Economic crisis and the demise of a popular contractual form: Building & Loans in the 1930s

Abstract

Before the 1930s Building and Loan Associations (B&Ls) were the leading residential mortgage leaders in the U.S. When severely distressed during the housing crisis of the 1930s, B&Ls frequently took years to liquidate. These delays in resolution resulted from the unique B&L contract that encouraged borrowing members to prolong dissolution and gave them shared control over the timing of liquidation. We estimate a hazard model of dissolution using a new dataset of New Jersey B&Ls and find that the probability of liquidation rose 37% when the share of non-borrowing members rose above two-thirds. The severe restriction on liquidity suffered by non-borrowers was instrumental to the rapid transition from the traditional B&L to the modern Savings & Loan industry during the 1930s housing crisis.

Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s

“…The sinking fund mortgage loan contract used by these intermediaries provided strong incentives for borrowers with sufficient resources to repay early. By doing so, they avoided sharing in the losses earned by their associations (Fleitas, Fishback, and Snowden 2018). The increase in foreclosures of interest here, moreover, depressed the stock of loans held by B&Ls throughout the 1930s.…”

“…forced closure because borrowers accounted for a significant share of B&L ownership. Fleitas, Fishback, and Snowden (2018) show that B&Ls were slow to liquidate and reorganize because their bylaws and case law required the support of two-thirds of the members in a vote before the institution could be liquidated. Borrower members and nonborrowing members had equal voting rights, and they had strong incentives to delay liquidation because they could avoid significant losses by repaying their loans before their B&Ls liquidated.…”

Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s

“…The central role of housing finance in the 2007-2009 financial has generated a surge of recent interest in the 1930s housing crisis. 8 A key feature of that crisis is its drawn-out resolution, especially relative to the disruptions in the commercial banking sector, as described by Fleitas, Fishback, and Snowden (2018) and Rose (2014). These studies have not yet attempted to estimate how foreclosure shocks limited new mortgage lending.…”

“…Both possibilities were likely to have been at work for B&Ls during the 1930s. The sinking fund mortgage loan contract used by these intermediaries provided strong incentives for borrowers with sufficient resources to repay early-by doing so they avoided sharing in the losses earned by their associations (Fleitas et al 2018). The increase in foreclosures of interest here, moreover, depressed the stock of loans held by B&Ls throughout the 1930s.…”

“…The fact that the effect becomes most negative after 1935 fits well with other evidence about B&L activity during the same time frame. After 1935 a number of associations were in trouble, while a significant number began liquidating as the share of borrowing members fell below the one-third threshold around that time(Fleitas, Fishback, Snowden, 2018).To approximate the impact that the effect of lagged REO share had on the new loans share, we can analyze how much of the change in mean new loans share is explained by the change in mean REO share times the REO coefficient. We do this over two timeframes, 1929 to 1935 and 1935 to 1940.…”