$1,000 or the amount the principal had been reduced, whichever is the lesser, without a title search. The statute recites that:

All persons who acquire any rights in or liens upon the mortgaged real estate subsequent to the recording of any association's mortgage should hold such rights and liens up to the additional loan.

Not to be outdone, the savings banks of New Jersey had the Savings Bank Act amended to provide advances up to $2,500. The ferment carried over into other States.

The Maryland statute was amended for all institutions, provided first lien statutes on advances for repairs, alterations, or improvements up to the original amount of the mortgage or $500, whichever is the

lesser.

In Massachusetts and New Hampshire, the amended statutes do not favor any particular class of mortgagor, but give or attempt to give first-lien status for advances up to the original amount of the mortgage.

Actually, while the statutes passed to date do give partial relief to the homeowner, the net effect has been to hamper rather than help the program. Restricting advances to $500 or $1,000 defeats the real value of an open-end mortgage program. Obviously, these advances are too limited to help a homeowner who wants to undertake an extensive modernization program.

Restricting advances to the original amount of the mortgage will eliminate many of the 8 million families who bought houses after the

Their mortgages, in most cases, have not been paid down enough. Horace Russell, the outstanding authority on the open-end mortgage, believes that it would probably have been better to depend on the common law, which in nearly all States permits advances beyond the original amount of the mortgage, providing a maximum limit is spelled out in the mortgage. The purpose of stating a specific amount: To put the world on notice.

What a boon this would be to the millions of people who bought 2-bedroom houses in the years after the war, and whose financial status has improved enough to afford the extra monthly payment a $1,000 to $3,000 home modernization would entail!

What, then, is the answer to reducing the cost of making additional advances in high-cost areas? Many attorneys, including Horace Russell, believe that in the majority of the States a title search isn't necessary. He says that in 31 States of the Union-those which by mortgage law or court decision follow the majority or "California rule"no title search is necessary. Reason: The courts in those jurisdictions have ruled that an optional advance is superior to an intervening claim if the mortgagee had no actual notice or knowledge of the intervening lien. The only way for the priority of optional future advances to succumb to intervening liens is for the intervening lienor to prove that the mortgagee has actual notice or knowledge of the intervening lien at the time the advance was made. See item 3 in references, page 84, Legal Bulletin.

Twelve States and the District of Columbia, according to Russell, probably follow the majority rule. However, because decisions are few, inconclusive, or incomplete in these States, and many times based on poorly drafted contracts, many prudent lenders will require a title search in the absence of a decision both clearly defined and directly

in point, although an affidavit is usually relied upon where the advances are relatively small amounts. See item 3 in references, pages 84-85, Legal Bulletin.

Four States-Illinois, Michigan, Ohio, and Pennsylvania-follow the minority or "Michigan rule" that the lien of an optional advance is inferior to subsequent encumbrances, even though it is made without actual notice of the intervening interest. Therefore, a title search is unavoidable. See item 3 in references, page 85, Legal Bulletin. Horace Russell contends that Texas follows the majority rule. He claims the law is well settled that property capable of being mortgaged may be made the subject of a valid open-end mortgage, and that optional future advances provided for therein have full priority over subsequent liens, whether such advances are made before or after attachments of the junior lien. However, he points out that a validly established homestead is incapable of being mortgaged in Texas, except for purchase money, taxes, work, and material spent for improvement, and for improvement only when a lien consented to by a wife is given in the same manner as when selling or conveying a homestead. It would appear that an open-end form could be used for materials and work, but that in every instance when money is disbursed the association must purchase the vendor's lien, tax lien, or mechanic's lien, as the case may be, and advance no amount in excess of that actually used for proper purposes. See item 3 in references, pages 105-106, Legal Bulletin.

Now, while a great number of attorneys for local lending institutions in the 31 States subscribe to Horace Russell's view that a title search is not necessary, they do require that the borrower sign an affidavit, swearing that there are no liens against the property and that he is still the owner. Other attorneys-and these include some who like to wear both belts and suspenders-still insist on a title search. This is especially true if the client is an out-of-State institutional investor who cannot hope to know each homeowner personally. Here is their reasoning:

1. A person who was the original mortgagor but who has since sold the property might fraudulently seek an advance.

2. An intervening lienor may have notified an employee of a lending institution in accordance with the law. But this employee may have failed to pass the information along to the mortgage officer, or the registered letter may have been misplaced.

So in the absence of court-tested statute, even though the common law is favorable, some lenders are going to insist on a search.

For these institutions, the problem then of the cost of a search is still with us. However, there are some very hopeful signs on the horizon. As the open-end mortgage increases in popularity, more and more title companies are establishing very reasonable rate schedules for the search and the insurance. And the title companies are discovering that it is profitable business.

The pioneer in this movement is the Los Angeles Title & Trust Co., one of the largest of the west coast companies. In 1925 it established special rates to make possible inexpensive financing for home modernization. It charges $10 for a $1,000 advance-this includes search and insurance $12.40 for a $2,000 advance, and $13.60 for a $3,000 advance.

The service is so popular that nearly all of the lenders in southern California use it even though the California law is very favorable. Chicago Title & Trust Co. is another example of an enlightened institution. It literally enjoys a monopoly in the Chicago metropolitan area, because the city of Chicago's realty records were destroyed in the Chicago fire, and the Chicago Title & Trust's vaults were fireproof. Yet this public-spirited company established a special schedule of its fees for open-end mortgage advances: $10 for the first $1,000 and $15 for $2,500.

The City Title Insurance Co. of New York, another pioneer in this movement, will insure advances for any lender in the United States for $5 per $1,000, a minimum charge of $10. This company, working with the attorneys of Dime Savings Bank of Brooklyn, have even developed an insurable modification agreement that permits Dime Savings to open-end all of its $400 million portfolio of existing loans, even though they contain no open-end provision. See item 4 in references, excerpt from House and Home article, December 1952 issue.

Time and competition, in my opinion, will take care of most situations. The need for legislation at the State level will, in the main, disappear. Frankly, I should hate to see title companies, who serve a very necessary economic function in our economy, deprived of legitimate fees.

I suspect we will have to correct some of the hastily conceived, faulty, and too restrictive statutes. We will have to clarify the law in a few States such as Wyoming, Delaware, and Massachusetts. In Texas, either the homestead law will have to be changed or the practice of financing modernization through the purchase of vendor's, tax, or mechanic's liens, and a consolidation with the original mortgage will have to be encouraged through a reduction in the title insurance schedule now established by State law in many of the metropolitan areas of Texas. In the smaller communities of Texas, where the rates are not fixed by law, lenders and homeowners are accomplishing the same goal as open-ending does.

Progress of the program: To begin with, the practice of making advances was confined to savings and loan institutions in rural and semirural communities. Very frequently the only assets a family possessed were the equity of its home and land. When Johnny went off to college, the homeowner got an advance to take care of his tuition. When mother had a new baby, the obstetrical bill was paid in the same way. When a successful crop came in, and this may have been 3 or 4 years later, the loan was paid down because the homeowner treasured his home. It served as his piggy bank. The practice grew because losses through the practice were almost nonexistent; the benefits to both borrower and lender obvious.

Today, not only savings and loan associations but also life-insurance companies and savings banks are enthusiastic supporters of the program. This is significant because it is considerably less profitable for an out-of-State institution to make advances, especially if the advance asked for is small. The cost of the paperwork alone would eat up the interest on a $500 advance. Prudential National Life of Vermont, and Northwestern Mutual are writing the open-end provision into all their mortgages. And just a week or so ago, another of the big four-New York Life-joined them.

In announcing its move, here is what Vice President Manning Brown had to say:

It could be a great advantage to the entire economy, especially in periods of decline in new construction. It would help to take up the slack in a recession and may be a useful instrument in preventing neighborhood declay.

He goes on to say:

In addition to providing a greater outlet for investment funds, which also means a larger servicing portfolio for the correspondent, it can reduce relative servicing and overhead costs each time an outstanding loan balance is raised.

It tends to protect the lender's seasoned loans against refinancing with some other lender. It encourages the borrower to keep his original loan or to apply to the first lender when he seeks any new refinancing.

When readvances are spent for home improvements or repairs, they improve the security behind the lender's entire outstanding mortgage balance on the property.

And, adds L. Douglas Meredith, executive vice president of National Life of Vermont:

And the borrower has not strapped himself with a high cost short-term loan to cover the cost of needed repairs or improvements. It also enables the homeowner to buy both material and equipment that he could not afford on shortterm credit. Inferior materials would either run him into excessive maintenance costs or make him let his property deteriorate, either of which is bad for lenders.

Incidentally, New York Life will probably allow maximum reborrowing in excess of the original amount of the mortgage except in States where legal technicalities make it inadvisable.

Last year $500 million worth of additional advances were made and the United States Savings & Loan League predicts that savings and loan associations of the United States will do a half billion dollars' worth in 1954.

And the surface has just barely been scratched, judging from a recent Federal Reserve Board survey. It shows that as of January 1949, one-half of the 9 million families who own mortgaged homes have equities of 50 percent or more in their properties. The equities claimed by the 9 million families amount to $48,600 million.

And if we are to take into account all possible methods of longterm financing of homes now free and clear, as well as advancing under old mortgages or recasting them, the credit potential is staggering. For according to this same Federal Reserve Board survey, the 20 million nonfarm families who own homes, claim equities totaling $148 billion-and 11 million of the 20 million own their homes free and clear.

Now, while we are not advocating that every homeowner should rush out and mortgage his debt-free home, it is comforting to know that low-income homeowners-and remember they represent 56 percent of United States families-now have the means of financing needed modernization in good times or bad on terms that won't strap them. The homeowner who can afford it, would be well advised to pay cash or use short-term credit.

Debt-free homeownership is a fine thing. It is a tribute to the thrift and good sense of our people that more than half of them own their homes free and clear. However, in many cases the home investment represents the owner's entire savings and assets. And if the owner chooses to make liquid part of this investment to keep up his home through the use of the long-term mortgage rather than borrowing on

high cost short-term credit, I don't believe this is an unwise practice. Of course he could choose not to maintain his home but the net result would be a depletion of his equity and also the equity of the man next door.

To us the chief importance of the long-term mortgage credit is the opportunity it holds for recognition of the mortgage as a social instrument of prime importance. Every lender knows that one chief reason for foreclosure is the homeowner's tendency to overload himself with installment credit. The use of the mortgage as a basic credit instrument for home modernization would establish the local mortgage lender as a permanent credit counselor to the homeowner of limited

means.

An official of one of the west coast's leading financial institutions that specializes in short-term credit told me this story that highlights the need of separating the sales from the lending function: A mutual friend of ours not too long ago put up a thousand very attractive, inexpensive homes for minority steelworkers near San Francisco. For the first time in their lives the Negro occupants of these homes became eligible for credit because they were "men of property." Within a few days after these poor folks moved in, a hoard of dynamiters came knocking on their doors.

"How would you like some of this synthetic-brick siding put on over that ugly redwood siding," or "How would you like this barbecue pit? Just sign this title I form and we will take care of the rest."

They did. Before the year was out a good number of these innocents were over their heads in debt. Nor did the short-term credit outfits who made these unnecessary title I loans even bother to check with each other to see if the homeowners were overextended. They were protected against loss up to 10 percent.

As a result a number of these unfortunate people contracted to pay monthly installments, including the mortgage payments, that exceeded their incomes. And you can guess what happened under the circumstances.

If the homeowner had gone to his mortgage lender, the lender would have talked him out of dealing with disreputable fly-by-night operators, and out of making a lot of useless expenditures. Or, if modernization was needed, the lender would have helped him with an additional advance.

If credit is understood in its fullest importance to our whole economic system, there would seem no safer or more intelligent way to employ it than to relate it to the prime security owned by the majority of United States families: a house and land.

In conclusion, I hope that you will not only see fit to give FHA authority to insure additional advances but will consider liberalizing the provisions of the Servicemen's Readjustment Act relative to such supplemental lending for purposes of repair or improvement of veterans' homes.

Bert King points out:

As the law now provides, the Veterans' Administration cannot extend guaranty coverage comparable to the proposed FHA program without a change in the existing statute since the $7,500 entitlement currently available to veterans under section 501 (b) of the act is restricted to loans for the purchase or construction of residential property to be occupied by the veteran as his home. Consequently,