S&Ls have been able to capture a stable share of the mortgage market based on their strong local position, the relatively slow turnovers in both their savings and mortgage portfolios and their ability to finance a substantial portion of new mortgage loans with the automatic return fund flows from existing mortgages. In the long run, the underlying trend in the industry is one of long-term growth in line with the growth in current dollar disposable income.

On the other hand, S&L earnings have suffered severe and sometimes lengthy cyclical depressions resulting in part from the regulatory lag in raising usury and deposit rate ceilings during high interest rate periods. Usury rate ceilings, which promote residential construction in recessions and restrict it in booms, became particularly dangerous because the continuing rise in inflation rates threatened a long-term secular decline for both the S&L and housing industries. A concerned federal government is now taking steps to raise usury ceilings or facilitate their circumvention.

Regulatory lag is now a problem primarily with respect to ceilings on deposit rates, which have traditionally prevented S&Ls from attracting adequate savings flows during high-rate periods. This problem has been exacerbated by the negative yield curve, which attracts long-term funds into short-term securities, encouraging disintermediation. Since S&Ls borrow short and lend long, a negative yield curve also raises costs relative to revenues.

A more complex factor contributing to the erratic nature of S&L earnings is the lead-lag relation between revenues derived from the pool of S&L mortgages and costs stemming from the pool of deposits. In the short run, the yield spread between these two pools is inversely related to movements in current rates. Over a time sufficient to permit turnover of the mortgage pool, however, the yield spread is inversely related to the rate of change in interest rates. In particular, if interest rates continue to rise but at a lower rate than in the past, the yield spread will improve, since the mortgage pool will continue to reflect the older rates, which will exceed the more current rates paid on deposits.