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Economic Crisis and the Demise of a Popular Contractual Form: Building and Loan Mortgage Contracts in the 1930s

Author

Listed:
  • Fleitas, Sebastian

    (University of Arizona)

  • Fishback, Price

    (University of Arizona)

  • Snowden, Kenneth

    (University of North Carolina Greensboro)

Abstract

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.

Suggested Citation

  • Fleitas, Sebastian & Fishback, Price & Snowden, Kenneth, 2016. "Economic Crisis and the Demise of a Popular Contractual Form: Building and Loan Mortgage Contracts in the 1930s," CAGE Online Working Paper Series 275, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:275
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    File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/275-2016_fishback.pdf
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    References listed on IDEAS

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    Cited by:

    1. Fishback, Price & Fleitas, Sebastian & Rose, Jonathan & Snowden, Ken, 2020. "Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s," The Journal of Economic History, Cambridge University Press, vol. 80(3), pages 853-885, September.

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