The Savings and Loan institutions were facing significant financial challenges due to the economic climate of inflation, which made their long-term fixed-rate mortgages less profitable. As inflation rose, the return on these mortgages was not keeping pace with rising costs, leading to losses for the S&Ls.

At the same time, they were losing deposits as customers sought better returns from higher-interest money market funds. This combination of losing money on mortgages and attracting fewer deposits created a severe financial strain on the S&Ls, impacting their stability and ability to operate effectively.