As the era of high interest rates unfolded, savings and loan companies began to lose massive amounts of money. Here’s why. Savings and loans borrowed money for a short term from depositors and lent much of it out long-term for home mortgages at fixed rates of interest. As short-term rates shot up, the cost of money to the S&Ls went up rapidly, whereas their revenue from the existing mortgage loans they had made earlier to homeowners at much lower fixed rates did not.
Still don’t really understand why the banking model makes sense. Unless you have a 20-year (or whatever the mortgage turnover half-life is) horizon and can offset losses in one decade when interest rates are rising against another when they’re falling. But comp and Wall Street don’t work on such horizons. Do any banks still hold mortgages these days? Are they poised for ruin with current interest rates?
