Home Financing
Banks, Lenders, Secondary Mortgage Market...
Home financing money for residential real estate, home
improvement, first time buyer financing or refinancing has been provided
enlarge, by some that believe, to be the single most important source, savings
and loan associations.
Historically, the savings and loan associations 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.
Home Financing 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.
Home Financing Savings Accounts
As October, 1983, savings and loan associations were offering several types
of accounts to attract savers for home financing. 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.
Home Financing 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 home financing 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.
Home Financing Disintermediation
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 home financing money.
Home Financing Sources
|
