Savings and Loan Mortgage Financing

Savings and loan associations are the single most important source of home financing money for residential real estate. 

Historically, they can be traced back  to early building societies in England and Germany. These were cooperative lending associations whose members pooled their money to make home loans to each other.

Regulation and Deposit Insurance

A savings and loan association may be either state or federally chartered. In the later case, the word “Federal” appears in its name. A charter is an association’s permit to operate. Federal charters are issued by the Federal Home Loan Bank Board (FHLBB). A federally-chartered association must be a member of the Federal Home Loan Bank System (FHLBS), and carry Federal Savings and Loan Insurance Corporation (FSLIC) insurance. (The FHLBB is the governing body of the FHLBS.) Until new federal legislation in 1981, federally-chartered S&Ls were required to be mutually owned (owned by their depositors). Today, a federally-chartered S&L can be either mutually owned or owned by stockholders. 

An outgrowth of the 1930 depression, the FSLIC is an agency of the U.S. Government that insures savers’ deposits against the possibility they will not be available whenever the savers wish to withdraw them. For this insurance, which is $100,000 per account, the S&L pays an insurance premium to the FSLIC of ½ of 1% per year times its savings deposits. The Federal Home Loan Bank System was also a product of the Great Depression; it was formed to bring order to chaotic and often weak state banking and savings laws. Today the FHLBS regulates the geographic area a federally-chartered S&L can lend in, maximum loan size, maximum loan-to-value ratios, and the ratio of home loans to other types of loans. The Federal Home Loan Bank System also provides S&Ls with access to the nation’s capital markets, as we will see later. 

State-chartered associations can be mutually owned by depositors or by corporations owned by stockholders. Federal Home Loan Bank System membership and FSLIC insurance are optional. Whether federal or state in origin, to be chartered an association must be financially healthy, have a sound lending policy, and maintain adequate amounts of cash and other liquid assets to meet depositors’ withdrawal demands. The Federal Home Loan Bank Board and the FSLIC periodically audit the accounting books of members to assure compliance with regulations and sound lending practices. Many-chartered associations are subject to audit by the Office of the Commissioner of Banking. 

Savings Accounts

As October, 1983, savings and loan associations were offering several types of accounts to attract savers. These included regular passbook savings accounts, checking accounts, fixed rate certificates, market rate passbook and checking accounts and various retirement accounts. 

The standard passbook pays savers 5½% per year interest and allows the flexibility of depositing or withdrawing without penalty and requires a minimum balance of as little as $1. Higher interest is available to passbook savers willing to keep a balance of $2,500 or more. Checking accounts, introduced in 1981, allow the payment of interest on funds held in a checking account. The rate of interest paid is 5¼% and checking services are usually free if a minimum balance of $500 is maintained in the account. Higher interest is available with a $2,500 minimum. 

Money Market Certificates

To compete with yields offered on bills, notes and bonds offered by the U.S. Treasury, S&Ls offer a variety of money market certificates. These are savings certificates, also called certificates of deposit, wherein the saver agrees to leave money on deposit for a fixed period of time. In return, the S&L agrees to pay the saver a rate of interest which is higher than that offered on passbook accounts. These certificates range from as short as 32 days in length up to 10 years and sometimes 20 years. 

Generally speaking, the longer a saver agrees to leave money on deposit, the higher the rate of interest the S&L will pay the saver. Each S&L sets its own rate, and it is usually based on current yields available on the above listed Treasury securities. Also, each S&L can change its rates in response to current interest rates in the marketplace. The minimum account balance for a certificate is typically $1,000 to $2,500. If a saver wants a certificate of $100,000 or more, sometimes called a “jumbo” certificate, most S&Ls will negotiate a higher interest rate on an individual account basis. S&Ls also offer various types of tax-deferred retirement accounts at attractive rates of interest. 

A key point to remember is that a savings and loan is an intermediary between savers and borrowers. S&L loans tend to be long-term, S&Ls pay higher interest rates to savers who are willing to commit to leaving their savings on deposit for longer periods of time. 


The purpose of offering savings certificates that pay interest similar to what is available from Treasury securities is to prevent disintermediation. Disintermediation results when depositors take money out of their savings accounts and invest directly in Treasury securities. In the past, when Treasury securities, in particular 3-month and 6-month Treasury bills, paid more than S&L accounts, money would flow out of savings accounts with the result that S&Ls  had less money to lend.  Without loan money, the real estate market would go into the doldrums. Today, S&Ls can offer high enough returns to attract money.

Savings And Loan To Commercial Banks