Savings and Loans associations (or S&L's), also known as a thrifts, are banking organizations that specialized in savings accounts and writing mortgages and other loans. These banking organizations came about after the Great Depression to help give individuals a chance to own homes and get out of everlasting debt. Prior to the Great Depression, mortgages where not from banks, but instead by insurance providers. These insurance company backed mortgages differed a little from the loans we know today. Many were short term loans with some sort of "balloon" transaction at the end of the term, or interest only mortgages in which none of the monthly installments went toward the most crucial of the mortgage. These were also seen as being a major contributor to the 2008 Financial Crisis. This type of mortgages caused many individuals to live in a constant cycle of re-financing their house, or face the loss of their house through property foreclosure when they were unable to make the increased payments at the end of the loan term. Savings and Loans Associations were created when the legislature approved the Federal Home Loan Bank Act in 1932. This was done to provide banks, more over savings and loans associations, the financing needed for them to offer long lasting, amortized mortgages for house purchases.
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The story of the Savings and Loans crisis is a two part story. The first consists of the events that brought on the S&L's trouble, the second part is the events that created the major crisis and cost Americans money. The initial trigger of the S&L crisis was inflation in the 60's and stagflation the 70's. A quick economics class, Inflation is the steady raise in the prices for goods and services. Inflation is calculated as an annual percentage increase. As inflation increases, your money will buy a smaller amount of a good or service. As an example, if the inflation rate is 2% annually, then in theory a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand. Stagflation is the same as inflation with the added bonus of high unemployment and a stagnate economy.
The Savings and Loans Associations struggled during these inflationary periods. Remember that the Savings and Loans Associations depended on residential mortgages and savings account deposits for income. The trouble with this business model was that the mortgage rate went from 7.25% in 1971 to a staggering 17.5% by 1981. As you can imagine the increase in the interest rate made it more "expensive" for people to borrow money. These rates along with the slow economy and high unemployment rate made it almost impossible to qualify for a mortgage.
Inflation and Stagflation were the causes to the failing of many savings and loans association. However these did not cause the savings and loans crisis, the crisis was a consequence of political figures, lenders, and lobbyist responding badly to the economical circumstances of the time. Of course these responses were nothing new in the 1980's and we saw them in another disaster in the 1990's and of course in the 2008 financial crisis.
The guidelines that came about to "help" the savings and loans crisis were:
Lending requirements were relaxed. Federal Deposit Insurance was brought up from $40,000 to $100,000. Enforcement of the law by banking regulators was reduced. Implementation of the remedy was late until the market itself couldn't possibly pay for it and tax payers were once again handed a bill. Politicians interrupted investigations of failing thrifts on part of certain S&L owners.
The significant lessons to be taken from the savings and loans crisis is that bad economical policies and an inadequate and improper regulating program can cause a wide spread disaster. This disaster along with the crisis of 2008 display that there is a large need for risk-adjusted profitability in the financial market and that badly managed lenders will hide their true level of risk and return. In reaction to this crisis the structure and control of the US financial market was generally improved if only for a few decades, however more should have been learned from it. But one significant problem that came out off this crisis was that bankers and bankers now realized that they were "too big to fail" and this was only the beginning!
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