Deregulation, Savings and Loan Diversification, and the Flow of Housing Finance

This paper assesses the probable impact on S&Ls' profitability and participation in mortgage markets of The Depository Institutions Deregulation and Monetary Control Act of 1980. It tracks inflation-induced secular declines in the value of S&L mortgage holdings between 1965 and 1979 and argues(contrary to conventional wisdom) that deposit-rate ceilings proved no more than a minor and temporary source of help to S&Ls. Analysis presented shows that Federal Savings and Loan Insurance Corporation guarantees, not deposit-rate ceilings, kept the industry afloat in recent years. Further analysis centers on federal and state restrictions on S&L loan opportunities and on mortgage lenders' ability to design and to price mortgage instruments for an environment marked by accelerating inflation and increasing inflation uncertainty. Since S&Ls were free to raise whatever amount of funds they wished through large certificates of deposit, restrictions on S&L lending opportunities had to lie responsible for the much-publicized bouts of disintermediation these institutions suffered near post-1965 business-cycle peaks.