Definition
Consignment in real estate finance refers to the process where the Federal Savings and Loan Insurance Corporation (FSLIC) replaces the management of an insolvent savings and loan association (S&L) while allowing the association to continue its operations. The primary objective of consignment is to restructure and stabilize the financial institution by bringing in experienced managers under federal supervision, ideally resulting in the recovery of the S&L.
Examples
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Southwest Plan: In Texas, many savings and loan associations were placed under the consignment program as part of the Southwest Plan. Under this initiative, experienced managers from other solvent S&Ls were brought in to run the insolvent associations. These managers operated under the supervision and directive of federal authorities to ensure effective management and stabilization.
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Other Regional Consignment Programs: Besides the Southwest Plan, similar consignment practices were employed during the 1980s across various regions in the U.S. where the FSLIC intervened to rescue troubled S&Ls by replacing their management teams with more experienced and competent managers.
Frequently Asked Questions
1. What is the main goal of consignment in real estate finance?
The primary goal of consignment is to stabilize an insolvent savings and loan association by replacing its existing management with experienced managers who can operate under federal supervision to restore the institution’s financial health.
2. Who oversees the consignment process?
The consignment process is overseen by the Federal Savings and Loan Insurance Corporation (FSLIC), which was later succeeded by the Federal Deposit Insurance Corporation (FDIC).
3. Does consignment always lead to the recovery of the insolvent S&L?
While consignment aims to recover the financial health of an insolvent S&L, it does not guarantee success. The outcome largely depends on the severity of the insolvency issues and the effectiveness of the new management.
4. How long does the consignment process typically last?
The duration of consignment can vary and depends on the specific circumstances of the S&L. It continues until the institution is deemed stable and capable of operating without federal oversight.
5. What happened to the FSLIC?
The FSLIC was abolished in 1989, and its responsibilities were transferred to the FDIC, which took over as the insurer of S&Ls.
1. Federal Savings and Loan Insurance Corporation (FSLIC):
An organization that provided deposit insurance to savings and loan associations in the United States until it was abolished in 1989.
2. Federal Deposit Insurance Corporation (FDIC):
An independent federal agency that insures deposits in banks and savings institutions in the event of bank failures.
3. Insolvency:
The state of being unable to pay debts when they are due, often leading to bankruptcy or restructuring.
4. Savings and Loan Association (S&L):
A financial institution that specializes in accepting savings deposits and making mortgage and other loans.
Online Resources
- FDIC Official Website
- Consumer Financial Protection Bureau (CFPB)
- Investopedia - Savings and Loan Crisis
References
- FDIC. “The S&L Crisis: A Chrono-Bibliography.” Accessed [URL]
- Investopedia. “Savings and Loan Crisis.” Accessed [URL]
Suggested Books for Further Studies
- “The Best Way to Rob a Bank Is to Own One” by William K. Black
- “The Big Short: Inside the Doomsday Machine” by Michael Lewis
- “The Savings and Loan Crisis: Lessons from a Regulatory Failure” by James R. Barth, Susanne Trimbath, and Glenn Yago
Real Estate Basics: Consignment Fundamentals Quiz
### What does consignment in real estate finance involve?
- [ ] Selling off property assets quickly.
- [x] Replacing management of an insolvent savings and loan association.
- [ ] Investing in new property developments.
- [ ] Leasing properties to new tenants.
> **Explanation:** Consignment in real estate finance involves replacing the management of an insolvent savings and loan association (S&L) while allowing it to continue operations under new, experienced managers.
### Who supervises the new management team in a consignment program?
- [x] Federal authorities.
- [ ] Local government.
- [ ] Shareholders.
- [ ] Existing board members.
> **Explanation:** The new management team operates under the supervision and directive of federal authorities, ensuring proper oversight and strategic direction to stabilize the insolvent S&L.
### What was the FSLIC's role before it was abolished?
- [ ] Manage rental properties.
- [ ] Develop real estate.
- [x] Insure deposits in savings and loan associations.
- [ ] Offer home loans directly.
> **Explanation:** The Federal Savings and Loan Insurance Corporation (FSLIC) provided deposit insurance for savings and loan associations.
### Under the Southwest Plan, managers from which type of institutions were recruited?
- [ ] Real estate developers.
- [ ] Insurance companies.
- [x] Other solvent savings and loan associations.
- [ ] Investment banks.
> **Explanation:** Experienced managers from other solvent savings and loan associations were recruited to run the insolvent S&Ls under the Southwest Plan.
### What motivated the inception of consignment practices in the 1980s?
- [ ] Booming real estate market.
- [ ] Lack of rental properties.
- [ ] Overabundance of housing supply.
- [x] Widespread insolvencies among savings and loan associations.
> **Explanation:** The consignment practices were motivated by widespread insolvencies among savings and loan associations in the 1980s, necessitating intervention and stabilization efforts by federal authorities.
### Can consignment guarantee the recovery of an insolvent S&L?
- [ ] Yes, always.
- [x] No, it depends on the severity and management effectiveness.
- [ ] Only if the S&L remains under federal supervision.
- [ ] Yes, if the S&L is small in size.
> **Explanation:** While consignment aims to recover the financial health of an insolvent S&L, success is not guaranteed and depends on the effectiveness of management and the specific insolvency issues faced by the S&L.
### As of today, what organization continues the role initially performed by the FSLIC?
- [ ] Federal Housing Administration (FHA).
- [x] Federal Deposit Insurance Corporation (FDIC).
- [ ] Consumer Financial Protection Bureau (CFPB).
- [ ] Internal Revenue Service (IRS).
> **Explanation:** The FDIC took over the responsibilities of the abolished FSLIC and continues to insure deposits in banks and savings institutions.
### What usually triggers the consignment of a savings and loan association?
- [ ] Increase in interest rates.
- [ ] New regulatory laws.
- [x] Insolvency and financial instability.
- [ ] Merger or Acquisition.
> **Explanation:** Insolvency and financial instability in a savings and loan association usually trigger the consignment process, prompting federal intervention.
### How does consignment affect existing management in the S&L?
- [ ] The management signs new leases.
- [ ] Management roles remain unchanged.
- [x] Existing management is replaced by experienced managers.
- [ ] Management receives additional training.
> **Explanation:** Under the consignment process, the existing management is replaced by more experienced managers brought in under federal supervision.
### What was one significant impact of the Southwest Plan on Texas S&Ls?
- [ ] Decrease in property values.
- [ ] Increase in commercial real estate investments.
- [x] Placement of S&Ls under consignment to stabilize them.
- [ ] Rise in mortgage defaults.
> **Explanation:** The Southwest Plan significantly impacted Texas savings and loan associations by placing many of them under consignment, recruiting experienced managers to help stabilize the insolvent institutions.
