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tions of the United States, the local agencies are confronted with an urgent need for immediate cash and often have sound collateral, such as home mortgages, to assure repayment of loans. In the interest of the communities served by these local institutions, their present situation must be viewed as an emergency. Accordingly, the following recommendation has been unanimously adopted :
“The committee recognizes the existing emergency and is in sympathy with the view of the President that it must be met.
"Further, the committee unanimously records its support of the President in any remedial measures he proposes."
THE SECOND-MORTGAGE PROBLEM
The home owner is confronted with a real problem in arranging for secondmortgage financing. There not only is a scarcity of second-mortgage money, but the home owner often is compelled to pay bonuses of 18 to 20 per cent for the use of this money. There are good reasons for believing that the greatest hindrance to the sound development of home ownership in the United States is the lack of a well-organized second-mortgage service which can be offered at a reasonable cost.
The question promptly arises as to why capital does not flow into the junior financing field. The salient reason is because of the hazards incident to this type of investment. The interest of the purchaser of the second mortgage always is junior that of the first, and in the event of trouble, the second mortgagee is apt to find himself in the situation where to protect his investment, he has to keep the first mortgage in good standing, pay the taxes, and carry the property until he can dispose of it. Then, too, in the event of a decline in real-estate values for various reasons, such as a change in the type of people living in a neighborhood, or general economic depression, the indebtedness might exceed the new value of the property, and again the junior mortgagee has the property on his hands if he is going to protect what remains of his investment. The usury laws are a constant threat to many potential investors, even though they are circuemvented continually. As a result of these and other hazards, capital is timid about going into this field, and when investors are willing, they select their mortgages with great care and insist upon a return which they consider commensurate with the risk.
A great majority of second-mortgage companies which were operated on a purely commercial basis have failed to weather the depression. The companies which have survived appear to be those which do not as a rule lend above 75 per cent of the appraised value. It is plain that whereas the exorbitant rates of interest paid by home owners for junior financing are imposing an undue hardship upon them, they were insufficient to insure the success of secondmortgage companies generally. Spurred on by the need of home owners for junior financing facilities, the committee has adopted a program which it believes will meet the needs of junior financing upon a reasonable basis, and this follows:
“1. That those who desire to own homes shall have sufficient savings to give them an equity of about 25 per cent at the time of the purchase.
“ 2. After consideration of the charges incident to the first mortgage, taxes, insurance, and adequate reserves for contingencies, it is suggested that the home owner arrange for a second mortgage of sufficient duration to enable him to pay off this indebtedness before expiration and thereby eliminate the need of a renewal,
" 3. That the matter of home ownership is essentially a community matter and one which the community is best qualified to foster. As the American method of buying homes is predicated generally upon some junior financing, it is strongly urged that the respective communities and States undertake this opportunity for service as a means of further developing good citizenship through the following methods:
"a. Through the encouragement of mutual junior mortgage organizations. The 50 years or more of experience in one city indicate that when they are operated in accordance with established principles, and in the public interest, they have rendered a satisfactory service to their members.
“b. Through the formation of a community pool of private local interests. This will advance junior-mortgage funds upon homes which are soundly built, well located, and whose prospective owner is known to be a reliable citizen. That such projects can be conducted successfully in the public interest has been proven in Providence, R. I., Utica, N. Y., and Niagara Falls, N. Y.
"c. Throught the removal of usury laws in relation to second mortgages, with appropriate safeguards in the public interest. It is believed such action will tend to bring additional money into the second-mortgage market and thereby help to relieve the home owner.
d. Through the encouragement of second-mortgage agencies to try new methods and further experiments, it may be possible for private initiative to meet the needs of the public at lower expense. Certainly activities of this kind should be stimulated in every sound manner."
LEGAL ASPECTS OF THE MORTGAGE
Uniform mortgage act.-Every borrower must be impressed with the amount of verbiage contained in his mortgage and if he views this legalistic document with suspicion, one can hardly blame him. As mortgage forms frequently contain from one to four thousand words and recording fees are based upon the length, the home owner is penalized on account of this. Furthermore, if the home owner has lived in more than one State, he must have been impressed with the variations in the form and contents of mortgages. The national conference of commissioners on uniform laws, after investigating mortgage forms for more than 15 years, adopted a uniform act in 1927, which was approved by the American Bar Association and the American Title Association. Although the proposal in principle has met with general approval, specific objections to details have been raised in certain States.
From a home owner's viewpoint, the proposed uniform act would require a statutory short mortgage form which would use about 160 words and a consequent reduction in recording fees. Certain covenants and clauses would become by statute a part of each mortgage. From the standpoint of mortgage lenders this short form of mortgage and the accompanying simplified procedure would facilitate the placing and handling of mortgages because of the uniformity possible thereby throughout the States, with a reduction of labor and other expense.
It is in the interest of home owners to encourage capital into mortgage investments. As institutions which have capital available for mortgage investment frequently do business in many States, they are greatly hampered by the diversity of laws in them. The national conference of commissioners on uniform lawg has endeavored to review and to weigh these laws to the end that, while protecting the interests of the borrowers and the lenders, the best laws would be recommended as parts of the uniform mortgage act. Accordingly the act proposes, among other things, a simple, inexpensive method of foreclosure, provides an opportunity for a court hearing there is a dispute, and a period of redemption for such States as may require it. These and other advantages in the interest of uniformity will contribute toward the elimination of many of the complexities and obsolete features of existing laws.
The committee believes the uniform mortgage act would result in a beneficial way to borrowers and to lenders and facilitate the purchase and selling of mortgages by institutions doing an interstate business and thereby tend to make mortgages more liquid. The nearer the 48 States come to uniform mortgage practices, the greater will be the tendency of mortgage money to flow into the States most in need. Accordingly the committee recommends :
“ The general adoption of the uniform mortgage act by the respective States, with the exception of those provisions, which, under existing laws, are more favorable."
Foreclosure costs.-The agencies which place the largest amount of money in home mortgages invest the funds of their depositors, policyholders, or shareholders who are frequently home owners and therefore have a very real interest in the security of these investments. Let us assume a home owner is on the finance committee of one of these institutions and various applications for mortgage loans are before him. The first one is on'a sound property in his own State, where, if it should be necessary to foreclose, court action would be necessary and this frequently costs at least $667. If he voted to approve this loan, he would be certain the security would be adequate to repay the principal and foreclosure costs. The next application is from another State where foreclosure is under power of sale and therefore usually costs only $97, and in this case he would vote for a fuller loan to the home owner than in the first case, even though the value of the properties were the same. The point to be emphasized is that in States where foreclosure costs are high, the home owner is the one who pays ultimately, in one way or another.
Effect of redemption periods on home owners.-The third application may be from a State with a long redemption period in the event of foreclosure. This legislation was designed in the interest of borrowers at a time when they may have needed this protection from lenders. To-day the borrowers provide a substantial part of the funds invested by the lending institutions in home mortgages. It is only under the most exceptional circumstances that lending institutions institute foreclosure proceedings on short notice, for in many cases the defaults may be due to circumstance which the borrower can overcome. From the borrower's viewpoint, it might appear advantageous to have an extended period, say a year and a half, within which to make good any defaults in payments. However, such a long delay frequently results in the property becoming badly depreciated through lack of care.
Certainly the home owner would view with more favor the applications from other areas within which, if his institution had to foreclose, it would get the property within a reasonable period of time so that the security would not be unduly impaired. In the event he did not vote to decline this application for a mortgage or recommend higher rates of interest to be charged, he would be inclined to reduce the percentage of the value that normally would be loaned with safety.
Much is said about giving liquidity to mortgage investments as a means of attracting funds which otherwise go into other channels. The complexity, multiplicity, and lack of uniformity of the laws in the respective States, undue periods of redemption, and unreasonable costs of foreclosure are responsible to a degree for this lack of liquidity and unattractiveness of mortgages as an investment to many people. In order to help correct this, it is the judgment of the committee:
“That additional capital would become available if periods of redemption from sales under mortgage foreclosure were abolished in all States and the costs of foreclosure were reduced substantially."
SUPERVISION OF MORTGAGE AGENCIES
Most of the various types of institutions making first mortgages are subject to some form of supervision by State agencies. The law is definite in various respects, such as the maximum amount which may be loaned. Realizing that the investment portfolios of the lending institutions in certain areas are frozen, the question promptly arises whether a review of existing State supervisory laws, in light of the experience during the depression, might lead to improved methods which will tend to prevent a repetition of existing conditions. Such action may do much to introduce some liquidity in mortgage investments, although it must be realized that at best, first mortgages can not be as liquid as other investments. Such a review should also consider the effect which taxation by the State and subdivisions thereof has upon sound home ownership and how this taxation might be rearranged on a more equitable basis to all parties concerned. The committee recommends:
“That adequate statutes be adopted by the various States in the interests of sound home finance and the public, to the end there may be proper supervision over local mortgage lending agencies and adequate publicity to periodic financial statements of these agencies. The committee believes this recommendation will do much to insure the maximum amount of liquidity possible in mortgages.”
NEED OF INTEREST IN COMMUNITY
Previously in this report it has been noted that assessments and taxes were the third most important cause of foreclosure. The committee appreciates the value of continued improvements in the various neighborhoods and municipalities, but it urges strongly that the financial situation of the residents be taken into consideration before such improvements are authorized. Certainly it is not in the interests of the community, for example, to put in a storm sewer at the expense of the loss of the homes of a number of people who just barely are able to meet existing taxes and charges.
The home owners themselves can do much to prevent untimely improvements through active participation in their community life. Such civic activity also will result in the prevention of the unwise opening of subdivisions which frequently results in loss to both the purchaser of the lot and the home buyer. In some jurisdictions, laws have been passed under which the municipality refuses to authorize land subdivisions unless certain essential utilities have been installed or a bond provided for their installation,
The building or building of a home is usually an epochal event in the history of a family. Successful home ownership is worthy of every effort because it leads to an enriched family life and is evidence of proven habits of thrift and financial planning which usually place the family beyond a hand-to-mouth existence and in a position of relative security. To achieve this, though, there must be an appreciation of just what home ownership demands in the way of responsibilities, a realization that unhappiness may result from purchasing beyond the means available and without adequate resources, as well as the need of eliminating obsolete and hampering legislation and greater uniformity of laws. The investigations of the four subdivisions of the Finance Committee, copies of which are attached, indicate much can and should be done to place home ownership on a sounder basis than exists to-day, but nothing in the course of the deliberations of the committee has changed its view that every American family which so desires and is able financially should own their own home.
JANUARY 29, 1932. Mr. FREDERICK H, ECKER,
Metropolitan Life Insurance Co., New York, N. Y. DEAR MR. ECKER: As a member of the finance committee of the President's Home Building and Home Ownership Conference, speaking particularly for the building and loan interests, I can not approve the report of the committee in two particulars. This is not entirely a personal opinion, as I have had the entire report before the oflicers and directors of the United States Building and Loan League, and they have taken action by resolution. I respectfully request that this communication and this resolution be made part of the finance committee report and footnote reference to this statement be made in the text of the report which I assume you would consider improper to alter. The two points of disagreement are :'
1. The United States Building and Loan League and myself, as the president of this organization, dissent from the recommendation of the committee which appeared on page 10 of their report and is as follows:
“The committee recognizes the emergency and is in sympathy with the view of the President that it must be met. Further, the committee unanimously records its support of the President in any remedial measures he proposes.
Part I of the resolution of the directorate of the United States Building and Loan League states their action on this matter.
2. The subcommittee on mortgage structure of the committee on finance made the following statement:
“There arises a question as to the wisdom of encouraging an institution dealing in second mortgages to solicit deposits of small savings funds, especially if its nature is not clearly distinctive from its title."
Building and loan leaders emphatically feel that the savings of the working classes should not be placed in this type of speculative or semispeculative investment. The recommendation of the committee appearing on page 11, No. 3A, recommending “mutual junior mortgage associations," is a veiled approval of a principal of procedure with which building and loan leaders can not concur, and on which, as shown, the subcommittee on mortgage structure does not concur.
The resolution of the United States Building and Loan League follows:
* PART I. In times of depression when unemployment impairs the ability of our people to save systematically and causes them to draw heavily on their accumulated reserves, not only is the capacity of the building and loan associations to fully serve their patrons severely taxed, but the heavy calls to refinance resulting from the demands for repayment by institutions holding straight mortgages, whose funds are subject to immediate withdrawal, create a situation which makes necessary the establishment of a home-financing reserve system not only for temporary emergencies but for permanent needs as well.
“ The building and loan association is a creature of the laws of our several States separate and apart from every other type of financial agency. Its bene184, 982. 31
ficient purposes hve given it universal recognition. In any proposed set-up for a rediscount or reserve institution, the functions and services of the building and loan associations should be preserved and no different financial types should be included so as to embarrass the standing and capacity of these savings and home financing organizations which have so successfully served the people of the United States and for whose plan no substitute or superior has ever been conceived.
" Part II. Any proposal for junior or second mortgage home financing by societies to be known under the general title of building and loan associations is abhorrent to those principles which have caused our associations to achieve the highest record of safety in the realms of American finance over a period of 100 years. The acceptance of it would be nothing short of a betrayal of the interests of the millions of people who have entrusted their savings to our type of institution and the addition of such second mortgage practices would lose to the present system of building and loan associations that confidence and trust which have brought to them nearly $9,000,000,000 of the savings of the people of this Nation,
“ In a Nation composed so largely of wage earners and persons of moderate means, it is apparent that home ownership must be achieved through financial institutions lending sufficient sums on the security of the home and on the faith and ability of the borrower to pay small amounts out of his earnings as received to cover interest charges, taxes, insurance, and a portion of the principal.
* The building and loan association provides this means of home financing without excessive costs and charges, and offers a time-tested plan of small, periodic payments spread over a sufficiently long period of time to obviate renewals or the calling of substantial sums of money.
“No straight mortgage or other plan of short or long maturity could have accomplished such successful results in home ownership.”
In closing I wish to state that the balance of the report has my enthusiastic approval, as I consider it one of the most constructive studies of home financing principles and problems that has ever been made and published, and I am going to make it my personal responsibility to give it wide circulation among building and loan associations in the United States when it has been published in its final form. Sincerely,
WILLIAM E. BEST, President.
Statements of condition of the Land Bank of the State of New York as of
December 31, 1931, and for the oulendar yeur 1931
BALANCE SIIEET AS OF DECEMBER 31, 1931
First mortgages on improved real estate_-
$1, 056, 375.00
105, 079. 76 16, 110, 000.00
594, 936. 06
17, 866, 390. 82
Land-bank bonds (amount due from member associations)
$16, 110, 000.00 Advance payments made by member associa
tions for redemption of bonds, Jan. 1, 1932- 329, 000.00
Total land-bank bonds outstanding
Reserved for interest on bonds---
1, 147, 000.00