Building society is determined by experts as a financial-lending organization that specializes in allocation of individual long-term loans for acquisition or reconstruction of living buildings at the expense of short-term deposits of urban sector.
The money is lent on the mortgage bonds. BS gains benefit through the difference between the interest rate, received on accommodated loans and the interest rate, paid on borrowed loans. The accommodation, purchased by a BS member, remains the property of the institute and serves as the security of a loan, before it is fully paid out. The difference between a building society and other mortgage institute consists in the fact, that this organization bestows loans only to their depositors.
For the successful functioning of BS it is important that all of its members have been its depositors for a long period of time and have saved a good amount of money. That's why the size and the procedure of loan service depend on the volumes and a time structure of savings.
There are many kinds of building societies, and you can hardly find their common classification, as in different countries and literary sources a different terminology is used. Generally, there are two types of such institutes: a building-and-loan cooperative society and a building-and-loan association. The main difference between them is that the first ones are noncommercial organizations and the second ones are commercial organizations. As a rule the cooperative societies are the property of their members who are responsible for their obligations, while building-and-loan associations are considered as joint-stock companies and limited liability corporations, belonging to outer investors.
It should be noted that cooperative societies don't have a right to take outer loans, that's why they use the investments of their members for originating loans. You should differentiate liquidated, serial and continuing cooperative societies. All the members of the liquidated cooperative society join it simultaneously. After that each member gains an apartment, this kind of cooperative society is liquidated. A serial cooperative society accepts new members in cohorts. At each moment of time all of its members belong to the same cohort. The capital exchange between cohorts allows an acceleration of originating loans and makes the withdrawal of the members, who don't want to take loans, easier. The acceptance of new members in a continuing cooperative society can be initiated in any moment or with definite periodicity, hence, it includes members, who have joined a cooperative society in different periods of time.
Building-and-loan association appeared as a result of a continuing cooperative society development. The contracts, offered by building-and-loan associations, are different from the cooperative contracts in nonzero interest rates on loans and deposits. These rates are usually less than market interest rates. A margin is a main source of building-and-loan association benefit.
What features make building society so important for the process of mortgage making?
Building society is a strictly specialized organization, and this fact limits the risks of its activity. Moreover it is often prohibited for BS to make outer holdings, and that also promotes the limitation of risk.
Building-and-loan cooperative societies are usually organized by a group of people, closely connected to each other, for instance, living together on the same territory or working in the same sector. Thanks to it a cooperative has quite full information about its members and is able to select those who deserve trusting. Improper members can be subjected to either economical or social sanctions.
The members of building-and-loan associations are nonobligatory connected to each other, however in a long process of saving money the financial opportunities of the debtor, his honesty and discipline are revealed.
The experience of East Europe countries showed that on the first stages of mortgage creating the majority of urban sector was not inclined to long-term saving and feared to entrust their savings to financial agencies. In these countries the inclination to long-term borrowings is also low in the comparison with developed countries. BS turns out to be a "school" of saving-and-debt behavior for millions of people. Having finished this school they acquire long-term planning skills of family budget. Thereby the basis for more developed forms of mortgage is being formed.
Building society also has a great importance as a source of so called long-term money that is indispensable for the developing and emerging economies. Building-and-loan associations are able to attract considerable part of savings, being in hands of population. The clients of building-and-loan associations are usually citizens with low or medium incomes who don't usually use the services of banking system, and that's why their savings don't "work" in the network of the official economy.
It should be emphasized that the development of BS system doesn't interfere with the establishment of other mortgage institutions, such as mortgage banks and mortgage programs of full-service banks, because they serve different profitable groups of people. For the purchaser with the high income it will be easier to prove his/her creditworthiness; he has sources for the payment of the initial contribution and is ready to take more expensive loan for the immediate purchase of an accommodation.
The increase in demand for housing gives a positive impulse to the home construction activity, contributes to the growth of building industry sector, stimulating the development of infrastructure. Raising the accessibility of housing building societies promote the establishment of efficient labor market, that is meant to be an important factor for developing and merging economies.