“It’s a Wonderful Life” and the strange story of construction and loans

It’s a wonderful life is a great movie, but what is a “Building and Loan”?

When the movie started in the 1920s, Building & Loans were huge. But by the end of the movie, right after WWII, in real life, most Building & Loans had either gone out of business or had been converted to Savings & Loans.

Somehow, if the movie had continued, the Bailey Brothers building and loan would soon have vanished.

Here’s what happened in real life.

Construction and loans were huge

On half of all residential mortgage loans outstanding held by financial institutions in 1930 came from the estimate 12,000 Construction and loans in the United States. And they were growing up quick, the membership of Building & Loans more than doubled from 1920 to 1930.

Construction and loans were tiny

Building & Loans were often extremely small like the Bailey Brothers Building and Loan. One study found that the median membership of Building & Loan Associations in Newark, NJ in 1930, for example, was only 450 people.

In the film, George Bailey himself called his Building & Loan a “cheap penny building and loan” and “a miserable one-horse institution” and later referred to it to help (only) 100 owners.

Strange mortgages

In real life, the Building & Loan way mortgages worked seems totally foreign to us today.

If you borrowed $ 2,000 to buy a house, depending on the interest rates, you could pay the Building & Loan $ 10 per month in interest. Plus, you could pay the Building & Loan an extra $ 10 a month which, in a roundabout way, would end up paying off your mortgage.

That second $ 10 per month was not used to pay off the principal, and it was not put into a savings account so you could save up to $ 2,000 to eventually pay off the mortgage.

That $ 10 a month was used to buy stocks (shares) in the building and the loan itself! Typically, after about 12 years in this scenario, you would own $ 2,000 of stock in the building and the loan and that’s how you paid off your mortgage. You used your $ 2,000 in stocks to pay off your $ 2,000 mortgage in one go!

A 12-year mortgage was about the longest mortgage you could get. The average bank mortgage at the time was only 4 years, which is why Building & Loans held around half of the mortgage market.

The exact time it would take you to pay off your Building & Loan mortgage was uncertain, however, as it depended on how much money you earned in dividends on the shares you owned in Building & Loan.

Zombies everywhere

Although Building & Loans got money from mortgage borrowers who bought stocks, their main source of funding came from investors like Mr. Potter who did not have a mortgage with Building & Loan. Buying Building & Loan shares was a popular investment because they paid higher interest rates than banks.

The fatal flaw in Building & Loans became apparent during the Great Depression. As home prices fell and foreclosures rose, Building & Loan stock values ​​came under great pressure, but if your stock value fell, it could take you years longer to pay off your mortgage!

Investors often wanted to withdraw their money from their buildings and loans as soon as possible, like in the movie. But the reaction in real life was often the exact opposite of what happened in It’s a wonderful life. The people with mortgages at Building & Loans didn’t want anyone to take their money out or do anything that would drop the value of their shares.

Building & Loans were co-operatives where every shareholder had one vote, regardless of how many shares you owned. You had the same number of votes as Mr. Potter. So instead of George Bailey using his own money to stop a bank run, in real life Building & Loan shareholders have often voted that no one can withdraw money from their Building & Loan. They froze withdrawals.

This supported the value of the Building & Loan stocks which helped people with these weird mortgages.

In real life, I bet there was a lot of drama in those thousands of Building & Loan shareholder meetings where shareholders with mortgages voted to stop any shareholder from withdrawing money.

Nonetheless, this blocking tactic worked for some mortgage borrowers who were able to continue making payments for years until they paid off their mortgages and became homeowners.

The withdrawal freeze, however, sounded the death knell for Building & Loans, as investors were never going to invest in them again knowing their money could be trapped in a Building & Loan zombie. Many investors did not take their money out for 10 years or more!

Death or rebirth

This confrontation of the interests of the owners against the investors is the major theme of the scene of the film where the villainous Mr. Potter wants to shut down the Bailey Brothers Building and Loan.

In real life, over the years, as more mortgage holders paid off their mortgages and were no longer voting members of building and loan associations, investors took control and closed their mortgages. , sold everything and distributed the money to shareholders. Investors would eventually get their money back, or what was left of it.

If you still had a mortgage with a Building & Loan when it closed, you were… in a bad situation. Your mortgage would be sold and you would still owe the full amount of the original mortgage to the buyer, but the value of the shares you bought in all those years might be only three-quarters or half of the value. what you paid for.

Not all Building & Loans went bankrupt. A lot of the little ones got merged, they stopped making these weird mortgages, and they started doing mortgages like today where people pay off a little bit of the principal every month. The survivors were usually members of savings and loan associations.

Strange luck

Another weird trait of Building & Loans was actually good and brought home prices down LESS during the Great Depression than they otherwise would have!

During the Depression, when a landlord stopped making payments, the Building & Loan would eventually foreclose, but these were member-owned co-ops, so they were usually very slow to seize.

More importantly, many Building & Loans would not resell the homes they had foreclosed on because house prices had fallen so much. If they sold a house, they would have to recognize the loss, which would have reduced the value of the Building & Loan shares.

Instead, for years and years, they simply rented out all the previously foreclosed homes they owned to avoid driving down their stock prices. Building & Loans ended up owning a ton of homes.

But at the same time, keeping all of those previously foreclosed homes off the market reduced the number of distressed home sales and kept home prices in the United States from falling even more than they did. made during the Great Depression.

Great Depression vs Great Recession

Compare that to the Great Recession of the 2000s. The mortgage design of the 2000s encouraged the foreclosure of delinquent mortgage borrowers as quickly as possible and the resale of those foreclosed homes as quickly as possible, at any cost.

Nationally, the homeownership rate fell more during the Great Recession than during the Great Depression!

  • During the Great Depression, the homeownership rate in the United States fell 4.2 percentage points from 1930 to 1940.
  • During the Great Recession, the homeownership rate in the United States fell 5.6 percentage points from 2004 to 2016.

While Building & Loans had a fatal mortgage design flaw that wiped them out in 1950, they also had odd attributes that slowed the number of foreclosures and sales of distressed homes during the Great Depression. This, in turn, has kept house prices from falling even further.

After the end

While George and Mary Bailey and the kids lived happily ever after, the Bailey Brothers building and loan would no doubt have vanished shortly after the movie ended.

Either it would have closed like several thousand other buildings and loans, or it would have merged with other small buildings and loans and turned into a savings and loan like thousands of other buildings and loans.

As a Savings and Loan, savers could then withdraw their money at any time, and the number of years of your mortgage would not increase when the benefits of your Savings and Loan declined.

And that conversion would have happened just in time for the post-war real estate boom that was made possible, in part, by Savings & Loans. They would thrive for decades – like Building & Loans – until the fatal flaws in Savings & Loan mortgage design were revealed in the 1980s.

Until then, I wonder if Zuzu would have followed in his father’s footsteps and made a career out of running the local savings and loan branch in Bedford Falls.

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