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Savings and Loan Usage of the Authority to Invest in Corporate Debt


  • Patric H. Hendershott
  • Kevin E. Villani


This paper examines the portfolio choice of savings and loan associations (SLAS) between mortgages and bonds, first in a certainty world and then under uncertainty. Differences in servicing and transactions costs, in default losses, in tax treatment and in the timing of payments are accounted for in a certain world. SLAs are seen as investing in bonds only if the demand for mortgage funds is sufficiently weak that more profitable SLAs compete away some of the value of their tax preference by bidding down mortgage rates; in this case less profitable SLAs would find corporate debt attractive. In an uncertain world, mortgages will command a premium over bonds to compensate for the prepayment option extended mortgage borrowers. The appropriate value of this premium depends on uncertainty regarding future interest rates and aversion to this uncertainty. SLAs that view future interest rates as more uncertain than the market does generally, or who are more averse to this uncertainty, will require an options premium greater than that determined in the market. Thus they will find corporate debt to be attractive relative to bonds, even when the demand for mortgage funds is strong and their mortgage tax preference is not competed away.

Suggested Citation

  • Patric H. Hendershott & Kevin E. Villani, 1981. "Savings and Loan Usage of the Authority to Invest in Corporate Debt," NBER Working Papers 0725, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0725
    Note: ME

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    Cited by:

    1. Patric H. Hendershott & Kevin E. Villani, 1981. "Housing Finance in the United States in the Year 2001," NBER Working Papers 0739, National Bureau of Economic Research, Inc.

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