Building and loan associations in the U.S., 1880–1893: the origins of localization in the residential mortgage market

Abstract

The paper offers an explanation for the localization of intermediated residential mortgage finance in the United States between 1880 and 1893. The focus is on building and loan associations that spread rapidly throughout the U.S. in the 1880s, and then held one-third of the nation's intermediated home mortgage debt until the 1930s. The modern descendants of these institutions, Savings and Loan Associations (S&Ls), emerged from the Great Depression as the most important institutional source of residential mortgage credit and continued to lend almost exclusively in local markets throughout the post-war period. The modern pattern of localization is often attributed to New Deal regulation, but I show that building and loans had adopted the principle of localization by the 1890s—long before they were required to do so by either state or federal regulatory authorities. I argue here that localization became best practice for building and loans because home builders and real estate professionals organized and managed these small, mutually-owned institutions to provide home mortgage credit for customers in their principal lines of business. These ancillary markets, especially home construction, were highly localized; so the organizers had incentives to safely manage an association only so long as it operated within these same boundaries. To support these conclusions I first examine and reject an alternative explanation of localization—that it allowed building and loan members to monitor each other. Secondly I show that home builders and real estate professionals continued to dominate the management of S&Ls well into the post-World War II era; and suggest that deregulation played a role in the S&L debacle of the 1980s when it accommodated the disruption of the close connection between thrifts and local building networks.