Bell, Spurgeon

English

bepress Legal Repository

Shifts in the Sources of Funds for Home Financing, 1930–1937

Duke Law Scholarship Repository

SHIFTS IN THE SOURCES OF FUNDS FOR HOMEFINANCING, I93o'I937SPURGEON BELL*The savings and loan associations, the commercial banks, the life insurancecompanies, and mutual savings banks, were the chief institutional sources of homemortgage loans in 193o. Individuals, title and mortgage companies, constructioncompanies and trust departments of commercial banks were also factors of con-siderable importance in the home mortgage market in i93o, as well as at the presenttime. The relative importance of these agencies is shown by the following table.TABLE IOUTSTANDING MORTGAGE LOANS ON I- TO 4-FAMILY NON-FARM HoMEsPer Cent of Total by Type of Lender 193o, 1933, and 1937. (End of Year)(Millions of dollars)1930 1933 1937Lender Amount Per cent Amount Per cent Amount Per centof Total of Total of TotalSavings and loan associations... $ 6,984 3.8 $ 4,9o6 26.6 $ 3,480 20.1Commercial banks ............ 2,425 11.1 I,8io 9.8 1,400 8.xLife insurance companies ...... 1,844 8.4 1,715 9.3 1,330 7.7Mutual savings banks ......... 3,300 15.0 3,200 17.4 2,7o0 x5.6Home Owners' Loan Corporation ... ... 103 o.6 2,398 13.8Individuals and others ........ 7,400 33.7 6,700 36.3 6,ooo 34.7Total .................... $21,953 100. $18,434 100.0 $17,308 100.0Source: Federal Home Loan Bank Review, August 1938.* Includes loans held by individuals, title and mortgage companies, construction companies, trust depart-ments of commercial banks and miscellaneous lenders.One's first question would be: What effect did the creation of the Federal HomeLoan Bank Board in 1932 have on the source of mortgage loans? Twelve districtfederal home loan banks were set up by the Board. On June 30, 1938 the capitalstock of the FHLB system (consolidated statement of the twelve district banks) was$16i,5x2,2o5, of which the government's fully paid subscription amounted to $124,-74i,ooo. The twelve district banks lend almost exclusively to member institutions,* B.S., z9o3, University of Texas; M.B.A., 1915, Harvard Graduate School of Business Administration.Research Economist, Brookings Institution, since 1937. Director, Division of Research and Statistics, FederalHome Loan Bank Board, 1934-1936; Professor of Business Research and Director, Bureau of BusinessResearch, Ohio Siate University, 1925-1934. Author of works on accounting ind industrial and com-mercial subjects.SHIFTs IN SOURCES OF FuNms FOR HoME FINANCING 511while insurance companies, mutual savings banks, and building and loan associations("savings and loan associations" in the above table) may be members of the FHLBsystem, its membership consists almost exclusively of building and loan associationsor savings and loan associations. On June 30, 1938- the total outstanding advances ofthe twelve district banks to members amounted to $196,=,132. The borrowing mem-bers generally use real estate mortgages or U. S. Government Bonds as collateral forloans whether they be short-time or long-time advances, but may secure short-termadvances without pledging any collateral. If one notes that on December 31, 1937 themember institutions of the FHLB system held $2,758,oooooo of mortgages it becomesapparent that advances of approximately $196,oooooo constitute about 7o of the totalfirst mortgage loans of the member institutions. The FHLBB is an agency whichcaters primarily to the building and loan type of association and is serving as a centralreserve for these home building agencies.The Home Loan Bank Board also supervises the Federal Savings and Loan Insur-ance Corporation and the Home Owners' Loan Corporation. The insurance cor-poration insures the share accounts and creditor liabilities of all federal savings andloan associations, and approved state chartered building and loan associations. OnJune 30, 1938, the assets of all insured institutions were $i,978,476,ooo. This insuranceis intended to place the building and loan institutions in position to secure shareaccounts (analogous to deposits) in competition with national and other banks wheredeposits are insured by the Federal Deposit Insurance Corporation.The Home Loan Bank Board has, however, exerted a considerable influence onthe lending resources of building and loan associations through its organization offederal savings and loan associations, in addition to the state-chartered institutionswhich are commonly styled building and loans, although the Federal Home LoanBank Review refers to both state and federal as savings and loan institutions. Theold state-chartered building and loan associations were also permitted to converttheir institution to federal savings and loan companies. On June 30, 1938 the progressof this program is indicated by the table below:Number Approximate AssetsNew ................................ 640 $ 301,242,000Converted ........................... 7o6 912,632,oooTotal ............................ 1,346 $1,213,874,000Source: Federal Home Loan Bank Review, August 1938.The total government subscription to the shares of member institutions was onJune 30, 1938 about $253,000,000.Wide shifts in mortgage holdings resulted from the operation of the HOLC.This corporation was authorized to issue government guaranteed bonds in exchangefor home loan mortgages, provided the mortgagor was hard-pressed as a result ofthe depression and threatened with the loss of his home. The sources from whichthe Corporation took over mortgages is indicated by the following table.LAW AND CONTEMPORARY PROBLEMSTABLE 2NUMBER OF MORTGAGEES BY TYPES THAT HAD RECEIVED $25,000 OR MORE FROM THE HOLC,AND AMOUNTS RECEIVED, NOVEMBER I, 1934MortgagesType of Mortgagee NumberBuilding and loan ass'ns ...... 2,358Savings banks ............... 1,340'Commercial banks ........... ,014Life insurance companies ...... 470Mortgage companies ......... 444Individuals ................. 224Investment companies ........ 216Fiduciary institutions ......... r21Other types .................. lo9Unknown types .............. 79Business corporations ......... 6oTotal ................... 6,435Per centof Total36.620.815.87.36.93.53.4'.9'.71.20.9100.0Mortgage Loans$336,420,545281,801,7o6125,389,65370,935,95554,234,9651o,617,81726,o25,82321,908,5237,145,4515,505,1227,812,665$947,798,225Per centof Total35.529.813.27.55.71.12.72.30.8o.60.8100.0Source: Federal Home Loan Bank Review, July 1936.In five states, however, there was a complete tabulation by the Home Loan BankBoard of the distribution of the HOLC mortgage loans by type of mortgagee. Thistabulation, compared with the estimated distribution of all home loan mortgageloans, indicates that the corporation took over mortgages from mortgagees roughlyin proportion to their holdings (see Table 3 below). The fact that this table is notrestricted to mortgagees receiving more than $25,000 from the HOLC doubtlessexplains the much higher representation of individual mortgagees than in Table 2.TABLE 3Coma'AssoN OF DISTRIBUTION OF HOLC LOANS IN FIVE STATES WITH THE DISTRIBUTION OFHoME MORTGAGESEstimated Distribution of Estimated Distribution ofDollar Amount of all Dollar Amount of Mort-Urban Home Mortgages gages Replaced by HOLCin the United States as in 5 Eastern States.'of Dec. 31, 1934.Individuals ............................. 214% 21.0%Banks and trust companies ................ 23.7 32.4Building and loan associations ............. 23.1 24.3Insurance companies ..................... 8.5  4.4Finance and morteaze companies ......... 6.r o.qH O LC ..................................All others ...............................Source: Federal Home Loan Bank Reviet, July 1936.8.3While it might be expected that the mortgage lenders receiving these bonds wouldsell them and invest the proceeds in mortgage loans, much of the proceeds of the saleof these bonds was used to pay off share accounts in building and loan associations, or* New York, Connecticut, New Jersey, Ohio and West Virginia.SHIFTS IN SOURCES OF FUNDS FOR Homy FINANCINGdeposits in banks. The taking over of some $3,ooooooooo of home mortgages by theHOLC served not only to give direct relief to some i,oooooo of hard-pressed homeowners, but also served indirectly to place in the portfolios of hard-pressed financialinstitutions some $3,ooooooooo of bonds issued against these mortgages and guaran-teed by the government. The HOLC does not make further loans, but is engagedin collecting the interest and principal of the mortgages taken over. From Table iabove it will be noted that on December 31, 1937 the Corporation still held a balanceof $2,398,ooooo of home loan mortgages, or 13.8% of the home mortgage investmentin the United States.The Federal Housing Administration is an organization created in 1934 to insurehome mortgage loans. It was authorized to insure mortgage loans on h6mes up to8o per cent of the value of the mortgaged properties. Later the institution was au-thorized to insure mortgage loans up to go per cent of the mortgaged property in thecase of homes costing $6,ooo or less. The amount and distribution of mortgagesaccepted for insurance up to June 30, 1938 was as follows:TABLE 4LENDING INSTITUTIONS FINANCING NET MORTGAGES ACCEPTED POP. INSUPANCECumulative through June 30, 1938Volume of MortgagesType of Number of Per cent Per centLending Institutions Institutions Number Amount of Amount New HomesNational Banks ...... 2,055 89,4II $ 362,225,173 30.5 51.1State Bks. & Tiust Cos. 2,387 79,988 322,537,441 27-2 49.5Total Comm. Bks. 4,442 169,399 684,762,614 57.7 504Bldg. & Loan Ass'ns.. 1,431 43,16o 170,433,621 14.4 52.8Mortgage Companies.. 193 32,304 146,162,357 12.3 64.8Insurance Companies. 189 22,169 105,212,579 8.9 52.7Savings Banks ....... 124 8,350 36,175,930 3.0 54.4All other ............ 45 9,791 44,763,758 3-7 61.7Total ........... 6,424 285,473 $1,i87,5io,859 100.0 53.2Source: Federal Housing Administration.The significance of the FHA goes considerably beyond its stimulation of con-struction through insuring home loan mortgages. The insured mortgage becomes arelatively liquid asset. The following chart showing the circulation of insured mort-gages indicates the manner in which mortgage insurance has created a certainamount of liquidity in the home mortgage market. The insured mortgage tends tobecome a sort of secondary reserve. Moreover, certain types of mortgage institutionsmake mortgage loans of the insured type and later transfer them to other institutions.The extent of these transfers by different types of institutions is indicated in the charton the following page.LAW AND CONTEMPORARY PROBLEMSINSTITUTIONS BUYING AND SELLING INSURED MORTGAGESThrough December 31, 1937PURCHASED SOLDMILuONS OF DOLLARS TYPE MI.LIONS OF DOLLARS70 so 0 30 20 to 0 _ 10 20 30 40 foNATIONAL BANKSSTATE BANKSBUILDING 8; LOANMORTGAGE Cd'SINSURANCE CO'SSAVINGS BANKSFEDERAL A43ENCYALL OTHERSFHA, Div. of Economics & Statistics.Mortgage companies, building and loan institutions, and state banks sell moreinsured mortgages than they buy. Consequently these institutions evidently havesome of the mortgage loans -which they them~selves make insured, and later sell themto insurance companies or other financial institutions. Indeed, the mortgage com-panies seem to be acting mainly as brokers in insured loans, making mortgages andhaving them insured and later selling them to insurance companies or other institu-tions.The Reconstruction Finance Corporation has cooperated with the FHA in certainof its large-scale housing operations. In addition to its insurance of one- to four-family home loan mortgages the FHA has accepted for insurance mortgages onlarge-scale rental projects. The RFC Mortgage Company has, in some cases, madesuch insured mortgage loans with the inteni of later selling them to financial institu-tions. Moreover, the RFC has cooperated with the FHA by the organization of theFederal National Mortgage Association and purchase of the stock and surplus of theassociation. This is an organization with $iooooooo capital and $i,oooooo of surplusset up to deal in insured mortgages. It is authorized to issue bonds against insuredmortgage holdings and thus finance its operations. The possible expansion of thisorganization is recognized by authorization of the purchase Of $50,000,000 of capitalstock by the RFC.The question may be raised as to the net effect of these federal agencies on thedistribution of home mortgages. The experience with frozen real estate mortgageStIFts IN SouRczs OF FUNDs FOR HOME FINANCING 515loans during the depression made the commercial banking institutions somewhatsour on such investments, but the appearance of the insured mortgage has had theeffect of bringing the banks back into the field of home mortgage loans to a greatextent. The FHA and the FHLBB tend to be competing institutions in certain re-spects. The Board was organized as a central reserve agency to lend to its members(mainly building and loan institutions) on home mortgages as collateral. The neces-sity of this liquidity function has been to some extent undermined by the appearanceof the insured mortgage, which serves as a secondary liquid reserve. While the in-surance companies have purchased these -insured mortgages on considerable scalefrom other financial institutions, the national mortgage associations, as they cometo be organized, will have as their chief function dealing in insured mortgages.Thus, in time, these mortgages should tend to be liquid instruments. In times offinancial stress a building and loan association holding insured mortgages mightprefer to sell them rather than borrow from the Home Loan Banks on their goodmortgages as collateral. The building and loan associations will, however, find theinsurance of share accounts by the FSLIC of great value in competing for depositsor capital. Moreover, there will continue to be a demand for loans on home loanmortgage collateral even after the insured mortgage becomes a more widely heldasset.There appeared in the Federal Home Loan Board Review of August, 1938, dataon the distribution of new home mortgage loans made annually since 1925. Thesedata, which appear in the table below, are presented by. the Review as an estimateonly since factual statistics for banks and private lenders are not as complete orauthoritative as lending data for other institutions.TABLE 5ESTIMATED HoME MORTGAGE LOANS MADE DURING DESIGNATED YEARS(Totals in millions of dollars)Total by Commer-cial Bks., Life Ins.Cos., Mutual Say- Percentage of Percentage ofTotal ings Bks. and Say- Total by Finan- Total by Say-all ings and Loan Total by Savings cial Institutions ings and LoanYear Sources Ass'ns and Loan Ass'ns Listed in Col. 2 Associations(1) (2) (3) (4) (5)1925 ........ $4,727 $3,327 1,584 70.4 33.51926 ........ 5,248 3,648 1,751 69.5 33.41927 ........ 5,737 4,037 1,899 70.4 33.11928 ........ 5,784 4,84 1,938 72.3 33-51929 ........ 4,960 3,560 1,665 71.8 33.61930 ........ 3,444 2,544 1,170 73.9 ,34.o1931 ........ 2,093 1,593 81o 76.1 38.71932 ........ 978 778 467 79.6 47.81933 ........ 663 460 296 69.4 44.61934 ........ 2,694 478 327 17.7 12.1r935 ........ 1,794 772 431 43.0 24.01936 ........ 1,859 1,105 547 59.4 29"41937 ........ 2,024 1,397 689 69.0 34.0516 LAw AND CONTEMPORARY PROBLE SJudging from this table, the chief financial lenders on home mortgages are barelyholding their own in comparison with individual lenders, mortgage companies, trustdepartments, and miscellaneous lenders. Judging from Table 3, above, the operationsof the FHA have tended to strengthen the position of the commercial banks in thehome mortgage market. Without the appearance of the FHA commercial bankswould probably have tended to decline as holders of home mortgages on account oftheir experience with frozen loans during the depression. The building and loanassociations have also tended to regain their position since 1934.In summary, it may be said that the largest shift in home mortgage financingduring the depression was made when $3,ooooooooo of distressed home mortgageswere transferred to the HOLC in exchange for HOLC government guaranteedbonds. The other operations of the FHLBB have been designed to stimulate homebuilding through loans from its members, which are mainly building and loai asso-ciations, or federal savings and loan associations.The mortgage insurance work of the FHA is available to all approved mortgageesof the various types listed in the tables above. Its services, however, have beenespecially valuable to commercial banks because of their need of liquid assets. Itsoperations have to some extent saved the commercial banks as sources of home mort-gage loans since their unfavorable experience with real estate loans in the depressionwould otherwise have tended to make them a declining source of home mortgagefinds.The Home Loan Banks have tended to make the home mortgages of their mem-bers more liquid by making loans available to members on home mortgages ascollateral. The FHA, on the other hand, has made insured mortgages liquid in thehands of all mortgagees, which purchase them. The Federal National MortgageAssociation -is the first of a type of agency designed to give a market for insuredmortgages.

https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1927&amp;context=lcp

Shifts in the Sources of Funds for Home Financing, 1930–1937

Abstract

Similar works

Full text

Available Versions

bepress Legal Repository

Duke Law Scholarship Repository