Wednesday, April 18, 2012

Pulaski Savings Bank and the Original Fair Lending Model

Pulaski Savings Bank was founded in 1890, just three years before the first savings and loan crisis. Its name has changed, it first opened as Pulaski Loan and Building Association of the 6th Ward. So has its address and its storefront. But behind the 1950s remodel, it continues to thrive, doing the same kind of lending it has always done.

Jane Rogocki, Executive Vice President and Operations Officer, started working at Pulaski Savings when she was 16. When she was a child, and her mother, a widow, tried to buy a home on May Street, a local commercial bank turned her down. “They didn’t lend to widows living on social security income,” Jane says. Pulaski Savings Bank gave her the loan to buy the house.

Savings banks have a heritage of making loans like that. Thrifts got their start in the early 19th Century, when bankers provided services for wealthy people. The building & loan association was devised as a lever for the working man to build wealth for himself.

David Mason, author of From Buildings & Loans to Bailouts, a history of the movement, gives a succinct account of how it worked in an article linked on the sidebar.

You’d buy shares on installment payments – when you’d paid them off, you could take out a loan for the face value of the shares. You’d keep making the monthly payments – they’d be applied to principle and interest. That was a novelty. 19th century mortgages were short term, interest only loans – if you couldn’t pay off the loan, or refinance it, at the end of the term, you’d forfeit the house.

Furthermore, the interest you paid at a bank went to profits for the bank’s owners. Building and loans were mutually owned by the depositors themselves. Profits from the loans were distributed back to members’ share balances.

The savings and loan model took off at the end of the 19th century, as the urban working class multiplied. Its success inspired a for-profit variation. Bankers and industrialists hired agents to organize local chapters and drum up deposits, which were sent on to the central office and used to make loans. The national building and loans paid higher interest rates to attract deposits, and generous salaries to their officers. They could afford to be generous as long as their membership kept growing. An economic downturn in 1893 stalled membership growth, and the national B&Ls collapsed in a wave.

The savings industry came out more organized. State regulations were passed, and a national trade association was created, promoting uniform practices in accounting, appraisals and loans.

By 1930, the first year of the Great Depression, there were over 900 building and loans in Illinois, according to the US Building and Loan League’s Blue Book for that year. (The movement would begin to promote themselves as Savings and Loans in the 1930s.) Collectively, they had $470 million in assets. That was up $22 million from 1929.

Some thrifts lost on loans in the depression, but not as quickly or dramatically as other banks. Partly because their model restricted withdrawals. Mason reports that between 1931 and 1932, almost 20% of US banks failed. Compared to 2% of its savings and loans.

There were 11 Building & Loans listed with Bridgeport addresses. Three of them have survived in some form. Aside from Pulaski Savings of the 6th Ward at 3156 S. Morgan, there was Washington Polish S&L at 2845 South Archer (Washington Federal is at 2869 S. Archer today). The Silver Crown Building and Loan and the Rovnost Homestead Association shared an address at 555 West 31st Street, which now belongs to the Southwest Chapter Credit Union.

There were another 40 B&Ls in Pilsen, but Pulaski Savings on Morgan Street, with $3 million in assets, was by far the largest. Between Pilsen and Bridgeport, 4 other associations had just over $1 million in assets each. The average size for B&Ls in Illinois, as listed by the Blue Book, was $500,000 in assets.

Roger Budny by the Vault

Roger Budny is Pulaski Savings Bank’s current President and Chairman. His father started working at Pulaski Savings Bank in 1939. Roger grew up in a Bridgeport built, at least partly, by the mutualist model of the savings and loan.

Roger describes the Bridgeport of his youth as having “a European philosophy of community.” People didn’t have cars or fancy houses but “everyone was working, everyone was doing well.” They worked at the stockyards or the Johnson pipe works. They shopped at stores within blocks of their homes.

He has a program St. Mary’s published when they built a gymnasium in 1941. The advertisements illustrate the community structure he remembers – mostly between Morgan Street and Racine. There were 4 different delis on Morgan itself and more “fancy meats” on Aberdeen. Katzman’s sold dry goods, Kaplan’s sold liquor, the Eagle Tavern on Racine sold White Eagle Beer (brewed in Bridgeport) and promised “tables for ladies.” There were multiple candy shops and paint stores; Roger remembers a small manufacturer of venetian blinds where the Pulaski Savings’ parking lot is now.

It all thrived on a different kind of credit. People didn’t have plastic in their pocket, they had an account at the local store. The owner of the currency exchange on 31st Street west of Halsted did loans on the side. “He probably did them out of his pocket,” Roger says. “He trusted you. You’d sign a piece of paper that would say ‘I owe you.’”

It’s impossible to do that kind of lending now. “It’s killing some of the businesses on Halsted Street,” Jane says. Local lenders would make loans based on undocumented income if they knew the borrower was good for the cash. “You can’t do that anymore,” she says. “You can’t explain to a regulator ‘they come in and pay cash every week.’”

Relationship lending is probably easier to manage when a neighborhood is highly local. Jane and Roger remember Bridgeport being so local that people could do business in their own fragment of it. People east of Halsted went to their own lenders, like the Southwest Chapter Credit Union on 31st, Street. “A lot of them probably didn’t know we were here,” Jane recalls. “We didn’t advertise.”

Roger still talks warmly of “fraternalism and trust,” the old virtues of a savings and loan movement organized for social uplift. He likes to say Pulaski’s lending isn’t based on “who you know,” but it’s not based on credit scores either. “We don’t allow them in the building.” They look at the whole person. They run a full credit report to catch anything the borrower hasn’t told them. But if problems show up in the credit report, that doesn’t mean they can’t make a loan. “We look at what may have happened to cause the problem,” Roger says.

Pulaski’s whole person underwriting appears to work. Pulaski has had only 1 foreclosure during the crisis, “and our delinquencies are miniscule compared to everyone else,” Roger boasts. (Accurately, according to reports filed with the FDIC.)

Vault Detail

This isn’t the first crisis Pulaski Savings has weathered in Roger’s career.

A spiral of inflation and high interest rates in the 1980s made business hard for thrifts, whose assets were locked into long term loans, which paid in at fixed rate of interest, while rates paid out on deposits spiked.

Since the Depression, when competition for deposits may have helped banks fail, regulators had maintained caps on rates banks could pay out. Initially, thrifts were exempt from limits on the grounds they weren’t in direct competition with banks; after 1966, they were allowed to offer rates a quarter percent higher than commercial banks, to compensate for other restrictions (they weren’t allowed to offer checking accounts, or commercial loans). In 1980, Congress passed a round of deregulation that phased out those caps.

In 1982, they lifted restrictions on the types of loans S&L’s might make, freeing them to pursue more lucrative loans to pay for deposits. Deregulation opened the door into markets where they had little expertise, and occasionally into outright fraud. Nationally, assets held by savings and loans multiplied in the 1980s (from $604 billion in 1980 to $1.187 trillion in 1989), but almost 1,400 of them disappeared during the same period.

The Woodstock Institute, a fair lending advocate, gives an idea of how these trends played out in Bridgeport. In 1985, the first year Woodstock published its Community Lending Fact Book, there were 309 residential loans reported in Bridgeport. Pulaski made 18 of them. District National, which later became Chicago Community Bank, made 45. In fact, loans by value that year were heavily concentrated in District National’s census tract. But most of the loans made in Bridgeport were made by banks and S&Ls, only 43 were made by independent mortgage bankers.

By 1995, there were 429 loans made in Bridgeport, a 39% increase, and they were worth 3 times as much. They were also more geographically diffuse. But only 74 of them were made by banks or S&Ls, the rest were made by independent mortgage bankers. Chicago Community Bank’s lending was down to 26 loans that year. Pulaski Savings’ was up to 24.

Independent mortgage bankers, and brokers, sold loans to government agencies, or private investors, as soon as they made them, then used the capital to make new loans. “That’s where our problems started,” Roger observes today. “They have no skin in the game.”

The federal government created a resale market for loans intentionally during the Great Depression. Fannie Mae would buy home loans, so banks would be more willing to extend long term mortgages (since they weren’t stuck holding the loans). A secondary market also helped distribute capital from rich areas to poorer ones, since banks in low-capital areas could sell their loans, and reinvest the proceeds.

Innovations in the 1970s and 80s made secondary market even more liquid. First, Ginnie Mae began pooling loans and selling slices as mortgage backed securities. Fannie Mae had been selling who loans, a more cumbersome process. Later, collateralized debt obligations divided up a pool of loans into slices with specific risk and payment characteristics.

These were also the years when shareholder capitalists were critical of traditional savings and loans for drawing “uninformed” depositors, and being run by managers with no incentive to maximize returns. Meanwhile, the new instruments added layers of transactions between home buyers and the investors who ended up holding their loans.

The S&Ls themselves responded to new pressures and opportunities in different ways. Some began to act more like mortgage bankers, selling their loans to make more loans faster. Others closed down their loan departments altogether and put their capital in securities for safe keeping.

By 2005, there were 1,051 residential loans made in Bridgeport, worth $226 million. Big banks and mortgage companies were moving to the top of Woodstock’s Bridgeport lender’s list. For 3 years between 2006 and 2008, Wells Fargo, Citimortgage, Countrywide and JP Morgan Chase were Bridgeport’s top residential lenders. But by 2009, they had disappeared.

The Easter Bunny, and Reflections of Morgan Street in the Window

Through decades of excitement, Pulaski Savings Bank steered a middle ground. In 1995, at the tail end of the Savings and Loan crisis, more than half its portfolio was squirreled away in securities. But it was still making loans. In fact, it made 30% more loans in Bridgeport that year than it had in 1985. Today, Pulaski reports $48.5 million in assets (their 1930 assets would be worth $38 million today) and they still maintain a careful portion in reserve – almost 30% as of 2011 – but they’ve moved 58% of their assets into portfolio mortgage loans.

Roger says under the direction of Pulaski's board, they’ve stuck close to their roots. They now offer checking accounts and ATM services, and they have 1 commercial loan, but they never embraced commercial lending like some of their peers did. “We’re here to help people save, and to buy homes.”

They also never bought loans from brokers, or financed investors who were buying to flip. Pulaski holds its loans on its books. So more turnover just makes more paperwork. They also require 20% down payments, and scrutinize their loans closely.

But ultimately, that’s an advantage to the customer, Roger observes. If a customer accidentally overdraws his account, he gets a phone call; if a borrower has a problem, “he doesn’t have to figure out where his loan is.”

“When he signs the papers, we tell them right up front, if you’re beginning to feel a squeeze or a problem, call. We can help you one way or another.”

Pulaski Savings Bank is a mutual, it is owned by its depositors and mortgage holders, and its managers haven’t forgotten that. “I want them to be successful,” Roger says. “We want the community to be viable.”