Economic Crisis and the Demise of a Popular Contractual Form: Building and Loan Mortgage Contracts in the 1930s
275/2016 Sebastian Fleitas, Price Fishback, and Kenneth Snowden
During the housing crisis of the 1930s long delays in the resolution of severely distressed Building and Loan associations led to the rapid diminution of these previously successful and important home mortgage lenders. These delays were caused by a unique contractual structure that created incentives for borrowing members to prolong dissolution and granted them control, along with non-borrowers, over the timing of liquidation. Using a new dataset of New Jersey B&Ls we estimate a voting model of dissolution and find that the probability of B&L liquidation rose 37 percent when the share of non-borrowing members rose above the two-thirds threshold. An average one-year delay in liquidation resulted that imposed costs on non-borrowing members roughly three times the gains borrowing members realized by delaying dissolution. These delays and costs contributed to the quick demise of the B&L and the rapid ascendancy of the modern Savings & Loan industry.
Journal of Financial Intermediation