View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

January 2019, EB19-01

Economic Brief

It’s a Wonderful Loan: A Short History
of Building and Loan Associations
By David A. Price and John R. Walter

Prior to the advent of modern home mortgage markets in the United States,
markets in which mortgage-backed securities and government-sponsored
enterprises now play significant roles, prospective homebuyers had to rely
on other mechanisms of home finance. For about a century, cooperative
organizations known as building and loan associations, a concept imported
from Britain, served millions of American savers and homebuyers.
From the 1830s until the Great Depression, a type
of thrift institution known as building and loan
associations made home loans more broadly
accessible. The best-known example is a fictional
one, Bailey Brothers Building and Loan, central
to the 1946 film It’s a Wonderful Life. The associations were based on notions of mutual self-help,
that is, self-reliance combined with mutual aid.1
Individuals held shares in the institutions and,
in return, had borrowing privileges as well as
the right to dividends. Broadly speaking, while
operating plans varied, members committed to
making regular payments into the association
and took turns taking out mortgages with which
to buy homes; the determination of the next borrower was often decided by an auction among
the membership. At the peak of their numbers
in 1927, some 12,804 of the associations were in
operation with 11.3 million members — at a time
when the entire U.S. population was only 119
million — and $7.2 billion in assets.2 Building and
loan associations were generally small and local,
but a rival group of “national” building and loans
was a significant force from the 1880s until the
late 1890s.
EB19-01 - Federal Reserve Bank of Richmond

Early Development and Diffusion
American building and loan associations had
their roots in British building societies, which
appear to have originated in Birmingham, England, in the 1770s or 1780s. At least a dozen of
the societies were founded in Birmingham in
the last quarter of the eighteenth century. These
increased to sixty-nine societies by 1825 and
then proliferated rapidly to 2,050 by 1851. In
general, members bought shares and paid for
them over time and received home loans on a
rotating basis. When all the members had taken
a turn, a society terminated.3
The British working class already had a longtime
tradition of “friendly” societies, cooperatives of
mutual self-help to which members would make
regular payments and from which they could
receive a loan in the event of certain hardships,
such as fire, job loss, or sickness. Conceptually,
it was perhaps a short distance from the friendly
societies to the building societies. Britain in the
nineteenth century also may have been fertile
soil for building societies because ideas of mutual
self-help were in the air more generally. Mutual
Page 1

improvement societies, for example, were groups of
working-class men who combined money to buy
reading material that they shared and discussed.4
The conditions that apparently drove the application
of these ideas to home buying were created by the
Industrial Revolution. The rise of factory work meant,
for many people, regular wages. Higher-skilled workers with relatively greater incomes might wish to
purchase a home to avoid tenement-like conditions
and to build equity through buying rather than renting. (In addition, homeownership brought with it the
right to vote for one’s representative in Parliament.)
But those workers were stymied by conventional
mortgage offerings of the time with their high down
payments and short loan terms.5 The British building
society enabled some to overcome these obstacles.
The building society model appears to have been
transmitted from Britain to the United States by British
immigrants. The first building and loan association,
Oxford Provident Building Association, was founded in
Frankford, Pennsylvania, (now part of Philadelphia) in
1831 by two factory owners who were natives of England. The model spread across the Northeast and midAtlantic, with associations established in Connecticut,
Maryland, New Jersey, and New York by 1850, along
with additional associations in Pennsylvania. (Several
associations also were established in Charleston,
South Carolina, at least one of them founded by an
English immigrant.) Associations were established
in the majority of other states during the 1860s and
1870s. Illinois, California, and Texas leapfrogged other
states outside the East Coast with associations established in 1851, 1865, and 1866, respectively, a pattern
that may have been the result of westward migration
of people who were familiar with the model.6
As in Britain, the growth of building and loan associations in the United States was likely aided by the
factory system and the swelling of a wage-earning
class — combined with a dearth of affordable home
financing. Under the National Bank Act of 1864,
national banks were not permitted to make loans secured by real estate. Mortgages from state-chartered
commercial banks required large down payments, up
to 60 percent of a home’s value, and the loans were

short-term (typically five years or less) and nonamortized. Mutual savings banks — which, notwithstanding the name, were not cooperatively owned
— offered longer loan terms than commercial
banks, but their mortgages still involved high down
payments. Insurance companies, another source of
mortgage finance in the nineteenth century, also
required high down payments.7
Operating Plans
In the early decades of American building and loan
associations, they closely followed the British societies’ form of operation. This model came to be known
as the “terminating plan” because an association’s
existence was required to end when all of its loans
had been repaid, or more precisely, when the shares
of stock that members purchased over time in connection with membership had matured.8
The plan of the Oxford Provident association offers
an illustration of how the terminating plan worked,
with that association’s actual numbers.9 The building
and loan would be formed by a group of individuals
(members), each of whom paid a membership fee of
$5 at the time of formation. Each member also subscribed to a number of shares of stock — between
one and five shares — with a predetermined maturity
value or par value of $500. Then each member was
required to pay in $3 per month per share until the
amount paid in per share equaled the shares’ maturity
value. In general, no other members were allowed to
join unless they paid, up front, an amount equal to
that already paid in by the founding members. Once
members’ payments reached the maturity value of the
shares, the association was terminated and members
were repaid.
While the association was operating, members could
pledge their stock and thereby take out home mortgage loans equal to as much as the matured value of
all their shares of stock (though at the time of the loan,
the member might have paid in much less than this
amount). For example, if a member had subscribed
to five shares, each with a maturity value of $500,
the member could borrow as much as $2,500. (The
borrower pledged his or her stock when taking out a
mortgage, then continued paying for the stock on an
Page 2

installment plan until the stock was paid for, which
had the effect of canceling the loan.) In the rotation of
home loans, members who wished to receive the next
loan bid against one another; the bidding determined
the premium that the winner would pay to secure the
upcoming place in the rotation. Most commonly, the
amount of the premium would be deducted from the
loan when it was disbursed.10
The relative simplicity of the terminating plan made
it an attractive framework for the associations during the first decades of the movement. A difficulty of
the terminating plan, however, is that it was burdensome for members to join once an association
was underway; as noted, all shares were issued at
the same time, so members who joined later were
required to pay a lump sum to cover the payments
they had missed. (In modern terms, a terminating
plan was “closed-end” in the sense that it generally issued shares only at its inception.) Moreover,
the automatic termination of an association was
perceived by some as wasteful given the efforts
involved in organizing it and its potential usefulness
if it were to continue.11
The 1850s saw the emergence of a variation on the
terminating plan that partially addressed these
shortcomings. An association organized under the
“serial plan” issued multiple series of shares over its
lifespan. In effect, a serial-plan association was like
a collection of terminating-plan groups, each with
its own onset and termination dates, under one
organizational umbrella. New series were commonly
offered quarterly or semiannually. Thus, someone
who had not been a member at the association’s
birth could join when the association later issued a
new series of shares without the obstacle of making
a large back payment. Because the association was
periodically adding member-borrowers to its rolls,
there was no need to require someone to take an
unwanted loan. Finally, the association as a whole
had no defined termination date.12
A third form of organization, the permanent plan,
arose in the 1870s. It did away with the concept of
series of shares and instead issued shares to each
member that were independent of the shares of

other members; consequently, members could
join and leave whenever they chose.13 As noted by
Heather A. Haveman of the University of California,
Berkeley and Hayagreeva Rao of Stanford University, the structural evolution from the terminating
plan to the serial and then permanent plans enabled
building and loans to serve a sometimes transient
home-buying population with less burdensome,
more flexible arrangements.14
With the further increase in U.S. urbanization in the
1880s, thousands of local building and loan associations were founded. Associations spread into every
state during this decade (except Oklahoma, which
saw its first building and loan in 1890). By 1893, according to a survey taken by the U.S. Commissioner
of Labor, there were 5,598 local associations with a
total of 1,349,437 members and $473.1 million in assets. The same survey indicated that the associations
were attracting many members from the working
class; among the associations that reported their
members’ occupations, over 59 percent of members
were “laborers and factory workers,”“housewives and
housekeepers,” or “artisans and mechanics.”15
While the serial, permanent, and terminating plans
continued to dominate, a new form of organization
emerged during this period. The Dayton plan, first
used in Dayton, Ohio, in the early or mid-1880s, permitted some members to participate as savers with
no obligation to borrow. This new model somewhat
reduced the centrality of mutual self-help in those institutions.16 In addition, the Dayton plan allowed borrowers to determine their own payment amounts,
with higher payments reducing their total interest,
a feature that partially anticipated the structure of a
typical modern mortgage allowing early prepayment
without penalty.
The National Associations: A Cul-de-Sac
Beginning in the mid-1880s, national building and
loan associations emerged. Unlike the local associations, the national associations operated across
city and state lines by opening branches. The term
“national” referred to the broader scale of the associations rather than any federal-level regulation or
charter. The term was somewhat of a misnomer since
Page 3

the associations could not operate on a truly nationwide basis; some large states adopted laws effectively
barring “foreign” — that is, out-of-state — associations
from doing business within their borders by requiring them to put up prohibitively high bonds with
the state.17 (Some banks during this period operated
in multiple states, but it was a rarity.18) From their
starting point of two institutions in Minneapolis, the
national associations had grown to some 240 by 1893,
with at least one in every state.19
There were significant differences between local and
national associations. While all of a member’s payments into a local building and loan went into paying down his or her shares, payments into a national
association went in part to an “expense fund” that
served to boost the organizers’ profits. The portion
allocated to the expense fund varied from one association to another; a range of 5 percent to 7 percent
appears to have been common. Local associations
did, of course, spend a portion of their funds on
operating expenses, but the amounts involved were
only in the 1 percent to 2 percent range. Moreover, if
a member of a national association failed to keep up
his payments, he would forfeit the payments he had
already made even if he had not yet taken a loan.
(Additionally, as with any mortgage, those who had
taken a loan were subject to foreclosure.) Countervailing these disadvantages, from the point of view
of prospective members, were the high rates of
return that the national associations advertised. The
dividend yields they promised were several times
those available from banks, local associations, or
government bonds.20
The local associations responded to the new entrants
in part by forming statewide trade groups that fought
the nationals through public education — that is,
vituperative criticism — and restrictive legislation. (In
some states, trade groups for local building and loan
associations were already in place before the emergence of the nationals.) These organizing efforts within the industry culminated in 1893 with the formation
of a nationwide body of the state trade groups, the
U.S. League of Local Building and Loan Associations;
its first convention took place that year in Chicago in
conjunction with the World’s Columbian Exposition.

In addition to opposing the national associations,
the state groups and their national body promoted
homeownership and the local associations.21
The groups representing the local associations held
that the nationals were cooperatives in theory but
proprietary for-profits in practice. A U.S. League
publication argued, “The only object in organizing
or carrying on the [national] association is to create
and gobble up this expense fund. Their name should
be changed.”22 Seymour Dexter, founder and first
president of the U.S. League, told the league’s second
convention in 1894, “Whenever so fine a field of operations presents itself to the scheming and dishonest as the present system of the National Building
and Loan Association, we may rest assured that the
scheming and dishonest will enter it and pluck their
victims until restrained by proper legal restrictions.”23
Whatever the share of national associations with
“scheming and dishonest” organizers, a weakness of
their business model was the difficulty of assessing
properties and monitoring real estate market conditions in branch areas. This difficulty reflected the
informational disadvantage of a centralized lending
operation; the information technology that eventually would help lenders overcome the disadvantages
of distance in home mortgage lending was, of
course, not yet in place. Consequently, in contrast
with the local associations and their locally based
operations, national associations ran a higher risk of
lending on the basis of inflated appraisals or lending
to poorly qualified borrowers.24
The downfall of the national associations was put in
motion by a major real estate downturn associated
with the Depression of 1893. In the first few years of
the downturn, the assets of the nationals actually
grew because their shares were perceived as low-risk
investments, but they would come to be hard hit.
While mortgage lenders in general suffered, national
building and loans were particularly vulnerable on account of the lower average quality of their loans. In addition, as economic conditions reduced the number of
new members, the national associations lost a source
of new expense-fund contributions and other fees,
which some institutions relied on to meet their obligaPage 4

tions. The knockout blow for the national associations
was the failure in 1897 of the largest of them, the
Southern Building and Loan Association of Knoxville,
Tennessee, an event that gravely damaged confidence
in the remaining nationals; virtually all of those institutions ceased operation within a few years.25
Final Wave of Growth in the 1920s and Demise
During and after the collapse of the national building and loan associations, some people in the local
building and loan movement expressed concern that
the dubious record of the nationals would leave a
long-term stigma on the local associations. An article
in the official newsletter of the Building Association
League of Illinois and Missouri, for example, noted in
1896 that in many “smaller cities and towns,” hundreds of savers had trusted their money to a national
association only to lose it all. “It will be years,” the
newsletter held, “before it will be possible to establish a genuine building and loan association in such
a community, after the name of building association
has been besmirched and prostituted, and brought
into grave disrepute through the actions of the
schemers who have run these bogus concerns.”26
Although the membership and assets of local building and loans did remain essentially flat during the
first few years of the 1900s, perhaps as a result of the
stigma left by the failed national associations, they
resumed their growth afterward: from about 1.5 million members and $571 million in assets in 1900 to
about 2.2 million members and $932 million in assets
in 1910. Even more rapid growth was still to come. By
1920, membership had more than doubled to nearly
5 million and assets had grown more than 150 percent to $2.5 billion. (The number of associations also
rose, but less dramatically, reflecting an increase in the
average institution size: from 5,356 in 1900 to 5,869 in
1910 and 8,633 in 1920.) In 1930, despite the financial
crisis of the preceding year, membership was up to
12.3 million, and assets totaled $8.8 billion.27
Several developments fueled the growth of the local
associations and their model of affordable mortgage
lending during this period. One is that the locals
became more promotion minded and more sophisticated about promotion. While hard data on their pro-

motional efforts are scarce, it appears that the locals
increasingly supplemented their primary means of
acquiring new members — word of mouth — with
the use of newspaper advertisements and window
displays. This shift appears to have been partly the
result of encouragement and guidance from the U.S.
League but is also consistent with the increasing
scale of the local associations, which could better
support such efforts.28
Another development that boosted local associations during this time was the real estate boom in
California and other western states, together with
the embrace of building and loan associations there
as a form of affordable housing finance. The assets of
building and loans in the West grew at an average annual rate of 47.1 percent from 1920 to 1930 compared
with 25.1 percent for the nation as a whole.29
Additionally, the 1920s saw a trend of developers and
builders establishing, in effect, captive associations
that they dominated to support the sale of their houses. While developers, builders, and brokers had long
been involved in local building and loan associations,
there is evidence that they went further during this
period in co-opting the building and loan model, possibly boosting the numbers of building and loans.30
Recessions were frequent during this period, even
before the Great Depression — eight recessions occurred from 1900 to 1928, or an average of one every
three and a half years — but these downturns did
not appear to interfere with the growth of building
and loans. In general, building and loans tended to
be more stable than banks during periods of market stress, such as the panic of 1907, because their
savers were member-owners rather than creditors
and because deposits at (that is, shares of ) building
and loans had longer maturities than bank deposits.
While bank depositors could, by definition, demand
the immediate return of demand deposits, not all
building and loan plans allowed for withdrawal
before prescribed maturity dates, and under those
plans that did, the association had a significant
period (commonly thirty or sixty days) to carry out
a member’s request. Thus, building and loans were
not exposed to the extent that banks were to a risky
Page 5

mismatch between long-term assets and short-term
liabilities.31 The withdrawal process is accurately represented in It’s a Wonderful Life:
TOM: I got two hundred and forty-two dollars in
here, and two hundred and forty-two dollars isn’t
going to break anybody.
GEORGE (handing him a slip): Okay, Tom. All right.
Here you are. You sign this. You’ll get your money
in sixty days.
TOM: Sixty days?
GEORGE: Well, now that’s what you agreed to
when you bought your shares.

Following the crash of 1929 and the ensuing Great
Depression, a large number of building and loans
did close; the number of associations dropped from
12,342 in 1929 to 8,006 a decade later.32 These closures did not result from depositor runs, but from
other effects of the Depression on the banking sector.
Because many building and loans required shortterm lending from banks (given that their assets were
mainly longer-term mortgages), the widespread extent of bank failures led to a short-term credit crunch
for the associations. It is reasonable to assume, also,
that the sharp drop in nominal real estate prices
contributed to building and loan closures.33 During
the era in which local building and loans thrived,
however, they played a significant role in extending
homeownership through more affordable mortgage
lending.
David A. Price is senior editor and John R. Walter is a
senior economist and policy advisor in the Research
Department at the Federal Reserve Bank of Richmond.
Endnotes
1

T his Economic Brief is excerpted from David A. Price and John
R. Walter, “Private Efforts for Affordable Mortgage Lending
before Fannie and Freddie,” Economic Quarterly, Fourth Quarter
2016, vol. 102, no. 4, pp. 321–351. Source notes are set out in
the original article.

2

P
 rice and Walter, p. 329, note 37.

3

P
 rice and Walter, p. 329, notes 39–42.

4

P
 rice and Walter, pp. 329–330, notes 43–44.

5

P
 rice and Walter, p. 330, note 45.

6

P
 rice and Walter, p. 330, notes 46–49.

7

P
 rice and Walter, pp. 330–331, notes 50–52. The provision of
mortgage loans by insurance companies during this period is
discussed in Price and Walter, pp. 339–341, 345.

8

P
 rice and Walter, p. 331, note 53.

9

P
 rice and Walter, p. 331, note 54.

10

P
 rice and Walter, p. 332, notes 55–56.

11

Price and Walter, p. 332, note 57.

12

Price and Walter, p. 332, note 58.

13

Price and Walter, pp. 332–333, note 59.

14

 eather A. Haveman and Hayagreeva Rao, “Structuring a
H
Theory of Moral Sentiments: Institutional and Organizational
Coevolution in the Early Thrift Industry,” American Journal of
Sociology, May 1997, vol. 102, no. 6, pp. 1606–1651.

15

Price and Walter, pp. 333–334, notes 65–68.

16

Price and Walter, p. 334, note 69.

17

Price and Walter, p. 334, note 70.

18

David L. Mengle, “The Case for Interstate Branch Banking,” Economic Review, November-December 1990, vol. 76, pp. 3–17.

19

Price and Walter, p. 334, note 71.

20

Price and Walter, p. 335, notes 73–76.

21

Price and Walter, pp. 335–336, notes 77–79.

22

Price and Walter, p. 336, note 80.

23

Price and Walter, p. 336, note 81.

24

Price and Walter, p. 336, note 82.

25

Price and Walter, pp. 336–337, notes 83–85.

26

Price and Walter, p. 337, note 86.

27

Price and Walter, p. 337, note 87.

28

Price and Walter, pp. 337–338, notes 88–89.

29

Price and Walter, p. 338, note 90.

30

Price and Walter, p. 338, note 91.

31

Price and Walter, pp. 338–339, notes 92–94.

32

Price and Walter, p. 339, note 95.

33

Price and Walter, p. 339, note 97.

This article may be photocopied or reprinted in its
entirety. Please credit the authors, source, and the
Federal Reserve Bank of Richmond and include the
italicized statement below.
Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

FEDERAL RESERVE BANK
OF RICHMOND
Richmond Baltimore Charlotte

Page 6