Special Tax Deferrals - A Look Back

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Historically, savings and loans firms have provided the lion's share of home mortgages. This article, originally published in the 1960s, gives a glimpse into this traditional lending institution.

As a group, savings and loan firms are the largest lenders of funds for home mortgages, providing 41 percent of all institutional home financing in 1959. It has provided $53 billion in mortgage funds in the past five years. According to one estimate, they would have been able to provide only about $30 billion had they not enjoyed the special status in tax deferral.

This special tax deferral helps make savings and loan operations particularly popular among investors. The 12 percent special tax deferral allowance was originally enacted by Congress to protect savings and loan firms from bad debt and is believed to have contributed most importantly to their past growth. Complaints about this special tax treatment generated quite a few congressional efforts to eliminate or at least reduce the tax benefits.

The loan industry has also been helped by the passage of a congressional bill in 1960 which has made permanent a ban on further acquisition of more units by savings and loan associations which, though appearing to be negative by limiting further expansion, has actually acted to prevent entry of new competitors into the exclusive clubs of existing savings and loan holding companies.

According to historical patterns, savings accounts of loan firms have risen slightly faster than mortgage loans outstanding. During the 1950-59 period, for instance, savings with loan firms rose 290 percent to $54.5 billion, while the total home mortgage debt held by them grew from $13.1 billion to $49.7 billion. In the past decade, savings in California-based firms have grown 1.7 times faster than those of other institutions (including commercial banks, insurance companies, etc.), while loans grew 1.6 times faster.

The major cloud on the industry's horizon is the downward trend in the interest rates loan firms can charge on their mortgage loans as a result of a general drift toward lower interest rates throughout the country. If the downward trend should continue, then they would have to make themselves less attractive by reducing dividends to depositors.

Other industry worries come from growing competition from commercial banks and other lending institutions and possible action from Congress which might affect the amount of dividends (interest paid on savings accounts) deductible as interest expenses.

In evaluating shares of savings and loan companies, stress is laid on book value per share as well as the increase in book value per share. While book value has become less and less a factor in evaluating shares of industrial stocks, especially companies in the new industries, it is still predominantly important in evaluating securities of the so-called money companies, whose book value is largely determined by cash and equivalents.

The loan shares are comparatively new in the market and are still considered more or less for professionals in the sense that they have only begun to be appraised by the market. The potential in this old-line industry has been present all the time although it has been only recently that Wall Streeters have suddenly awakened to the new growth inherent in this hitherto lackluster industry.

While not as relevant today, this information can be helpful to any investor looking to succeed in the competitive mortgage marketplace.

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