In the movie "It's a Wonderful Life," James Stewart playing George Bailey, head of the building and loan in Bedford Falls, explained to depositors that their savings were in the safest investment of all: the mortgages that had built their homes and those of their neighbors. Their savings had created a community.
These days people watch that movie with mixed emotions--admiration for the traditional values mingled with regret that savings and loans more recently have abandoned them to squander deposits in worthless, fraudulent investments.
So it's important to remember that not all S&Ls deserted traditional values. And those that stayed with the business of lending on single-family homes proved to be smarter. "The savings and loans that have stuck to their traditional business of home mortgages (i.e., Ahmanson, Boston Bancorp, Golden West) have not seen substantial deterioration in their loan portfolios," notes the Value Line Investment Survey.
And those virtuous S&Ls will enjoy real growth opportunities in this decade, says analyst Joseph Jolson of Montgomery Securities, as the strong expand and the weak vanish in the $2.5-trillion business of residential mortgages. Jolson includes Great Western Financial among the bright prospects.
It seems foolish, of course--a Frank Capra-type of optimism--to speak of opportunity in a time of declining home sales and home ownership, and with estimates of the cost of the S&L debacle rising toward $1 trillion.
But it's no fiction, as you'll understand if you follow Richard Deihl's description of his business.
Deihl, 62, is chairman of H. F. Ahmanson, the holding company owner of Home Savings of America, the nation's largest S&L, at $50 billion in assets. He has been 30 years with Home, his father and brother were in S&Ls "and I worked as a janitor in a savings and loan."
He knows what others forgot: that it's a tough business with no shortcuts. He remembers that S&Ls "were applauded at the time" for investing in commercial real estate and junk bonds because they made a big spread of 4% and more over their cost of deposits. But they got burned. "You have to ask yourself if you're really making more money or just making money faster," says Deihl, rubbing it in.
Deihl by contrast drove Home to make all the home loans it could in the 1980s, at spreads of about 2.5%, reckoning that a large volume of low-margined loans were safer and ultimately more profitable. The company just about quadrupled its loans in the decade--to more than $43 billion--and has been consistently profitable since the 1982 recession.
As in any other business, success comes from sweating the details. In the inflationary 1970s, when interest rates were deregulated, Home began making adjustable-rate mortgages so it wouldn't get caught paying depositors a market rate of 10% while receiving 6% on the mortgage loans it had outstanding. That's the very situation that caught many other S&Ls in a bind.
Why didn't they go to adjustable-rate mortgages? "It's hard to do," Deihl says. It demands close attention to the variables of money market rates and duration of deposits to avoid mistakes in a business where the margin between profit and loss is narrow.
Essentially, Home and other S&Ls survive because they keep expenses low. Home's expenses are 1.5% of the value of its loans. So, after deducting expenses from a 2.5%-interest rate spread, the company makes just about 1% on every loan.
That may not sound like much, but major banks and other lenders have expense ratios double those of Home and thus have difficulty making any money at all in home mortgages.
And that's one reason Deihl now aims to expand from California into other populous states. With its low expenses, Home can acquire less competitive lenders at what Deihl calls "incremental cost; we don't need to take on their data processing department, we already have one."
There's plenty of room to consolidate, says analyst Jolson, "because the home mortgage business is so fragmented; the leader--Home Savings--has only a 2% share of the $2.5-trillion market."
But an equally important reason that strong lenders will absorb the weak is that new laws governing savings institutions--reforms that raise capital requirements and disallow diversification--are designed to favor Home and other S&Ls that stayed with residential mortgages.
The obvious reason is that the government is concerned with the decline in home ownership--63.9% of American households now own a home, compared to 65.6% in 1980. That's a big drop. And partly to blame for it is the fact that so many traditional lenders thought there were better things to do than work hard at making home loans.
So they did other things and collapsed in bankruptcy and are now a burden on the taxpayers.
But declining home ownership is an even greater threat to the economy than the mammoth S&L losses. It threatens industries such as furniture and appliances, and markets for existing homes. It even threatens to divide society into haves and have nots.
That's why the housing industry was given priority status in law and finance for decades and is likely to regain status--despite all the gloomy predictions you hear--in the new decade.
Home ownership, quite simply, is good business, as Jimmy Stewart recognized 45 years ago in "It's a Wonderful Life." And some savings and loans, to their credit, never forgot.