Mortgage Contracts, Dissolution Rules, and the Closure of Building and Loans
During the Great Depression
Sebastian Fleitas, Price Fishback, and Kenneth Snowden
June, 2014
Rough Preliminary Draft for UNCG Brown Bag
Abstract
On the eve of the Great Depression, Building & Loan associations were the most important
residential mortgage lender in the United States. During the housing crisis of the 1930s, however,
more than one-third of the 12,000 B&Ls operating in 1930 failed. The failures occurred in a
protracted fashion that was just winding up in 1940. In this paper we connect the protracted
process of B&L exit during the 1930s, and the simultaneous emergence of the S&L industry, to a
transition in mortgage loan contracts. We study the traditional sinking-fund SAC contract as one
source of disagreements among B&L members that delayed liquidation and resolution within the
industry. Constructing a new panel of firm-level data on more than 1,500 B&Ls in New Jersey
between 1930 and 1940 we use a hazard model to test the role of SAC members on liquidations.
Analysis of the panel shows that firms with higher shares of SAC borrowers had lower
probabilities of failure which is consistent with the observation that borrowers under the SAC
contract borrowers had strong incentives to delay liquidation relative to other member groups.

Economics Department, University of Arizona (sebastianfleitas@email.arizona.edu).
Economics Department, University of Arizona (fishback@email.arizona.edu) and NBER

Economics Department, University of North Carolina-Greensboro (snowden@uncg.edu) and NBER

1. Introduction
Financial crises are a fact of life in developed economies where people make investments
by tapping the credit markets. The depth of a financial crisis is influenced by the features of
contracts and regulatory rules in lending markets. Individual borrowers sign contractual
agreements with lenders to repay their loans according to the clauses in the contracts. When
changing conditions cause the borrower to fail to repay, the loan is foreclosed in line with the
terms of the contract. When a large enough share of borrowers fail to repay, the owners of the
lending financial institution must make decisions about whether to allow the institution to close
and these decisions are strongly influenced by the rules and regulations established for closure.
We examine the role of contractual form and dissolution regulations in the Building and
Loan (B&L) industry in the United States during the Great Depression. The Great Depression
ranks among the worst downturns in economic history and bank suspensions and failures in the
early 1930s have been discussed extensively. Yet, there remain large holes in our knowledge of
the financial problems of the 1930s because much less has been written about the Building and
Loan industry. B&Ls held a large share of the U.S. economy’s loans. In 1929, the value of B&L
non-farm residential mortgage loans was $7.8 billion compared with $36 billion in loans of all
types held by commercial banks. The B&L experience helps explain why unemployment
remained so high and other conditions remained dire throughout the 1930s. Even as the problems
with commercial bank failures were largely coming to an end in 1933, the problems with
liquidations of B&Ls were just getting started and continued throughout the 1930s.
More than 12,000 B&L associations were operating in every state and in cities of all sizes
by the end of the 1920s. Together they held 47 percent of the nation’s institutional nonfarm
residential mortgage debt on 1-to-4 family homes. Over the next fifteen years this most important
sector of the home mortgage market virtually disappeared as more than 6,000 B&Ls exited the
market while the remaining B&Ls converted into modern Savings & Loan associations. The
form of mortgage contracts and the regulations for dissolution of the B&Ls played a significant
role in the dissolution of the B&Ls. The share accumulation contract (SAC) had long been the
standard form in the B&L industry, but the Great Depression exposed a key feature of the
contracts that likely contributed to a large number of foreclosures on homes between 1931 and
1936. Large numbers of new borrowers and lenders moved away from the SACs to use a direct
reduction contract (DRC).1 Given that the SACs became unpopular and contributed to increased
foreclosure rates on individual mortgages, we might expect, in turn, that B&Ls that were still
heavily reliant on SACs in the late 1930s were more likely to fail. However, there was a
countervailing factor. The regulations for dissolution for a B&L required votes of the
members/owners of the B&L before it could be closed. The dissolution rules in most states gave
SAC borrowers who were still current on their loans incentives to vote against the closure of the
B&L because closure would create more problems for situation than for other members in the
B&L. Therefore, the ultimate effect of the SACs on the closing down of the B&Ls is an
empirical question that we seek to address here.
In the next section we explain the ownership structure of the B&Ls and the features of
SAC mortgages. We then describe the problems that developed with SAC mortgages (and other
mortgage loans) during the mortgage crisis of the 1930s that contributed to increased foreclosures
and thus greater pressure for closing B&Ls during the 1930s. We then describe how the voting
for closure of a B&L was influenced by the rules for disposing of the dissolved B&Ls assets.
SAC borrowers in good standing with the B&L had more incentives to avoid closing the B&L
than DRC borrowers and non-borrowing members in the B&L. We test which of these two ways
that SAC borrowing influenced B&L closures is stronger by compiling a panel of annual balance
sheet data for all 1,563 B&Ls that operated in the state of New Jersey between 1930 and 1940.
New Jersey is in many ways an ideal place to illustrate the process through which B&Ls failed. It
1
See Rose and Snowden (2013) and Fishback, Rose, and Snowden (2013) for discussions of the
development of B&Ls and the problems that arose from the SACs and the shift toward the DRCs.
was a leading B&L state in terms of numbers of associations and members. With few exceptions
its B&Ls retained their state charters rather than adopting new Federal S&L charters, and there
was variation within the state in the depth and duration of the housing crisis of the 1930s. Using
the panel we estimate the relationship between the share of members in the B&L with SAC
contracts and the likelihood that the B&L closed in the next year. The results show that a one
percent increase in higher SAC borrower shares was associated with a 1.25 percent reduction in
the closure rate of B&Ls. Over the course of the decade this SAC share dropped by 10
percentage points, and the elasticity implies that the drop in SAC shares was associated with a
rise of 13.7 percent in the probability of a B&L closing. Thus, the evidence suggests that SAC
owner/members had significant incentives to delay the closure of B&Ls, and a number of B&Ls
with weakened balance sheets did not close until the share of SAC members fell the 33 percent
figure necessary to block closure.
2. The Mutual Structure of B&L Ownership and SAC Mortgages
After first appearing in the U.S. in the 1830s, by 1930 B&Ls had spread to every state
and to cities of all sizes, and ranked as the nation’s most important institutional source of
residential mortgage credit. The engine for B&L growth was its unique organizational and
contractual structure. The heart of the typical B&L was the share accumulation contract. A B&L
raised funds by attracting individuals who agreed to buy shares in the B&L in weekly or monthly
installments until the accumulated value of these payments plus dividends earned on the shares
grew to equal the listed par value of the shares. Since the data we work with here are from New
Jersey, we will use information from New Jersey B&Ls to describe the typical process. In our
New Jersey sample a typical non-borrowing member of the B&L made a monthly payment of $1
to purchase shares with a par value of $200. Under this contract if the B&L offered a dividend of
6 percent on shares each year, it took the non-borrowing member 139 months for the accumulated
value of shares and dividends to mature, and thus reach the par value of $200. If the B&L paid
lower dividend rates the time to maturity was longer and higher dividend rates led to a shorter
time to maturity. Under this contract the non-borrowing members were free to withdraw their
funds at maturity. They could withdraw funds before maturity with some forfeiture of dividends.
Non-borrowing members who defaulted on contractual monthly payments faced fines and did not
earn dividends and could eventually be dismissed by the association with only their accumulated
contributions.
As the B&L accumulated these funds it made loans, but only to individuals who also
agreed to become members through the same share accumulation plan used by non-borrowing
members. Under this share-accumulation loan contract (SAC) the borrower simultaneously took
out a straight, interest-only balloon loan and committed to purchasing installments shares in the
B&L with an equal maturity value. To obtain a $2,000 home loan, the borrowing member signed
a contract to purchase ten shares each with a par value of $200. For this example, assume a
dividend rate of 6 percent and an interest rate of 6 percent on the loan. The borrowing member
each month paid $10 in “dues” for her shares ($1 per share for each $200 share) plus $10 per
month in interest on the balloon loan (6 percent of the $2,000 loan divided by 12 months).2 The
borrower’s payment of shares went into a sinking fund and dividends were paid on the shares. If
the association paid dividends of 6 percent on each share, then the value of the sinking fund
would reach the loan principal amount of $2,000 in 139 months. At that point the mortgage was
extinguished. The length of time it took to accumulate enough shares to extinguish the loan was
shorter if dividend rates were higher and was longer if dividend rates were lower. It is important
to note that the principal owed remained the same throughout the length of the loan and the loan
could not be extinguished until the time when the value of assets in the sinking fund reached the
principal amount. In periods where the B&L had to cut dividends or the value of shares fell, the
2
If the market interest rate at the time of the loan differed from the dividend rate at the time the
loan was taken out, the borrowing member might pay an additional premium payment each month
or make a lump sum payment at the time of the loan.
time required to repay the loan would increase. Such extensions of time to repayment became a
significant problem in the Great Depression. If the borrowing member defaulted on payments
during the loan period, the association could foreclose upon the property and seek full repayment
from the borrower’s share account and from the proceeds from renting or selling the property.
These features of the simplest form of the traditional B&L highlight several important
aspects of these institutions that explain how they performed during the 1930s. B&Ls were not
regulated, depository institutions—they were, instead, corporations owned by their borrowing and
non-borrowing members. They were quite different from most corporations, however. B&L
owners purchased their capital over time in installments rather than with lump-sum full payments.
In addition, the non-borrowing members could withdraw their accumulated stock and dividends
when their stock reached its maturity value and could request a withdrawal even earlier, although
at some cost.3 An association had substantial latitude in honoring withdrawal requests, however,
so that they did not disadvantage remaining members in the association. B&L associations
remained primarily equity-financed organizations, finally, even though they could and did borrow
from outsiders. Taken together, these features explain why distressed B&Ls could continue to
operate for protracted periods when their balance sheets reached levels that would have driven
other types of financial institutions to close. The B&Ls were permitted to delay withdrawal
payments to its own members indefinitely and rarely owed debts to outside creditors large enough
to trigger a default.
The experience of the traditional B&L in New Jersey during the 1930s illustrates the
durability of these associations as financial intermediaries. At the beginning of the decade the
1,561 operating B&Ls claimed 1.2 million members and $1.2 billion in assets—88 percent of
which were traditional share accumulation mortgage loans. During the first five years of the
depression the assets of the associations fell by more than 20 percent—to $950 million—while
3
Borrowing members could not withdraw their share accumulations prior to maturity, and repayment of the
loan, unless they paid additional funds so that their loan was repaid in full prior to maturity.
the number of members decrease by more than 40 percent to only 700,000. Despite the severity
of the rapid shrinkage in the industry’s absolute size during the early years of the Depression,
only 53 of associations had ceased operations by 1935 and half of those exited by merging with
other B&Ls.4 The associations that survived these early shocks did so despite severe shocks to
their balance sheets. Some 1,431 of the B&Ls in New Jersey held more than 80 percent of their
assets in mortgage loans in 1930, but only 70 of the state’s 1,514 B&Ls in operation could still
make that claim in 1935. The average mortgage loan share of assets held by all B&Ls fell, in
fact, from 0.89 to 0.55 over this five-year period. At the same time, there was a surge in missed
installment payments on stock subscriptions by both borrowing and non-borrowing members,
missed interest and premium payments by borrowers, and foreclosures on mortgage loans. The
impact was reflected in the B&Ls balance sheets as a marked increase in non-earning assets—
arrearages and real estate owned—from 5 to 35 percent of total assets by 1935. A deterioration of
assets of this magnitude made it very difficult for a financial institution to secure financing and
this impact showed up on the liabilities side of the B&Ls balance sheet as their traditional source
of funds—installment dues on stocks and apportioned profits, decreased from 84 to 66 percent of
liabilities.5 B&Ls could offset this drain, however, by forcing members to hold on to matured or
lapsed shares, rather than letting these members withdraw, and by increasing unapportioned
profits, which were earnings not passed on to member/owners as dividends. These categories
nearly completely offset the loss of traditional financing channels by increasing from 1 to 15
percent of liabilities between 1930 and 1935.
New Jersey B&Ls were deeply distressed by 1935, but they proved to be durable because
their institutional and contractual structures could withstand these shocks so that only a few dozen
left the industry. The pattern changed over the next five years as more than 500 of the B&Ls left
4
Six new B&Ls began business in the early 1930s so the net change in the industry was a decrease of 47
B&Ls. Twenty-seven associations left through mergers, and another 21 were put in liquidation or trust by
state regulators.
5
Apportioned profits were the accumulation of past dividends paid to the members.
the industry, total assets decreased by more than 50 percent to $400 million and membership fell
from 700,000 to 400,000. The continued shrinkage and wave of exits was partly due to a
deterioration in balance sheets, as the real estate owned share of assets rose from 0.22 in 1934 to
0.39 in 1939 (see Table 1). On the liability side, the share of unapportioned profits rose from
0.12 to 0.212, while the share of liabilities in the form of installment shares fell from 0.59 to 0.44.
Even as the balance sheets deteriorated, New Jersey B&Ls left the industry in large numbers after
1934 largely because they finally CHOSE to close as the best option—400 of the exits were
either by merger (about 50), reorganizations (40), or through voluntary liquidation (some 350).6
It required a two-thirds vote of the members attending a special meeting of the association to
close the B&L.7 Only ????? of the B&Ls were closed because state regulators forced liquidation.
Since SAC borrowers composed a significant share of the owner/members in a B&L, their
incentives and votes would have strongly influenced how the reliance on SAC loans influenced
the closure rates of B&Ls.
2. The Rise and Fall of the SAC Mortgage
B&Ls relied heavily on the SAC mortgages for a century while the number of
associations and borrowers grew continuously. Industry insiders believed the success of B&Ls
was due at least in part to the SAC because it provided borrowers with an opportunity to repay
their mortgage debt gradually over many years. The vast majority of loans offered by other
financial institutions were short term interest-only balloon loans with lengths of 3 to 5 years. For
a five-year $2,000 loan at 6 percent interest, the balloon loan involved a monthly payment of $10
in interest each month until the end of 5 years when the borrower was expected to repay the
$2,000 principal in full. Under the SAC mortgage B&L borrowers were setting aside small
monthly payments that earned a return and thus were essentially saving in equal installments to
pay off the principal when it came due. Thus, the B&L borrower avoided having to scramble like
6
7
Another 80 closures were due to the seizure of a B&L by state regulators.
Sundheim (1933, p. 297) discusses the voting requirements and procedures in New Jersey.
the balloon borrower to make the full principal payment or find a new loan to make the payment.
Most balloon borrowers ended up rolling their loan over several times before they fully paid off
their mortgage.
An alternative means of spreading the mortgage repayments equally over time was
developed when direct reduction contracts (DRCs) were first introduced in the 1880s in the form
of the “Dayton Plan,” named for the city where it was first used. The DRC mortgage called for
equal payments each month composed of interest and principal. The payments for the principal
“directly reduced” the amount of principal owed on the loan. As a result, the length of the loan
term was fixed, the borrower owed a smaller amount of principal on the loan as she made each
payment, and she paid interest only on the amount of the principal that had not yet been repaid.
Further, there were no externality effects on the borrower’s loan length when other members of
the association failed to repay their loans because all terms of the loan were set.
Despite these apparent benefits, the adoption of the DRC was gradual and limited before
the 1930s. Many B&Ls chose not to switch to avoid the costs that were involved. The costs
included reducing or reallocating the credit risk that borrowers had borne under the SAC, the
possible loss of tax exemptions that had been based on the mutual character of the B&L, and the
costs associated with modifying accounting and organizational practices that had been designed
around the SAC (Rose and Snowden 2013).
B&L leaders also discouraged the switch to DRC by arguing that proponents overstated
the benefits that came from paying interest on a declining principal over time. Even though the
borrower paid interest on the full amount of the principal over the life of the SAC loan, B&L
leaders pointed out that the additional interest charges were offset by the dividends
borrower/members earned on their shares in the B&L (Clark and Chase 1927, 137-41 and Piquet
1931, 224-34).
SAC proponents also touted the long record of high dividends within the B&L industry
that regularly reduced the duration and total loan costs of SAC loans. They acknowledged,
however, that SAC borrowers were exposed to losses not only through reductions in dividends,
but also through possible write-downs of their accumulated equity shares if their association
suffered large losses over protracted periods. In the worst case, in fact, these losses could be so
severe that the value of the borrower’s equity in the association would have to be determined
during a protracted liquidation of the B&L. The industry’s long record of stability, however,
indicated that relieving borrowers of exposure to such risks “…makes very little practical
difference because of the small likelihood of failure.”(Chase 1925, 255).
These assurances about the SAC lost traction when the mortgage crisis hit as part of the
Great Depression. Large numbers of people lost their jobs and fell behind on their mortgage
payments. As they faced increased threat of foreclosure, housing prices fell sharply, making
selling the home to avoid foreclosure more difficult. Sharp increases in foreclosures and
delinquencies led to reductions in B&L dividend payments and write-downs of the values of
installment shares. These reductions, in turn, meant that the length of time required to fully repay
the mortgage lengthened, which gave borrowers even more reason to stop paying and go into
foreclosure, which fed into the next phase of this vicious cycle (Snowden 2005; Rose and
Snowden 2013). 8
After the problems caused by the uncertain length of the SAC loans were exposed by the
mortgage crisis in the early 1930s, the industry perceived that continued reliance on SAC loans
would lead to continued problems with foreclosures, which could accumulate and lead to the
closure of the B&L. The events that followed appeared to support this view. By 1939, 4,000 out
of the 12,300 B&Ls operating in 1929 had closed and total B&L assets had declined by more than
one-third. All mortgage lenders were hit hard by the Great Depression, but the B&Ls fared the
8
Note that the problems were just as bad and possibly worse with the balloon interest-only loans. When the
principal balloon payment came due for many borrowers in the early 1930s, many fewer people had the
assets to repay the principal and few could roll their loans over because the lenders lacked funds to lend.
Commercial and savings banks had seen sharp declines in deposits, and insurance companies had seen large
numbers of insureds cash out their policies (Fishback, Rose, and Snowden 2013).
worst as their share of mortgage lending on one-to-four family homes decreased from 33 percent
in 1929 to 23 percent a decade later.
The traditional SAC contract that had been so widely used and extolled for decades was
considered “obsolete” by 1934. Two respected B&L leaders were convinced that attempts to
make new SAC loans would made it “more difficult for associations to obtain the best mortgage
loans…The difficulty of obtaining good loans is especially pronounced in areas where there are
major reductions in dividend rates or where there have been failures or reorganizations of
associations. It also becomes a greater problem where competitors citing unusual examples use
them to discourage borrowers or prospective borrowers in even the best managed institutions
using this plan” (Bodfish and Theobald, 1938, p. 183).
Meanwhile, the rapidly growing new federal system of Savings & Loans moved from
allowing federal S&Ls to writing and holding both SAC and DRC loans to allowing only lending
with DRC loans by 1936. At the same time the industry trade group, the US Building & Loan
League, sponsored educational campaigns to instruct B&L managers on how to transition away
from the SAC contract and to adopt accounting and organizational procedures that accommodated
the DRC (Rose and Snowden 2013). In New Jersey the SAC share of the value of total loans at
the typical B&L fell from 99 percent in 1930 to 59 percent by 1940.
The change in preferences toward DRC loans over SAC loans and interest-only balloon
loans was driven largely by the perception that the features of the SACs, particularly the uncertain
length had significantly contributed to the increase in foreclosures. These increases in the number
of foreclosures reduced the quality of assets on the balance sheets of B&Ls and thus increased the
pressure to close them. But this pressure was opposed by a countervailing force. The decision to
close the B&L was most often made voluntarily, and SAC borrowers in good standing in the
B&L had strong incentives to oppose closure.
SAC Mortgage Borrower/Members and the Rules for Closing B&Ls
The closure decision required a two-thirds vote by the member/owners of the B&L. By
the mid-1930s the members could be divided into four interest groups: defaulted SAC borrowers,
SAC borrowers current on their loans, DRC borrowers current on their loans, and non-borrowing
members. Because defaulted SAC borrowers generally lost their association shares and their
membership during the foreclosure process, they did not generally vote on the later decision
whether to liquidate the entire association.9 As a result, the decision to close was determined by
the attitudes of the non-borrowing members and the members in good standing with SAC loans
and the members in good standing with DRC loans. Their attitudes toward closure were driven
by how the closure rules distributed the net assets of the B&L to each group. These rules were an
active area of judicial action and interpretation before and during the 1930s.
Legal complications arose because under the share accumulation contract the SAC
borrowing member was both an owner and a debtor to the association. The view held in the great
majority of states, including the New Jersey B&Ls we study here, was known as “the
Pennsylvania Rule,” named after the state where the key court decision was made.10 Under the
9
New Jersey was one of more than 20 states that did not impose a foreclosure moratorium during the
1930s. Deficiency judgments were also allowed and enforced in this state. As a result, the combination of
the sale of the foreclosed property and the balance in the member’s share “sinking fund” account was
ordinarily exhausted during foreclosure—otherwise the borrower would have had incentives to liquidate
these investments herself and avoid incurring the foreclosure costs.
10
An alternative way to deal with SAC borrower/members was adopted by a handful of states and was
known as the Maryland rule. The dual role of stockholder-mortgagor was treated as a fiction imposed by
the technical aspects of the B&L contractual structure. From this view the borrowing member was defined
by the net impact of the two contracts—she was fundamentally a debtor to the association with a liability
equal to the difference between her outstanding straight mortgage loan [Ken: ????This is just the principal
owed right????By straight mortgage loan you mean the interest-only balloon loan????] and the balance in
her share account. Under insolvency, therefore, the borrower became purely a debtor for the NET of the
two accounts. The NET debt became due immediately which meant that the value of the shares held in the
SAC borrower’s account were evaluated immediately to establish what the net debt was. The court in the
Pennsylvania rule argued that the Maryland rule led to unequal treatment of the share accounts of the
nonborrowing member and of the SAC borrower. The Pennsylvania rule For a passionate defense of the
Maryland rule see Ken’s Law Reference?????.
The interesting feature of the Maryland rule for purposes here is that it treated a B&L loan as if it
were a modern, fully amortized “direct reduction” loan upon the insolvency of an association. During the
1930s, as we have pointed out above, New Jersey B&Ls, and B&Ls throughout the U.S. began to issue
these direct reduction loans as they moved away from the traditional B&L model and towards the modern
Pennsylvania Rule the SAC borrower was both a bona fide member/owner of the B&L and a
debtor to the B&L. The rationale for this position was that the share account attached to the SAC
member’s loan earned the same profits and absorbed the same losses as the share accounts of the
non-borrowing members. The central principal at stake was that the association had to treat all
owner/members equally regarding earnings. When the B&L closed and was declared insolvent,
all debts came due, including the principal of the balloon aspect of the SAC mortgages. The
stock accounts held by all members, borrowing and non-borrowing, were held back until all of the
B&L’s assets were disposed of and a liquidating dividend payment was declared. Consider how
this influences the asset positions of the non-borrowing member and of the SAC
borrower/member if the B&L is dissolved. They each will ultimately receive the same liquidating
dividend payout, but the principal amount of the SAC borrower’s mortgage is supposed to be
repaid immediately. The SAC borrower faces the transactions costs of scrambling to obtain a
new loan in a seriously distressed mortgage market. If she cannot obtain the loan she faces
foreclosure and the loss of the home. In contrast, if the B&L were to stay open, the SAC
borrower has more time to repay the loan and switch status to becoming a non-borrowing member
with the house no longer at risk when the B&L is dissolved. The benefits to the SAC borrower of
keeping the B&L open are even larger if they anticipate an improvement in the economy because
they not only gain extra time to repay the loan but also have a greater likelihood that the B&L
would survive or the liquidating payment would be larger. Therefore, SAC borrowers had
incentives to vote against closure that nonborrowing members did not.
In the final analysis the impact of reliance on SAC loans on the probability of closing a
B&L in most states in the 1930s depended on which of the two effects we describe dominates.
S&L form. Relative to the insolvency decision, therefore, New Jersey borrowers with direct reduction
loans were is an important way subject to the Maryland rule, while the borrowers with share accumulation
loan contracts were actually subject to the Pennsylvania rule. Below we use the New Jersey B&L sample
to examine this hypothesis—that SAC borrowers should have been more in favor of delaying insolvency by
voting for voluntary liquidation than DRC borrowers.
Under the first effect reliance on SAC loans led to higher closure rates if the externality features
of SAC loans and their uncertain length raised foreclosure rates enough to threaten the viability of
the B&L. Under the countervailing effect, a larger share of SAC borrowers would have voted
against closing and thus reduced the probability of closure.
The incentives of DRC borrowing members in closure votes are more unclear, although
they remained a small share of voters. Over the course of the 1930s DRC borrower members as a
share of the voters rose from less than 0.3 percent in 1930 to around 1 percent in 1934 and
ultimately to 5.6 percent by 1939 (see Table 1). If they had any voting power in the decision to
close the B&L, it came largely as swing voters. Few of the DRC borrower members were
required to hold more than a very small number of shares but their votes counted the same in
closure because each member of the B&L held one vote. Therefore, they had few ownership
shares at stake in the decisionThe DRC loans were likely among the strongest loans in the
association because the vast majority were taken out after 1933 during the midst of the recovery
when the vetting of loans was tight. The absence of requirements continually to purchase
ownership shares and the fixed duration of the loans made them easily transferrable at very little
discount to other financial institutions. Thus, even though the loans came due if the B&L closed
down, the loan could be sold with few transactions costs for the DRC borrower or the DRC
borrower could more easily obtain a new loan than most SAC borrowers. Thus, DRC borrowing
members had fewer incentives to oppose closing down the B&L than SAC borrowing members.
The transactions costs of switching loans gave them more incentives to oppose closure than the
nonborrowing members.
4. Data
In order to discuss the events of failure and DRC adoption this paper will focus in the
state of New Jersey (NJ) during the period 1934-1939. When compared with other states, NJ
experienced a severe and protracted B&L crisis. Rose and Snowden (2013) find that New Jersey's
transition from SAC to DRC loans was somewhat slower than in the mid-Atlantic and
Midwestern states, although faster than in New England. By 1940 the SAC loans still accounted
for roughly 60 percent of the loans held by B&Ls but the process of adoption of the DRC was not
the same among B&Ls and moreover the firms were increasingly differentiated in this aspect.
One issue related to this is that many SAC loans from the late 1920s were still being repaid
because the SAC loans typically lasted 10 to 12 years, or even longer when the B&L reduced
dividends and/or the value of B&L shares declined. In addition, the SAC loan repayment practice
of only paying off the loan when the full amount was accumulated meant that the full value of the
loan amount remained on the B&L’s books for the entire life of the loan. In contrast, the value of
a DRC loan on the books declined each time a payment was made.
The time frame is related with the incidence of the main public policies. The main
advantage of looking at NJ is that the market was virtually untouched by the conversion of B&Ls
to federal charters or the entrance of new Federal S&L (which offered insurance over the loans)
until the forties. Given the shift away from SAC loans and the absence of federal S&Ls, which
were required to use DRC loans, the B&Ls in New Jersey by and large had to choose to move to
DRC to meet the demands of new borrowers. During the 1930s the Department of Banking and
Insurance of New Jersey took few actions and the main cause of closure of B&Ls was the
voluntary liquidation. Rose (2012) shows that actions by the Department of Banking and
Insurance were very uncommon before 1940: “after 20 B&L were closed by the state in the early
1930s, one more was seized in 1938, and then 20 more in one day in April, 1940”.
Other federal policies did matter, however. The foreclosure crisis following the great
depression (see Fishback et al. (2011), Ghent (2011)) led to public action first by the creation of
the Federal Home Loan Bank (FHLB) and finally by the Home Owner's Loans Corporation
(HOLC). The HOLC was a federal program established in 1933 that aimed to reduce the number
of foreclosures. Home owners at risk of foreclosure applied to the HOLC for a mortgage
refinancing. If the HOLC decided to accept to refinance the loan, it acquired the loan and in
exchange the lender received HOLC bonds. Although the effects of HOLC affect the B&L in
heterogeneous ways, because the HOLC stopped accepting applications in 1934 its effects do not
change over our reference period. The other important public policy was the Federal Housing
Administration (FHA), which focused on DRC lending. However, the FHA insured a relatively
small share of mortgages in NJ before the early 1940s.
In sum, NJ was a state with a B&L industry hard-hit by the crisis that faced a protracted
series of failures, and then adopted the DRC slowly. It also was unique in that before 1940 the
transitions occurred almost completely without influence of, or competition from, the new
Federal S&L system and the exiting was almost completely voluntary. So, while not nationally
representative in important ways, it provides a particularly interesting case to examine the
impacts of SAC on failure and the growth of DRC. NJ is also an unusual case because its
published annual balance sheets provide extensive detail about assets and liabilities including the
proportion of SAC loans in each B&Ls loan portfolio as we will see in the data section.
To test which of the two effects of the SACS most strongly influenced the closing down
of B&Ls, we develop a panel data set from 1934 to to 1939 (with additional information from
1930) that combines time-varying information on the balance sheets of all B&Ls in the state of
New Jersey with information on time-varying economic activity in the county mortgage market
where each B&L was located. The B&L information on the amount and composition of assets
and the shares of DRC and SAC loans was collected, compiled, and digitized from the Annual
Reports of the Commissioner of Banking and Insurance in the years 1930 to 1940. Information
that varied from year to year on measures of economic activity and income distribution was
compiled at the county for retail sales per capita, the infant mortality rate, and tax returns per
capita. The county information comes from data sets compiled by Fishback, Kantor, Kollman,
Haines, Rhode, and Thomasson (2013).
The Annual Reports for the New Jersey B&Ls report the name, location, and date of
establishment for each association that operated between 1930 and 1940 as well as
comprehensive balance sheet information for each year. A total of 1,581 associations operated at
some time during the decade, but with wide variation in age and size. In 1930 there were 283
associations operating that had been established before 1900, another 583 that had been placed in
operation between 1900 and 1920, and 693 that had been organized during the rapid expansion of
the 1920s. After 1930 only 20 more associations were established while by 1940 more than 600
B&Ls exited the industry. The New Jersey reports classify B&L exits into a wide range of
categories of which the most important are voluntary liquidations (366), mergers between two
B&Ls (85), and placement into state conservatorship (90). The remaining categories include
smaller numbers of reorganizations and suspensions. We are most interested in terminations of
business that are approved by only by the shareholders of the exiting B&L—both borrowers and
non-borrowers. For this reason our preferred measure of exit includes only voluntary liquidations
and the miscellaneous categories of reorganizations and suspensions. When using this definition
the associations that merged with another B&L or by way of state conservatorship are not
classified as exits although they disappear from the panel at some point. We use this strategy to
protect against selection that might occur if these exits that involved the decisions of agents
outside the exiting B&L were simply excluded from the sample. In our robustness analysis,
moreover, we examine whether our results change if our measure of exit is expanded to include
mergers and state conservatorships.
The size of New Jersey B&L’s varied considerably. The average association held assets
of $633,000 and had 528 members of which 123 were borrowers. In 1930, however, more than
400 small associations had total assets of less than $250,000 while another 92 held assets of more
than $2 million. For purposes here we control for the size of B&L with the natural logarithm of
total assets. Membership numbers correlate closely with total association size and vary from 240
small associations with fewer than 250 owner-members in 1930 to the 297 that claimed more than
1,000 members that year. In using the membership data, we are interested here in measuring the
relative importance of SAC borrowing members, DRC borrowing members and non-borrowing
members. The annual reports provide the number of borrowing members and the number of nonborrowing members. The reports provide information on the value of loans of SAC borrowers
and DRC borrowers but not the number of each. Other evidence from the period suggests that the
average size of loans for SAC and DRC borrowers for similar, so we multiply the SAC
percentage of the value of loans by the number of borrowing members to estimate the number of
SAC borrowers and then can subtract this estimate from the number of borrowing members to
obtain the number of DRC borrowers. , The detailed balance sheet data provided in the annual
reports provides a rich set of measures of each association’s financial structure and strength that
we use here as controls for the probability of exit. Because the size of the association is explicitly
controlled for by total assets, we use the detailed sheet information by measuring the shares of
total assets represented by key assets and liabilities. The principal earning asset for B&Ls were
mortgage loans, which represented shares of total assets that varied, on average, from nearly 90
percent in 1930 to only 50 percent in 1937; the average share then recovered to 58 percent by the
end of the decade. The decrease in the shares of mortgage loans in assets reflected the severe
impact of the housing crisis, of course, and required B&Ls to carry large amounts of non-earning
assets. Nonpayment of dues on stock subscriptions and interest on loans were classified as
arrearages, and the average share of assets in this category increased from less than 1 percent in
1930 to 5 percent in the mid-1930s before falling back to 2 percent in 1940. Increases in
arrearages on loans and shares securing loans were signs of problems and often were followed by
foreclosures by the association. Increased numbers of foreclosures caused the average share of
assets represented by real estate owned to increase from 3 percent in 1930 to nearly 40 percent as
late as 1939. The annual shares of mortgage loans, arrearages and real estate owned for the B&Ls
in our sample together give a rich and dynamic picture of their basic profitability and solvency
and we supplement that here with a measure of their short-run liquidity—the share of assets held
in cash.
The liabilities reported in the annual reports characterize the structure of claims on each
B&L’s assets that were held by its member-owners. In 1930 most of the capital invested in New
Jersey B&Ls (84 percent on average) came through the traditional channel—dues paid on
installment shares and the profits on these shares that had been apportioned by the B&L and
accumulated in the members share account. As distress mounted, B&Ls built loss reserves and
sought greater liquidity by holding back on payments of dividends and retaining ed control over
profits to serve as loss reserves and to fund greater liquidity. These unapportioned profits—which
legally belonged to members--became a major funding source during the decade as its share rose
from less that 1 percent in 1930 to more than 20 percent by the end of the decade. Also by the end
of the decade the more modern form of investment that would become the standard liability in the
postwar S&L—paid-up shares—increased in importance as a share of liabilities.
Although the shares of assets and liabilities measure different elements of the financial
structure and health of B&Ls, there are strong connections between the structure of liabilities and
and the structure of assets. To protect against multi-collinearity in our discussion of the effects of
the asset and liability structure variables, we have estimated models with the variables describing
the structure of assets alone, with variables describing the structure of liabilities alone and with
both sets of variables.
5. Empirical Approach
The impact of SACs on the closure of B&Ls depends on which of two effects was
stronger. A higher share of SAC loans would have led to a higher probability of closure if greater
reliance on SAC loans led to enough foreclosures to endanger the overall asset position of the
B&L. On the other hand, the Pennsylvania rule for dissolutions gave SAC borrowers/members
who were current on their loans greater incentives than nonborrowing members and DRC loan
members to avoid closing down the B&L; therefore, higher shares of SAC borrowers would have
been more likely to have blocked the closure of the B&L. New Jersey’s collection of information
on the types of loans held allows us to determine which of these two effects was stronger in
influencing the closures of B&Ls using panel data methods.
We estimate a Cox survival model in which the hazard of closure is
h(t) = h(t) exp( β SACitc + γ DRCitc + δ1 Fitc+ δ2 Citc + δ3 Fi30c + εitc ), (1)
in which h(t) is the hazard of closure in time t, SACitc is the share of SAC borrowing members
among all members, DRCitc is the share of DRC borrowing members, and the left-out reference
category is the share of nonborrowing members. The subscript i refers to the firm, t to the year,
and c to the county where the firm is located. Our primary focus is on β, the coefficient on the
proportion of SAC borrowers.11
The most complete specification of the model includes a rich set of correlates to control
for omitted variable bias and potential selection bias. Fitc is a vector of time-varying firm
characteristics, including size (measured as log of total assets), the shares of assets in arrears
(nonpayments), real estate owned, and cash on hand. In the asset groupings the left out category
is loans and miscellaneous assets. On the liability side we can also control for the shares of
liabilities in installment shares, paid up shares, and unapportioned profits with apportioned profits
and miscellaneous as the left-out category. Citc represents a vector of time varying measures of
economic activity in the county where the B&L was located. Retail sales per capita offers a
measure of average consumption, federal tax returns filed per capita controls for the top end of
the income distribution, while infant mortality rates offer a proxy measure of the share of low
11
Because the SAC and DRC borrower shares may have some measurement error, we have tried alternative
measures of the reliance on SAC loans. In one we used the SAC share of the value of loans, which focuses
on the differences between DRC borrowers and SAC borrowers but ignores the nonborrowing members. In
a second, we used the proportion of borrowing members of the total membership, which focuses on
differences in attitudes between borrowers and nonborrowers but ignores differences between DRC and
SAC borrowing members. The results in all settings that greater reliance on SAC loans was associated with
a lower probability that the B&L suggest would close.
income households in the county. The hazard model structure will not allow us to control for
time-invariant features of the B&Ls with fixed or random effects. To control for a significant
degree of the unmeasured time-invariant heterogeneity across firms, we therefore include timeinvariant controls for the asset structure and size of the firms in 1930 and/or the liability structure
in 1930 just as the mortgage crisis was beginning to develop. Finally,
e itmc is a random shock at
the firm level.
6. Results
Table 2 reports the results for the relationship between closure of the B&L and the shares
of SAC members and DRC members, as well as for a variety of other correlates that influenced
the probability of closure. The coefficients are elasticities of the probability of closure with
respect to the change in the factor. Column 1 presents the unconditional relationship and Column
2 presents the results when only firm and year fixed effects are used as controls. Column 3, 4 and
5 add respectively asset control variables, liabilities control variables and the combination of the
two. Finally, Column 6 includes all the previous controls plus city and county time variant control
variables.
SAC Borrowing Members Relative to Non-borrowing Members
Our expectation for the position of SAC borrowing members relative to nonborrowing
members was that the SAC members would be less willing than nonborrowing members to allow
for closure of the B&L. The key difference is that the loan comes due for the SAC borrowers
creating a variety of transactions costs that the nonborrowing members did not face. In all of the
specifications, the SAC share has a negative and statistically significant relationship with the
probability of closing.
The elasticity is -5.18 when no correlates are incorporated in the model
in specification 1. The elasticity implies that a one percent decline in the SAC borrowers’s share
of the membership relative to the share of nonborrowing members would have reduced the
probability of closure by 5.2 percent between 1934 and 1940. The absence of information on
time-varying aspects of size and the structure of assets and liabilities appears to impart a negative
omitted variable bias, because once these variables are added in specification 2 the elasticity
drops to -2.36. It falls further to -1.54 when information about the state of the county economy is
added in specification 3. Finally, the SAC share elasticity ends up at -1.25 when we add
information on assets, liabilities and size from 1930 to control for heterogeneity in the long run
stability of the B&Ls in 1930 before the mortgage crisis expanded in specification 4. This
estimate shows the extent to which SAC borrowers slowed the closure of B&Ls while taking into
account the changing asset positions of each B&L relative to their asset positions during good
times.
To get a sense of the explanatory power of the SAC member share, consider how the
change in the mean share between 1934 and 1939 influenced the probability of closure. The
share of SAC borrowers among members fell from 0.26 in 1934 to 0.16 in 1939. This decline
reduced the voting strength of SAC borrowers and thus led to an increase in the probability of
closure of 13.7 percent. This is a strong impact, although not as strong as some of the asset
variables described below.
DRC Borrowing Members Relative to Nonborrowing Members
The predicted impact of the DRC members’ share in the B&L relative to nonborrowing
members is less clear than for SAC members. The DRC members faced the transactions costs of
having to find new loans because the loan came due making them less likely to seek closure. On
the other hand, they had few assets invested in the B&L, so there was very little gain to them of
getting their assets out of a closed building and loan. The elasticity of -2.54 in the specification
with no correlates suggests that a higher share of DRC members was associated with a lower
probability of closure, although the estimate is not statistically significant. However, the addition
of all the correlates in the full specification leads to a reversal in sign and a statistically significant
positive elasticity of 3.04. The average share of DRC members rose from 0.01 in 1934 to 0.06 in
1939, and was associated with a 15.3 percent rise in the probability of closuresThe Structure of
Assets, Size, and Liability
The elasticities for the time-varying asset shares and building and loan size document the
impact of delinquencies and foreclosures that ultimately led to the closure of the B&Ls. The first
sign of trouble came as the share of arrears increased, showing the impact of delinquencies in the
payment on the loans. The share of arrears had the highest positive elasticity among the timevarying factors at 5.20. Between 1934 and 1939 the arrears share of assets actually fell from 0.05
percent to 0.025 and the decline helped offset the other pressures for closing the B&Ls by 12.3
percent. Unfortunately, the decline in arrearages actually was bad news because the arrearages
were being replaced by increases in real estate ownership as the B&L foreclosed on the
mortgages that were in arrears. The increased ownership of real estate, in turn, also increased the
probability of foreclosure with a strong elasticity of 3.44. As the mean owned real estate share of
assets rose from 0 .225 in 1934 to 0.385 in 1939, it was associated with a rise in the probability of
foreclosure by 73.6 percent. B&Ls also sometimes accumulated cash when they anticipated
future problems. The elasticity of closure with respect to the cash share of assets was negative,
relatively small, and statistically insignificant at -0.23. Further, the changes in cash share over the
1934 to 1939 period were small and barely affected the hazard rate.
Given a specific set of asset conditions and ownership conditions, larger B&Ls were less
likely to close with an elasticity of -0.41. Unfortunately, between 1934 and 1939 the average size
of B&Ls declined by roughly 40 percent, which was associated with a rise in the closure hazard
by 17.4 percent.
On the liability side, high installment and paid-up shares were signs of strength in the
typical B&L. Their elasticities were strongly negative and statistically significant at -1.46 and 0.90, respectively. As the share of installment shares fell from 0.59 in 1934 to 0.44 in 1939, the
B&L’s liability position worsened and the change was associated with a 24 percent increase in the
hazard of closure. Meanwhile, the paid-up share of liabilities rose somewhat from 0.101 in 1934
to 0.129 in 1939, but only enough to lower the closure hazard by 2.4 percent. When problems hit
the B&L, one sign of trouble on the liability side was a rise in unapportioned profits. The
elasticity of the unapportioned profits share was 0.92, although it was not statistically significant.
The unapportioned profits share rose from 0.118 to 0.212 percent between 1934 and 1939, which
might have contributed to a 9 percent increase in the closure hazard.
County Economic Activity
None of the county economic activity variables had statistically significant elasticities.
Increases in tax returns per capita and the growth of retail sales both were associated with lower
rates of closure with elasticities of roughly -1.4. Improvements in their means between 1934 and
1939 reduced the probability of closures by 5.7 and 1.2 percent respectively. The infant mortality
rate was included to get a sense of the extent of poverty in the area. Higher infant mortality and
greater poverty were associated with lower rates of closure, but the elasticity is small at -0.04 and
not statistically significant. Even though the coefficients are not statistically significant, the
inclusion of the county correlates sharply reduces the estimated elasticity of the SAC membership
share.
The 1930 firm characteristics
We included the 1930 asset and liability structure and size variables to control for the
heterogeneity in structures of the B&Ls just before the mortgage crisis hit. The estimates of
elasticities show the impact of prior conditions in the good times around 1930 after controlling for
the variation in the asset structure that followed during the period when B&Ls began to close.
Even after controlling for the changes that followed from 1934 through 1939, observers could
largely predict which B&Ls were likely to fail from their asset and liability structures in 1930.
The elasticity for arrears as a share of assets in 1930 was a very large 9.8. A common difference
in the 1930 was a one-standard deviation difference in the arrears share of 0.015. The elasticity
implies that a B&L with an arrears share that much higher would have had a higher closure
hazard rate by 16 percent. Higher 1930 cash shares and real estate shares of assets also had
strong positive elasticities of 3.26 and 0.85, and the effects of one-standard deviation increases in
those 1930 shares were associated with rises in the closure hazard rate by 7.8 and 4.2 percent.
On the liability side the 1930 unapportioned profit share was a sign of trouble with an
elasticity of 3.16 that was not statistically significant. The standard deviation in 1930 of
unapportioned profits was very low at 0.009, such that a one-standard deviation increase would
have raised the hazard by 2.8 percent. Paid-up shares had the expected negative sign but the
elasticity was much smaller than for the time-varying paid-up shares. The installment shares as a
share of assets, had an unexpectedly positive elasticity that was much smaller than the elasticity
on the time-varying installment shares variable.
7. Robustness checks
Newark and SAC share interaction. Interaction with retail sales.
8. Final Comments
Rose and Snowden (2013) argue that the shift from SAC to DRC within the thrift
industry during the 1930s is particularly interesting because there had been experimentation, and
limited adoption, of the modern DRC loan contract within the B&L industry beginning in the
1880s. It was not until widespread distress set in during the 1930s, however, that the pace of
adoption accelerated markedly. They explain this time pattern, using state-level data and
contemporary discussion, as having been stimulated by shift in the perceptions of borrowers and
B&L managers that attributed high levels of borrower defaults, and high rates of B&L failure, on
the unexpectedly poor performance of the traditional SAC contract when housing prices fell
rapidly in local distressed housing markets during the 1930s.
We focus here, instead, on whether differences in the pace of transition from SAC to
DRC loan contracts within individual B&L’s influenced when and whether they declared
insolvency. To do so we build on Rose’s (2012) analysis of prolonged resolutions within the
B&L industry during the late 1930s. Rose shows that the secondary markets in B&L shares that
emerged in the mid-1930s in Newark and other major B&L centers so that non-borrowing B&L
members could liquidate their investments in these distressed organizations. Withdrawals by
these savers were generally allowed and honored under their share ownership contracts, but could
be indefinitely delayed when a B&L became distressed. Such refusals became widespread during
the 1930s which led to thousands of B&Ls becoming “frozen” and slowly paying off withdrawing
members out of the association’s loan portfolio and the disposal of real estate that had been taken
through foreclosure. This process took years to accomplish and Rose explains the development
of secondary markets in B&L shares as a response to systematic disagreements among different
classes of members within B&Ls regarding whether and when to begin voluntary dissolution.
These disagreements mattered because dissolution required the approval of the membership
including both borrowing and non-borrowing members.
The contribution of this paper is to explain and identify the traditional SAC contract as
one source of disagreements among B&L members that delayed liquidation and resolution within
the industry. In particular, our main finding is that borrowers under the SAC contract had strong
incentives to delay liquidation relative to other member groups. Importantly, we emphasize that
this incentive arose not because of the explicit terms of SAC contract, but because of how the
courts required these rules to be applied during liquidation. We conclude, therefore, that the
delay in declaring insolvency and allowing liquidation within traditional B&Ls was primarily due
to the “incompleteness” of the SAC contract rather than its explicit provisions. Similar “gaps” in
contracts have contributed to the resolution problems in the 1980s and 2000s and these all
indicate that it is important to think about how mortgage contracts can be unwound under distress
before a mortgage crisis occurs if one hopes to shorten and ameliorate the costs of resolution after
the crisis takes place.
In this paper we connect the protracted process of B&L exit during the 1930s, and the
simultaneous emergence of the S&L industry, to a transition in mortgage loan contracts. Prior to
1930 B&Ls relied primarily on a unique ‘share accumulation” mortgage contract that used a
sinking fund arrangement to provide borrowers with longer maturities and a form of amortization
while most other lenders continued to write only short-term, renewable balloon loans. During the
1930s this was gradually replaced within traditional B&Ls, and adopted more rapidly within the
new “S&L” associations by the modern, fully-amortized, “direct reduction” loan contract. We
explain here why borrowing B&L members under the traditional “share accumulation” B&L
contract had incentives to delay liquidation when their association became distressed. We then
show, using an unusual, firm-level annual panel of financial conditions within the New Jersey
B&Ls, that variations in the reliance on the traditional share accumulation contract among B&Ls
influenced whether and when they declared insolvency and began to liquidate. The evidence
confirms the analysis of contract incentives—the traditional share accumulation B&L contract
delayed liquidation of distressed B&Ls in New Jersey and contributed to the protracted character
of the transition through which the B&L industry was transformed into the modern S&L during
and after the Great Depression.
From a broader perspective, this paper contributes to our growing appreciation of how the
resolution of distressed mortgage lending arrangements lengthens and increases the social costs of
home mortgage crises while stimulating and directing financial institutional change. We learned
in the 1980s, for example, of the difficulties that can arise when mortgages are funded with
federally-insured deposits that are written and held by thinly-capitalized S&Ls. The resolution of
this modern version of a thrift crisis bankrupted the Federal Savings & Loan Insurance
Corporation and required the creation of the Resolution Trust Corporation that owned, managed
and liquidated hundreds of insolvent thrifts between 1989 and 1995 at a cost to taxpayers of some
$120 billion. This episode greatly diminished the role of thrifts in the residential mortgage
market and contributed to the rapid post-1990 expansion of public and private mortgage
securitization structures. The failure of these, of course, have generated a lengthy and costly
process of resolution beginning in 2007 that has involved the public conservatorship of Fannie
Mae and Freddie Mac, the creation of the TARP program, and numerous and ongoing law suits as
losses are being allocated among homeowners, investors and taxpayers. We still do not know in
this case, however, just how the lessons learned during this latest resolution process will
contribute to and shape the future institutional structure of the nation’s residential mortgage
market.
The 1930s episode we examine here was similar to these modern developments in many
ways —it involved the dissolution of what was at the time the nation’s dominant home mortgage
lending channel, it required new and extraordinary resolution mechanisms, and it helped to
stimulate a major institutional restructuring of the home mortgage market. One must recognize,
at the same time, that all three resolution processes were severe only because of the lending
mechanisms involved had been so successful within the market during the expansion of mortgage
debt that preceded the resolution crisis. By 1930, for example, the traditional B&L lending model
had been growing in popularity for nearly a century and had been used by millions of households
to build and acquire their homes. It is striking and even somewhat surprising in hindsight that
such a successful, well-worn financial innovation could fall out of favor and virtually out of use is
only fifteen years and it is against this backdrop that Rose and Snowden (2013) attempt to
document and explain the timing of the transition from the share-accumulation mortgage loan
contact (SAC) to the direct reduction loan (DRC) within the B&L and S&L industries. They
argue, in fact, that this transition was an important, but neglected, chapter in the broad rise of the
long-term, fully-amortized home mortgage loan in the U.S. because these thrifts operated
primarily throughout the period in the conventional, uninsured home mortgage market. The more
well-known displacement of the short-term, balloon loans with federally subsidized long-term,
amortized loans, on the other hand, occurred primarily among banks and life insurance
companies.12
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Table 1
Means and Standard Deviations from New Jersey Data
SAC borrowers as Share of
Members
DRC borrowers as Share of
Members
Shares of Assets
Cash on Hand
Arrears
Value of Real Estate Owned
Natural Log of Total Assets
County Variables
Retail Sales Per Capita
Infant Deaths per 1000 Live
Births
Federal Tax Returns filed per
Capita
Shares of Liabilities
Installment Dues
Paid-up Shares
Unapportioned Profits
1930
1934
1939 19341940
0.160
0.214
0.121
0.129
0.056
0.029
0.060
0.049
Mean
Std. Dev.
Mean
Std. Dev.
0.235
0.117
0.003
0.009
0.263
0.123
0.010
0.022
Mean
Std. Dev.
Mean
Std. Dev.
Mean
Std. Dev.
Mean
Std. Dev.
0.016
0.023
0.015
0.015
0.033
0.048
13.678
1.084
0.021
0.030
0.052
0.046
0.225
0.136
13.847
0.955
0.028
0.043
0.027
0.044
0.385
0.196
13.451
0.886
0.024
0.034
0.039
0.049
0.339
0.183
13.626
0.922
Mean
Std. Dev.
Mean
Std. Dev.
Mean
Std. Dev.
447.570
102.630
54.901
8.107
0.051
0.018
290.202
60.426
48.509
10.569
0.053
0.017
396.125
71.804
38.756
6.719
0.094
0.022
357.940
80.942
42.196
8.484
0.081
0.041
Mean
Std. Dev.
Mean
Std. Dev.
Mean
Std. Dev.
0.676
0.097
0.078
0.089
0.007
0.009
0.590
0.111
0.101
0.104
0.118
0.054
0.442
0.164
0.129
0.116
0.212
0.097
0.516
0.150
0.116
0.113
0.167
0.082
Table 2
Hazard Model of B&L Closures
Elasticities with Standard Errors
in Parentheses Below
Shares of
Membership
SAC borrowers
DRC borrowers
Shares of Assets
Cash on Hand
Arrears
Value of Real
Estate
Owned
Natural Log of Total
Assets
Shares of Liabilities
Installment Dues
Paid-up Shares
Unapportioned
Profits
County Variables
Retail Sales Per
Capita
(1)
(2)
(3)
(4)
Change
in Means
1934-39
Effect of
Chng in
Means
-5.18***
(0.94)
-2.54
(1.91)
-2.36***
(0.55)
2.86***
(0.69)
-1.54***
(0.58)
3.18***
(0.81)
-1.25**
(0.53)
3.04***
(0.90)
-0.103
0.137
0.047
0.153
-1.06
(1.16)
6.05***
(1.30)
3.35***
-1.27
(1.22)
5.99***
(1.31)
3.54***
-0.23
(0.99)
5.20***
(1.25)
3.44***
0.008
-0.002
-0.025
-0.123
0.160
0.736
(0.51)
-0.51***
(0.08)
(0.51)
-0.55***
(0.08)
(0.46)
-0.41***
(0.12)
-0.396
0.174
-1.35**
(0.54)
-1.22**
(0.53)
0.99
(0.95)
-1.34***
(0.50)
-1.39***
(0.44)
0.80
(0.98)
-1.46**
(0.59)
-0.90*
(0.50)
0.92
(1.04)
-0.148
0.241
0.027
-0.024
0.094
0.090
0.0006
(0.0016)
-0.04
(0.03)
-0.96
(4.03)
0.0006
(0.0016)
-0.04
(0.03)
0.59
(4.58)
105.923
0.066
-9.753
0.439
0.041
0.025
Infant Deaths per
1000 Live Births
Federal Tax Returns
filed per Capita
(Table 2
Continued)
Table 2
(Cont)
Standard
Deviation
in 1930
Effect of
Std.
Dev.
Change
1930 Asset Shares
Cash on Hand
3.26*
(1.71)
0.023
0.077
Value of Real Est.
Owned
0.85*
(0.50)
0.048
0.042
Arrears
9.84**
(4.07)
0.015
0.159
-0.07
(0.15)
1.084
-0.076
0.097
0.078
0.009
0.028
0.089
-0.022
Natural Log of Total
Assets, 1930
1930 Liability Shares
Installment Dues
0.77***
(0.26)
3.16
(4.66)
Unapportioned
Profits
-0.25
Paid-up Shares
9426
N of obs.
9426
9426
(0.71)
9426