in g s account i n a bank may be i n
co n v e n ien ce d a t a l a t e r d a te i f c ir c u m sta n c e s p r e v e n t
s a v in g s and loan a s s o c i a t i o n s from p r o v id in g the immediate
a v a i l a b i l i t y of fu n d s. S a v in g s and lo a n a s s o c i a t i o n s can
h a r d ly e x p e c t to m a in ta in p u b lic c o n fid e n c e i f , at a future
tim e , th ey are u n able to f u l f i l l th e e x p e c t a t i o n s o f t h e i r
i n v e s t o r s . A lso a s a r e s u l t o f the p u b l i c 1s c o n c e p tio n
t h a t s a v in g s and lo a n a s s o c i a t i o n s are b an k s, somewhat
s t r a in e d r e l a t i o n s betw een th e s e two f i n a n c i a l i n s t i t u
t i o n s have d e v e lo p e d . T h is s i t u a t i o n d oes not seem
180
conducive to securing p u b lic favor and good w i l l toward
sa v in g s and loan a s s o c ia t io n s .
Banks and sa v in g s and loan a s s o c ia t io n s perform
d if f e r e n t economic f u n c tio n s , and each p rovid es a d i f f e r
ent type o f o u t le t fo r sa v in g s. Banks p rim a rily provid e a
source o f sh ort-term commercial and consumer c r e d it , a
source o f government c r e d it , and a means o f payment. To
a much l e s s e r e x te n t than sa v in g s and loan a s s o c ia t io n s ,
banks a ls o p rovid e a source o f lon g-term mortgage fu n d s.
As an o u t le t fo r sa v in g s, banks provide and assu re alm ost
immediate l i q u i d i t y to the saver and pay a ra te o f retu rn
on sa v in g s below th a t p aid by savin gs and loan a s s o c ia
t i o n s . On the oth er hand, sa v in g s and loan a s s o c ia t io n s
p r im a r ily provide a source o f funds fo r long-term mortgage
lo a n s, and an o u t le t fo r sav in g s which does not assu re
immediate l i q u i d i t y but which pays a h igh er re tu rn than
th a t paid by banks. Savin gs and loan a s s o c ia t io n s are
supplements t o , ra th er than s u b s t it u t e s f o r , commercial
banks. Because banks and sa v in g s and loan a s s o c ia t io n s
perform e s s e n t i a l l y d if f e r e n t economic fu n c t io n s , each
o cc u p ie s a d if f e r e n t p la ce in the economy. Because banks
and sa v in g s and loan a s s o c ia t io n s provid e a d if f e r e n t type
o f o u t le t fo r sa v in g s, each can have a p la ce in the sav
in g s program o f the in d iv id u a l. A sa v in g s account in a
181
bank seems appropriate for the amount of funds for which
an individual desires immediate availability, A share
account in a savings and loan association seems appropri
ate for funds for which an individual desires a higher
return rather than assured immediate availability.
From the standpoints of both long-term profitability
of savings and loan associations and the welfare of their
investors, it would seem wiser that these institutions
inform the public of their true investment merits rather
than attempt to stress their similarities to banks. This
practice has been followed by at least two savings and loan
associations in Los Angeles County. It is not probable
that associations in general will adopt this policy in the
near future because of the possibility that many individu
als would prefer the assurance of immediate liquidity of a
savings aecount in a bank to an investment in a savings
and loan association. It seems probable that if the public
became aware of the essential differences between share
accounts in savings and loan associations and savings
accounts in banks, many individuals would not wish to
invest funds in savings and loan associations. It also
seems probable that those who would choose investments in
savings and loan associations would regard such funds as
long-term investments rather than as substitutes for bank
182
accounts* Because a savings and loan association invests
its funds on a long-term basis, it seems obvious that it
can best operate when savings entrusted to it are regarded
by their owners as being long-term investments. Thus,
from a long-range point of view, it would seem that by
informing the public of the true nature of investments in
savings and loan associations, thereby attracting funds
which individuals will not expect to withdraw immediately,
these institutions can better perform their economic func
tion and operate to the benefit of their savers.
Compared with the other important institutional
real estate lenders in the Los Angeles area, banks and
insurance companies, savings and loan associations are
unique as a source of funds for home financing. Loans
made by savings and loan associations are almost always
secured by mortgages on one to four family dwellings, the
single family dwelling being the most prevalent. Savings
and loan associations make proportionately less Government
insured or guaranteed loans than do either banks or insur
ance companies. Savings and loan associations make loans
on older and less desirably located homes than do insur
ance companies, and tend to make conventional loans re
quiring lower down payments and lower monthly terms than
those made by banks. Savings and loan associations have
' '183 i
I
been more active in construction lending than have banks
or insurance companies. It appears that savings and loan
associations are more willing to assume more risk in mort
gage lending than are these other institutional lenders.
This is probably true because savings and loan associations
must earn a higher return on their investments than must
either banks or insurance companies.
A large proportion of the funds used to finance the
purchase or construction of homes in the Los Angeles area
from 1 9) 4.1 through 1 9 5 1 came from savings and loan associa
tions. While quantitatively these funds might have been
supplied by banks or insurance companies, it is probable
that the lending policies of these institutions would not
have been suitable to meet the demand of all individuals
who borrowed funds from savings and loan associations
during this period.
The construction of homes in the Los Angeles area
during the postwar period, much of this financed by sav
ings and loan associations, undoubtedly has been in part
responsible for the economic activity and the generally
high level of incomes in the area during this period. As
a result of the construction of homes in this area during
the postwar period, the supply of housing here has in
creased enough to alleviate the housing shortage existing
1 8 1 ) .
in the area during and for the first few years following
World War II. These have been some of the desirable
social and economic effects of savings and loan financing.
The high level of building activity existing in the
Los Angeles area during the postwar period has created an
excess in the demand for building materials over their
supply. As a result, the price of housing in this area
has increased to the extent that many families have not
been able to afford adequate housing, even though a hous
ing shortage does not exist. On the other hand, the
increase in the supply of housing, the generally high
levels of incomes, and the availability of funds for home
financing to a wide segment of the population have provid
ed many more families better housing than they had pre
viously.
It is entirely possible that if economic conditions
become less favorable in the future, an over supply of
housing relative to then effective demand may exist In the
Los Angeles area. Such a situation would tend to accentu
ate already depressed conditions in the area. However,
social losses which undoubtedly would have occurred in the
area if housing had not been built, would probably have
been less desirable that the consequences which might occur
as a result of a possible over supply of housing.
185
It is probable that savings and loan association
financing has been in part responsible for the increase
in home ownership in the Los Angeles area during the past
decade. Increase in home ownership seems to be generally
desirable, although it is possible that funds have been
loaned to some individuals who cannot afford the luxury
of home ownership, and that, under less favorable economic
conditions which may prevail at a future date, these indi
viduals may not be able to continue to make payments on
their homes.
The name savings and loan association does not seem
to be entirely appropriate in describing this financial
institution. The word "association” implies that the
institution* s borrowers and savers have mutual interests,
that the institution is operated for these mutual inter
ests, and that these individuals control its affairs.
Actually, savings and loan associations are corporations
in which the interests of savers and borrowers seem to be
more opposing than mutual, and in which "members” do not
exercise their voting rights. The affairs of savings and
loan associations, as other corporations, are controlled
by a self-perpetuating management. It also appears that
much of the "profit” of a savings and loan association
accrues to its management rather than to its members as
1 8 6
the term association might imply* Insofar as income tax
is concerned, savings and loan associations are no longer
looked upon as being essentially different from other
corporations* This seems to be appropriate* Whether or
not savings and loan associations should continue to use
the word association in their titles seems to be an argu
ment of a more academic than of a practical nature, how
ever, It does not seem that there is any particular harm
in continuing to use this word, exeept that some savings
and loan investors may not be fully aware of the diffi
culties of effectively exercising their rights as members
in the event of dissatisfaction with the results of the
association. It seems likely that savings and loan associ
ations will continue to use the word association in their
titles, since the public has grown accustomed to the term,
and since the implications of the word may be profitable
in attracting funds to this financial institution.
While most savings and loan associations in the
Los Angeles area are Federally chartered, and are there
fore mutual in their form of organization, the majority
of those chartered by the State of California are guaran
tee stock corporations. Some aspects of the guarantee
stock device seem desirable. First, in this form of
organization there is an additional financial cushion
187
provided by non-wlthdrawable and assessable stock• Second,
this form of organization may promote an additional finan
cial incentive to good management not provided by mutual
associations. This may occur because it is possible for
the management of the guarantee stock association to own
stock in the association, the profitability of such stock
being largely determined by the results of the management
of the association. Therefore, the management of a guaran
tee stock association may have a greater chance of gain
and a greater chance of loss than the management of a
mutual association In which stock ownership is not possible.
The interests of savers in a guarantee stock association,
however, may be inconsistent with the interest of stock
holders of that association, and, since the latter group
holds the voting control, there is little savers can do to
t remedy a dissatisfying situation. Whether or not financial!
incentive is the most important stimulus to good manage
ment, it does seem that the compensation of the management
of mutual associations should be higher than that of
guarantee stock associations in order to provide equal
financial incentive to management.
>
The Federal Home Loan Bank System, to which most
savings and loan associations in Los Angeles County are
members, provides a central credit reservoir for savings
188
and loan associations. Although Federal Home Loan Bank
borrowings have assisted savings and loan associations in
meeting the demand for mortgage loans and have enabled
these institutions to continue meeting withdrawal requests
promptly during periods when other sources of funds were
insufficient, savings and loan associations have not used
this source of credit to any great extent* The present
borrowing capacity of savings and loan associations seems
ample under normal conditions. During such periods it
seems that associations should preserve this potential
source of credit as much as possible in order that it may
be available during periods of less favorable economic
conditions when there may be a real need for funds* During
depressed economic conditions it would seem desirable that
savings and loan association borrowing capacities from the
Federal Home Loan Bank System be increased and that such
funds be used both for lending and for paying withdrawal
requests. Such action might assist in the maintenance of
public confidence in associations, thereby encouraging
funds to flow into these institutions. Increasing borrow
ing capacity for the purpose of lending would serve to
supplement association funds which could be used to re
finance loans and thus help prevent widespread defaults on
mortgages and a depressed real estate market. New loans
189
for construction would tend to stimulate economic activity
by promoting activity in the building industry. Widening
the borrowing powers of savings and loan associations at
the beginning of a depression might tend to lessen the
extent of a depression and effect some recovery. It seems
that the functioning of the Federal Home Loan Bank System
can be an effective device in helping to prevent the
future occurrence of a serious economic disaster.
Federal Savings and Loan insurance, to which most
savings and loan associations in the Los Angeles area sub
scribe, adds an additional measure of safety to savings
invested in insured associations. This insurance program
seems to have been beneficial in stimulating public confi
dence in savings and loan associations. It is probable
that individuals who hold savings and loan share accounts
do not thoroughly understand the provisions of Federal
Savings and Loan Insurance and are, therefore, not aware
that their savings are guaranteed As to safety but not as
to liquidity. The Federal Savings and Loan Insurance
Corporation need meet its obligations to individuals whose
savings it insures only after the association in which such
savings are invested has been declared in default, and the
Corporation need not meet its obligations to savers by
payments of cash, but may give them accounts in other
1 9 0
savings and loan associations It is conceivable that such
savers may have to wait a long time before their invest
ments are finally liquid. However, it has been the prac
tice of the Federal Savings and Loan Insurance Corporation
to meet its liabilities primarily by lending funds to
associations in financial difficulty in order to prevent
their default, thereby giving liquidity as well as safety
to savings invested in such associations. This practice
seems commendable and will probably be followed in so far
as possible in the future. While the financial resources
of the Federal Savings and Loan Insurance Corporation may
not be sufficient to meet its liabilities in the event of
a future financial panic, it is probable that the Federal
Government would contribute additional funds in order to
prevent the widespread default of savings and loan associ
ations.
Within the limits of legal restrictions which affect
the management of funds in savings and loan associations,
a great deal of variation seems to exist among individual
associations with regard to their investment and reserve
policies which affect the safety, liquidity, and profit
ability of invested savings. These variations which exist
among individual associations indicate the importance of
careful investigation of an association before an
investment is made therein* Such an investigation should
involve a study of the financial condition of the associa
tion as it is revealed on the association1s balance sheet
and as much knowledge as the potential investor can gain
regarding the quality of and the policies followed by the
management of the association. During present favorable
economic conditions, it is probable that many individuals
neglect to make a careful investigation of the association
before making an investment therein. Because economic
conditions may not continue to be favorable, a potential
investor should make every effort to select an association
which in all probability will remain a profitable place for
his investment even if economic conditions change.
It seems important at this particular time, in view
of high real estate prices and the uncertainty of the con
tinuation of present economic conditions, that savings and
loan associations make more conservative loans than laws
permit. It appears that to some extent this is being done,
at least by some associations. Although this practice may
restrict the availability of funds to some individuals who
desire loans and may decrease the earnings of savings and
loan mortgage loan portfolios, this practice seems desir
able in protecting the safety of savings and loan assets.
It appears that the continued safety of savings and
192
loan assets in the light of uncertain future economic con
ditions may require that many associations allocate a
larger portion of earnings to reserves.
In order to provide reasonable liquidity to- investee,
savings in the light of uncertain future economic condi
tions, it seems that savings and loan associations should
preserve their Federal Home Loan Bank borrowing powers
for emergency periods and increase their holdings of
United States Government securities. While savings and
loan associations are not legally obligated to provide
immediate liquidity to invested savings, their policy of
meeting withdrawal requests on demand has accustomed their
investors to expect this practice to continue. Even if
efforts are made to educate savings and loan association
investors that their savings may not be available on
demand, funds will probably not be easily attracted unless
the reasonable availability of funds is provided by associ
ations. In the event that the purchasing power of the
dollar continues to decline, investors will probably be
even more interested in liquidity than they are at the
present time.
If the measures which have been mentioned are taken
to further strengthen the safety and liquidity of savings
and loan assets, the margin between the rate of return
193
available on savings invested in savings and loan associa
tions and that available on savings invested in other
savings institutions will probably tend to decrease, un
less offset by rising mortgage interest rates* If this
margin decreases, it is probable that the present rate of
increase of savings invested in savings and loan associa
tions may also decrease. It is also probable, however,
that if a slower growth of savings and loan associations
results from efforts to affect their safety and liquidity,
the probability for long-run profitability for associa
tions and their investors, as well as the probability that
savings and loan associations will produce desirable long-
run social and economic effects will increase*
Savings and loan associations in Los Angeles County
substantially increased their importance as an outlet for
savings and as a source of funds for home financing from
1 9ifl through 1951* In this area, the proportionate amount
of total savings invested in savings and loan associations
during the period seems to have been largely because
savings and loan associations have provided a higher rate
of return on savings than have other savings institutions,
and have provided safety and liquidity to invested savings
equal to that provided by other savings institutions.
The Increased participation of savings and loan
19k
associations in lending funds for home financing during
the 19^.1 through 1951 period in the Los Angeles area seems
to have been largely due to the increase in the amount of
funds which savings and loan associations have had avail
able for investment and to lending policies which have been
attractive to a large group of individuals*
Savings and loan associations in the Los Angeles
area have become important financial institutions * The
future of savings and loan associations in this area is
tied in with future economic conditions affecting the
ability of individuals to continue payments on loans and
the level of real estate prices; the growth of population
and economic conditions which will affect the demand for
homes; and the ability and desire of individuals to save
money, which will, largely be determined by future economic
conditions affecting incomes, the level of taxes, and the
level of prices. Over these future conditions savings and
loan associations have no control. If the population of
the Los Angeles area continues to grow as expected, it
would seem that the well managed savings and loan associa
tion can continue to occupy an important place in the eco
nomic structure of this area. It appears that the associ
ation that will be best prepared to meet economic changes
will be the association whose management adopts financial
policies conducive to the safety of the association’s
assets, keeps assets sufficiently liquid to provide reason
able availability to savings funds, and keeps earnings
high enough to enable the association to pay a rate of
return on savings in keeping with safety yet high enough
to attract investors. Such an association should be in a
position to retain an important and profitable place, and
to produce desirable social and economic effects, in the
future development of the Los Angeles area.

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_________, "Looking A h ead ,” N a t io n a l S a v in g s and Loan
j o u r n a l , January, 1952, p. 11.
Husband, W. H . , " S av in g s Growth E xceeds Rate o f S p en d in g,”
Commercial and F i n a n c i a l C h r o n ic le , August 9 , 1951,
17^:5lh.
K each, Benjam in, "How Do We Im press the P u b lic ," S a v in g s
and Loan News, A u g u st, 1951, PP* 9* 1 0 , 12-li|_.
K le i n , P h i l l i p , "The Account Concept i n S a v in g s and Loan,"
S a v in g s and Loan News, A u gu st, 191+9 > PP* 1 7 -1 8 .
K rau ss, E. A ., " S av in g s v s . S p e n d in g ,” Magazine o f W all
S t r e e t , Septem ber 8 , 1951, PP. 592-595*
Lindholm, R. W ., "The F e d e r a l N a tio n a l M ortgage A s s o c i a
t i o n , ” The Jou rn al of F in a n c e , 6:51+-6l, March, 1950.
L i n v i l l e , J . E . , "F u n ction and Im portance o f S t a t e Sav
in g s and,Loan L eagues," S a v in g s and Loan J o u r n a l,
December, 1951, PP• l!+“l 5 , 30-31*
M er ed ith , L. D o u g la s , " L iq u id it y : A Growing A t t r ib u t e o f
Mortgage Loan P o r t f o l i o s , " The J ou rn al o f F in a n c e ,
December, 1950, pp. 318-323#
"Mortgage Funds are Hard to Get," U n ited S t a t e s News,
202
3 1 :6 8 -6 9 * September 2 8 , 1951.
"Most Incomes End Up W ith Some S a v in g , ’1 C onference Board
B u s in e s s R ecord, 7:11+8-1+9* A p r i l , 1950.
Noon, Frank C ., and M ilto n 0 . Shaw, T tWeak S p o ts i n S a v in g s
and Loan A s s o c i a t i o n O p e r a tio n ,” S a v in g s and Loan
J o u r n a l, January, 1952, pp. 18-19* 21+-25.
" P e r so n a l S av in g in the P o st War P e r io d , ’1 Su rvey o f Cur
r e n t B u s i n e s s , Septem ber, 19^9* PP* 9 “ 17* 23.
Ray, W alter J . L* * " C oop eration and U n derstand in g E s s e n
t i a l s i n Today1s F in a n c i a l World," S a v in g s and Loan
News, June, 1951* PP* 9 - 1 0 , 12.
_________, "The Home F in a n c in g B u s in e s s in a P a r t i a l l y
M o b iliz e d Economy,” Commercial and F i n a n c i a l C h ro n ic le,
17i4-:506, 52J4.-525*
R e i s , B. J . , "What to do With Your S a v in g s ," Consumer
R e p o r t, 1 6 :2 7 6 - 7 8 , June, 1951*
"R eview ing 195 1** .F o r e c a s t in g 1952*" S a v in g s and Loan
J o u r n a l, January, 1952* pp. 8-10* 26-27*
Ruml, B e a r d s le y , "Our N a tio n a l Need: S a v i n g s , ” Harpers
M agazine, Septem ber, 1951* PP• 32-31+*
" S av in gs and Loan A s s o c i a t i o n s Boom,” B u s in e s s Week,
May 17, 1952, pp. ll+8 , 150 -1 5 2 .
" S av in gs Bonus?” B u s in e s s % eek , September 8 , 1951* p . 13l+*
S l i c h t e r , S . H ., " P e r so n a l Savin g i n an I n f l a t i o n a r y
Economy," Commercial and F i n a n c i a l C h r o n ic le , 17l+:
lll+9, 1 1 8 0- 1 1 6 2 , Septem ber 2 7 , 1951*
S tru n k , Norman, "The Improved In vestm en t P o s i t i o n o f Sav
in g s and Loan A s s o c i a t i o n s , ” The Jou rn al o f F in a n c e ,
2 : 1 - 2 1 , O ctob er, 191+7•
_________, " S a v in g s and I n f l a t i o n , " S a v in g s and Loan News,
May, 1951* PP. 9 - 1 2 .
"Thin l e e f o r S 8c L s , ” B u s in e s s Week, Septem ber 2 2 , 1951*
p . 152.
"2j-$ers H it B a c k ,” B u s in e s s Week, March 11, 1950, p . 112.
"What t o do With S a v in g s ," U n ite d S t a t e s News, Septem ber
2 2 , 1950, pp. 3 6 - 3 7 .
"Where American F a m ilie s I n v e s t T h eir Money," S a le s
Management, January l5> 1950, p . 7 0 .
"Why Retail Trade Lags: People Are Saving More, Spending
Less," United States News and World Report, December
7, 1951, PP. 5k, 56, W ^ 9 .
C., LEGAL REFERENCES
C a l i f o r n i a In su ran ce Code, 1 9 5 0 . Sacram ento: ^ C a lifo r n ia
S t a t e P r in t in g O f f i c e , 1951. 563 PP.
1951 E d i t i o n , B u ild in g and Loan A s s o c i a t i o n A c t , S t a t e of
C a l i f o r n i a . Los A n g e le s: C a l i f o r n ia S a v in g s and Loan
League, l 9 5 l . 97 pp.
R u le s and R e g u la tio n s f o r the F e d e r a l S a v in g s and Loan
S ystem . W ashington, D .C .: Home Loan Bank Board, 1951*
1+7 pp.
R u les and R e g u la t io n s f o r In su ran ce o f A c co u n ts. W ashing
t o n , D .C .: Home Loan Bank Board, l 9 5 l . ^3 PP*
D. REPORTS
Annual S t a t i s t i c a l Report on th e S a v in g s A s s o c i a t i o n and
C o -o p e r a tiv e “ Bank System f o r 1 9 5 0 . C h icago: U n ite d
S t a t e s S a v in g s and Loan League, 1 951 . lU PP.
C a r te r , Judge James M., on S a v in g s and Loan A s s o c ia t i o n s ,
Los A n g e le s D a ily Jou rn al R e p o r t s , V o l. I I , No. 7>
J u l y , 1 9 5 1 j pp. 2 2 0 -2 3 .
Comb in ed F i n a n c i a l S ta te m en ts o f Members o f the F e d e r a l
Home Loan Bank S y stem , 1 9 5 0 . W ashington, D.C. : Home
Loan Bank Board, 1951* 76 pp.
2 Oi|
F i f t y - S ev en th Annual Report o f the B u ild in g and Loan
Com m issioner o f th e S t a t e o f C a l l f o r n ia f o r the Year
1 9 5 0 . C a l i f o r n i a : S t a t e o f C a l i f o r n i a P r i n t i n g
O f f i c e , 1951* 8i| pp.-
F in a n c i a l R e p o r t, F e d e r a l S a v in g s and Loan In su ran ce
C o r p o r a tio n , June 3 0 , 1 9 5 1 . W ashington, D .C .:
F e d e r a l S a v in g s and Loan In su ra n ce C o r p o r a tio n , 1951.
5 PP.
F ourth Annua1 R e p o r t, Housing and Home F in a n ce A gen cy,
195 c H W ashington, D .C .: U n ite d S t a t e s Government
P r in t in g O f f i c e , 1951. PP*
Jam ison, Conrad C ., " P o p u la tio n Trends i n the Los A n g eles
A r e a ,” R e s i d e n t i a l R esearch R e p o r t, F o u rth Q u a r te r ,
1951. Los A n g e le s: R e s i d e n t i a l R esearch Committee',
T95Z.
"Housing C h a r a c t e r i s t i c s o f the Los A n g e le s , C a l i f o r n i a ,
Standard M e tr o p o lita n Area: A p r il 1, 1 9 5 0 ,” 1950
Census o f H o u sin g , P r e lim in a r y R e p o r t s . W ashington,
D .C .: U n ite d S t a t e s Department o f Commerce, 1951*
Report Humber 3 h ? Commercial and Mutual S a v in g s B anks.
W ashington, D .C .: F e d e r a l D e p o s it In su ran ce Corpora
t i o n , 1951. PP.
R e s i d e n t i a l R esearch R e p o r t. Q u a r te r ly r e p o r t s A u gu st,
l9i|b - F eb ru a ry , 1952. Los A n g e le s: R e s i d e n t i a l
R esearch Committee o f Los A n g e le s .
S t a t i s t i c a l Summary, 1 9 5 1 * W ashington, D .C .: Home Loan
Bank Board, 1951. 3*2 pp.
Summary of O p era tio n s f o r 1950 9 F e d e r a l Home Loan Bank
S y stem , F e d e r a l S a v in g s and Loan In su ran ce C orporation,
Home Owners1 Loan C o r p o r a tio n . W ashington, D . C . :
Home Loan Bank Board. 19 pp.
Trends i n the S a v in g s and Loan F i e l d , 1 9 5 0 . W ashington,
D .C .: Home Loan Bank Board, 1951. lb pp.
E. PARTS OP SERIES
205
Orchard, C. R ., " C oo p era tive Consumer C r e d i t , ” The A nnals
of th e American Academy o f P o l i t i c a l and S o c i a l
Scien ce^ 196 : 155* January, 193 8" •
S a v in g s and Loan A n n a ls , 1 9 5 0 . C hicago: H ig g in s , I n c . ,
1 9 5 1 9 U n ite d S t a t e s S a v in g s and Loan League. 272 pp.
Words and P h r a s e s , Permanent E d i t i o n . S t . P a u l, M in n eso ta :
West P u b lis h in g C o ., 1939* P lu s Cum ulative Pocket
P a r t, 195 2. V o ls . 10 - 759 PP*> p lu s cu m u la tiv e p a r t ,
189 PP#; 12 - 7^2 p p ., p lu s cu m u la tiv e p a r t , 2 3 0 p p .;
39 ~ 875 PP#> p lu s cu m u lative p a r t , 235 PP#
F . ENCYCLOPEDIA ARTICLES
“B u ild in g and Loan A s s o c i a t i o n s , ” Corpus J u r is Secundum,
V o l. XII* pp . 3 9 1 -5 5 6 ; 1952 C um ulative Annual Pocket
P a r t , pp. J 4 .f1 .~5 6 . B rooklyn: The American Law Book
Co., 1938.
C la r k , Horace P . , and A lexan d er B lo c k , " B u ild in g and Loan
A s s o c i a t i o n s , ” E n c y c lo p e d ia of th e S o c i a l S c i e n c e s ,
V o l. I l l , pp. i^.7-51# New Y o rk : The M acm illan Co.,
1930.
G. PAMPHLETS
F a c t s You Should Know About S avin g Money. / B o s t o n / :
A s s o c i a t i o n o f B e t t e r B u s in e s s B u reau s, I n c ., 1951#
15 PP.
The F e d e r a l Home Loan Bank S y stem , I t s Aims and A c t i v i t i e s .
W ashington, D.C. : Home Loan Bank Board, 19361
10 p p .
F i n a n c i a l F a c t s About S a v in g s and Loan A s s o c i a t i o n s .
W ashington, D.C.: U n ited S t a t e s S a v in g s and Loan
League, 1951. 18 pp.
2 0 6
^ Handbook o f S a v in g s and Loan, C hicago: American S a v in g s
and Loan I n s t i t u t e , 19£ l . 59 PP*
Home Loan Bank B oard: O u tlin e o f F u n c t i o n s * W ashington,
D.C.: Home Loan Bank Board, 195l* 1T"PP*
In vestm en t C e r t i f i c a t e s . Los A n g e le s : S ou thern C a lifo r n ia
B u ild in g and Loan A s s o c i a t i o n , 1952. 13 pp.
H. MISCELLANEOUS
Adams, J. A l s t o n , 1 1 S u p e r v is io n and th e Dual System of
F i n a n c i a l I n s t i t u t i o n s . 1 1 U n pu blished a d d r e ss b e fo r e
c o n v e n tio n o f the I l l i n o i s S a v in g s and Loan League,
P e o r ia , I l l i n o i s , O ctober l 6 , 1951* 9 PP*
Amendments o f FDIC and FSLIC, r e : Payment o f I n s u r a n c e .
New York City: American Bankers A s s o c i a t i o n , S a v in g s
and Mortgage D i v i s i o n , 1951* 1 P*
B alan ce S h e e t , June 30, 1951* W ils h ir e F e d e r a l S a v in g s
and Loan A s s o c i a t i o n o f Los A n g e le s .
B alance S h e e t , June 30* 195l* S ou th ern F e d e r a l S a v in g s
and Loan A s s o c i a t i o n .
Comparative Survey o f th e FDIC and FSLIC. W ashington,
D.C.: N a t io n a l S a v in g s and Loan League, 1951* 1 P*
Husband, W illiam H ., t1The Key to Our B u s i n e s s . 1 1 Unpub
l i s h e d e x c e r p ts from an ad d ress d e l iv e r e d b e fo r e the
Annual S tock h old ers* M eeting o f the F e d e r a l Home Loan
Bank o f New York, New York City, January 2 7 , 19^-9*
12 pp.
In su ran ce o f A ccou nts i n S a v in g s and Loan A s s o c i a t i o n s ,
R esearch D epartm en t, S e c u r j t y - F i r s t N a tio n a l Bank o f
Los A n g e le s , June 2 , 1951*
I n t e r v ie w w ith Mr. L. E. F r i e s e , V i e e - P r e s i d e n t , C a lifo rn ia
S a v in g s and Loan League.
I n t e r v i e w w it h Mr. Conrad C. Jam ison, A s s i s t a n t V ic e -
P r e s i d e n t , S e c u r i t y - F i r s t N a tio n a l Bank o f Los A ngeles,
207
N
■ j
I n te r v ie w s w it h Mr. M. F. B. MacBan, A s s i s t a n t V i c e - P r e s i
d e n t, C a l i f o r n i a S a v in g s and Loan League.
I n te r v ie w s w it h W illia m Purmort, A s s i s t a n t t o the Vice-
P r e s i d e n t , E le v e n th D i s t r i c t F e d e r a l Home Loan Bank.
I n te r v ie w s w it h C. W. V aught, Exam iner, D i v i s i o n o f Build*
in g and Loan, S t a t e o f C a l i f o r n i a .
L iqu id S a v in g s Held by I n d iv id u a ls i n Los A n g ele s County,
R esearch D epartm ent, S e c u r i t y - F i r s t N a tio n a l Bank of
Los A n g e le s , A p r il T J 9 1952. 1 p.
Monthly Payments and T o t a l I n t e r e s t P aid on a Home Pur
chase Assuming Varying Down Paym ents, I n t e r e s t R a tes,
and A m o r tiz a tio n P e r io d s , R e sea rch D epartm ent,
S e c u r i t y - F i r s t N a tio n a l Bank o f Los A n g e le s , J u ly 6 ,
1950. i± pp.
P o p u la t io n , R esearch D epartm ent, S e c u r i t y - F i r s t N a t io n a l
Bank o f Los A n g e le s , March 13, 1950. 1 p.
S a v in g s and Loan A s s o c i a t i o n s i n Los A n g ele s C ounty,
R esearch D epartm ent, S e c u r i t y - F i r s t N a tio n a l Bank of
Los A n g e le s , J u ly 6 , 1950. 7 PP*
” S t a t e Abandons Appeal i n S u i t f o r Power over F e d e r a l
Loan C om panies,” The Los A n g ele s D a i l y J o u r n a l, LXV:
HI4 .: 1, June 6 , 1952 • 1 p •
The U n ited S t a t e s S a v in g s and Loan L eague, 1892- 1914-9«
W ashington, D.C.: U n ited S a v in g s and Loan League,
n .d . 5 PP*
U n iversity of Southern California Library

Asset Metadata

Creator Bauer, Dorothy Ann (author)

Core Title The economic significance of savings and loan associations with emphasis on Los Angeles County

Contributor Digitized by ProQuest (provenance)

Degree Master of Business Administration

Degree Program Business Administration

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag business administration, banking,OAI-PMH Harvest

Language English

Advisor Martin, G. Preston (committee chair), Carus, Clayton D. (committee member), Trefftzs, Kenneth L. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-125971

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Document Type Thesis

Rights Bauer, Dorothy Ann

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Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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