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List of lending institutions making additional advances—Continued

State

Oklahoma:

City, Okla.
Oregon:

land, Oreg.
Pennsylvania:

Pa.

Greenville, S. C.
South Dakota:

Tenn.
Texas.

Utah.
Vermont:

Vt.
Virginia:

W. Va.

[blocks in formation]

Wisconsin:

North Shore Savings & Loan Association, Milwaukee, $10 to $15.

Wis.
Reliance Building & Loan, Milwaukee, Wis.

$6.
Washington:

Washington Mutual Savings Bank, Seattle, Wash No charge

Puget Sound Mutual Savings Bank, Seattle, Wash.. $10 to $15..
Wyoming: Cheyene ist Federal Savings & Loan, Cheyene, Refinances mortgages for additional
Wyo.

advances at charge of $35.

All mortgages so provide.
Yes; $6 charge.
All mortgages so provide.
Yes; $10 to $15 charge.

do.
do

Lending institutions operating on a national level who use the open-end mortgage: Prudential Life Insurance Company of America; National Life Insurance Company of Vermont New York Life Insurance Co.; Northwestern Mutual Life Insurance Co.

(From House & Home, July 1953) Modern mortgages : A monthly report on important developments in the modernization of mortgage credit, with particular emphasis on the expanding potential of the package mortgage, the open-end mortgage, and the expandable mortgage.

CAN FHA INSURE OPEN-END MORTGAGES? The majority of savings and loan associations, many big insurance companies, and more and more savings banks now use the open-end or additional-advance mortgage. VA insures mortgages with open-end provisions, but FHA is still a holdout. The National Association of Home Builders, the Mortgage Bankers Association, and the National Retail Lumber Dealers Association have endorsed the open end and urge FHA to insure this type of mortgage. In the previous political administration FHA cited several legal objections (below). They are answered by two top legal advisers :

FHA OBJECTIONS

1. Can FHA transfer to the lender the responsibility for increasing the principal amount it has insured in the first place? The National Housing Act requires FHA-insured mortgages to contain amortization provisions requiring the niortgagor to make periodic payments within his means to extinguish the debt at maturity.

2. FHA is required to collect from mortgagees annual insurance premiums on the outstanding contractual balance without taking into account prepayments or delinquent payments. Purpose is to permit FHA to bill by machine methods on the original schedule without regard to the outstanding balance. The purpose would be defeated if the original amortization schedule were subject to change without new findings and a new contract of insurance.

3. Additional accounting complications would be presented to FHA upon fore closures. Mortgagees are entitled to debentures in return for properties conveyed to FHA. This is set by statute as the "original principal obligations of the mortgage” unpaid at the date of commencement of foreclosure.

4. If a lender advances money on an open-end mortgage with no actual knowledge of an intervening lien, is the optional advance superior to the intervening lien? The principal difficulty that arises, even with conventional, uninsured loans, is the wide variations in State laws governing priority.

Herbert S. Colton, former assistant general counsel for FHA and now general counsel for NAHB, says:

"Legal questions are not primary. The real point: Is the open end so necessary or desirable as to require change in legal thinking, amendment of applicable statutes?

"Acceptance of new concepts in the rigid field of real property law is a slow process. Statutes, judicial interpretations, and legal opinion all change from time to time to conform to public opinion. A prime example is how public opinion demanded new mortgage financing after the real-estate collapse in the great depression. When FHA pioneered this, even FHA's constitutionality was questioned. But legal thinking quickly conformed to public thinking.

“The current intense interest in conservation and rehabilitation of residential property now points up the lack of a satisfactory legal instrument for facilitating that kind of work. The open end, properly used, offers a flexible legal form well adapted to this purpose.

"Acceptance of the open end would undoubtedly be accelerated if it were possible for FHA to recognize open-end provisions in mortgages insured by it.

"Neither of FHA's objections on collection of insurance premiums or on the matter of handling debentures is insurmountable. Except in degree, FHA's accounting problem would not seem to differ from that of National Life Insurance Co. of Vermont or the Dime Savings Bank of Brooklyn, 2 big lenders consistently in the forefront of progress in the last 20 years. The statutory language on debentures could by simple amendment be revised to include in the debentures issued after default the amount of any substantial optional advance made pursuant to a provision in the mortgage. Congress appears interested in rehabilitation, so such an amendment should not be difficult to obtain.

"Whether statutory revision should be sought or whether FHA would be justi. fied in undertaking the administrative burden involved depends upon its evaluation of the results to be obtained. This is not a legal but a policy matter."

Horace Russell, former general counsel for the Home Owners' Loan Corporation and now general counsel for the United States Savings and Loan League, was asked for an opinion by NRLDA. His answer to FHA's objections, in order:

“FHA can authorize open-end mortgages by amendments to its regulations and mortgage forms. The agency may authorize advances without prior approval up to the contractual amount. If the advance under the open end increases the mortgage beyond this amount, FHA should approve of it and get an additional premium.

"Since FHA charges insurance premiums on the contractual balance and without regard to prepayments, it ought not charge an additional premium for advances up to the contractual amount. Therefore its problem would be even smaller than that of the Dime Savings Bank which must make changes every time it makes an additional advance. The additional advance can be treated the same as the original advance ; therefore, there should be no necessity for an amendment to the National Housing Act. FHA should not be concerned with lien status because that rests entirely with the mortgagee.”

(Legal Bulletin, United States Saving
and

Loan League, September 1953)

The Flexible Mortgage Contract

HORACE RUSSELL, general counsel, and WILLIAM PRATHER, assistant counsel

United States Savings and Loan League

TH

HE MORTGAGE OF TODAY has come gage and a discussion of other flexible

a long way from the clay tablets features, including the privilege of of antiquity. Much of the progress in prepayment, grace periods, graduated mortgage lending has been of recent interest rates tailored to the risk date, and to the pioneers of the sav- from time to time, and the amortizaings and loan business must be given tion of principal over the life of the a good share of the credit. As a result loan. It is our purpose not only to list of imagination, practical planning the advantages of these features, but and testing in practice, the modern also to point out the pitfalls in some mortgage is streamlined, self-liquida- jurisdictions. Illustrative forms (to ting, flexible.

be adjusted to state law) incorpoThe purpose of this article is to rating the various features are set discuss the legal and practical aspects out as addenda hereto, together with of the flexible mortgage contract. The suggested language for appropriate package mortgage will be considered legislation where it is felt that such first, followed by the open-end mort- is needed.

THE PACKAGE MORTGAGE

*HE PACKAGE MORTGAGE has been is also avoided, as well as duplication

of loan administration charges. fact that many families use virtually The added advantages to the mortall their available funds in making gage lender include not only the betthe down payments on their homes ter credit position of the borrower, and have little or nothing left to buy but the expansion of the lending field the appliances and other improve by the capturing of business that forments they need immediately. The merly went to short-term lenders or principal advantage of the package installment sellers. mortgage is that it helps the home The package mortgage form differs buyer over a financial hurdle in the from the standard mortgage only in first two or three years of the loan. By that it expressly and specifically sets adding the cost of the improvements out the intention of the owner to make to the cost of the home and amortizing a part of the real property the heating the payment of both over the entire and air-conditioning equipment, the period of the mortgage, he is able to kitchen range, the refrigerator and buy the equipment he needs without frozen food locker, the dishwasher, obligating himself beyond his means the garbage disposal unit, the home in the first two or three years with a laundry and perhaps other items. parallel series of burdensome loan Thereupon, the mortgage becomes a payments. The high rate of interest lien upon the real property, including usually incident to a short-term loan such items as a part of it.

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