Growing Pains

SAVINGS & LOAN

Booming along with the demand for home mortgages, the nations' savings and 'loan associations have grown phenomenally. In the past 25 years, their assets have risen nearly 20 times over, to $107 billion. Today they hold more than one-fifth of the nation's personal savings, finance nearly half of its homes. But signs are cropping up that the long-green years are over. Last week, at the annual meeting of the American Savings and Loan Institute in Washington, S. & L. leaders weighed some disturbing statistics. Compared with last year, the net inflow of savings into federally insured S. & L.s dropped 53% in January and 7% in February--while savings deposits rose in the competing commercial banks.*

Failure & Fright. The S. & L.s have been badly tarnished by recent scandals. Top officials of three S. & L.s in California and three in Chicago have been indicted on charges ranging from embezzlement to making fraudulent loans. Six associations in Illinois have been liquidated, taken over by authorities or forced to merge; 22 in Maryland are in receivership, and federal officials say that about a dozen others around the nation are "in trouble." Though no depositors have lost money--thanks to federal deposit insurance--the sour publicity frightened away customers.

Many S. & L. executives seem poorly prepared to cope with their first experience of trying times. Few trained bankers are in the business; managers often do not know how their association's money is invested, and appraisers often do not understand the subtleties of evaluating mortgage risks. The S. & L.s fail to attract enough bright men partly because the associations have grown faster than their ability to develop sound executives, and partly because they pay notoriously poor salaries. At one of Los Angeles' biggest associations, only one executive--the president--earns more than $15,000 a year.

The S. & L. managers operate in a business climate that has become vastly more complex and competitive in the past few years. They have been chasing savings accounts by offering inflated interest rates (up to 5% in California), which, in turn, have led the associations into some risky investments to cover the interest payments. This has resulted in a fairly high rate of S. & L. mortgage foreclosures in the West, Southwest and Florida. On top of that, Congress in 1962 cracked down on the liberal tax deductions that the S. & L.s enjoyed, so that many of them are paying federal income tax for the first time.

Out of Adolescence. Concerned about the troubled fringe of the S. & L. business, Chairman Joseph Patrick McMurray of the Federal Home Loan Bank Board--which is to the S. & L.s roughly what the Federal Reserve is to the commercial banks--this year raised the associations' reserve requirement and clamped restrictions on the interest-rate warfare. With these moves, McMurray, a former Government economist and assistant to the late Senator Robert Wagner, has cooled the race for depositors but has brought bitter complaints from many S. & L. leaders. Government officials, however, believe that the new rules will let the S. & L.s grow at a safer if slower speed and help them to achieve the maturity that the prudent banks have already attained.

*Which, unlike S. & L.s, can make loans for any purpose, service checking accounts, operate trust departments; S. & L.s are limited to investing in the mortgage market.

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