6 per cent, it would be unwise for a building and loan association to ask more than 7. In order to charge a higher actual rate, many different forms of "premium" have crept into use. These premiums are called by different names, but their purpose is the same. The building and loan statutes sometimes provide specifically that interest and premium are not to be considered usurious, which means that any rate agreed to between the association and the borrower could be collected in the courts. The sum demanded per week or month is of more importance to the average wage earner than the total amount to be paid over a long period of years. A few additional payments make no essential difference to him. The premium is probably destined to be merged into the regular interest charge, when our people are more familiar with the operation of the associations, but until they understand more about finance, there is small likelihood of the abandonment of the premium. "The present use of the premium is largely as a lever to obtain a higher total rate from the borrower in order to give a bonus to the member saving on "free shares." Sometimes it is used to take advantage of the excessive need of a prospective borrower. The latter use, however, is definitely becoming obsolete. It is possible to induce a borrower to make this additional payment on a loan because the association is crediting him with earnings upon the installment repayments. For example, when the dividend rate and the ostensible interest rate are both 6 per cent, the borrower may not realize that when a premium of $5 per month per thousand is added to the cost of his loan he is paying approximately 12 per cent interest. The credits of dividends on the installments appear to be large and the borrower who is unskilled in finance may be led to believe that he is paying much less than the real interest rate.

In Table 6, mentioned above, the figures prepared in December, 1931, by the United States Department of Commerce for the President's conference on home building and home ownership show a range in premium charges by 347 typical building and loan associations of less than 1 per cent per year to over 10 per cent per year. The median average is 5 per cent per year, but it seems fairer to give the arithmetical or mean average, which is 2.72 per cent per year (over and above the ostensible interest rate).

It will be noted that in a mutual organization the premiums, fines, fees, and forfeitures are returned to the depositors, stockholders, or shareholders, as the case may be, but it must be remembered that only one-sixth of the building and loan association "members" are borrowers, the other five-sixths being nonborrowers who are purchasing "free" shares of stock; thus five-sixths of the earnings go to nonborrowers, while only one-sixth is returned to borrowing members.

Also it must be remembered that these actual interest figures are based on transactions to be completed in the usual way, i. e., the borrower will complete his payments on the stock and the stock will cancel his loan. In case of default, or when the loan is paid before maturity, the membership and loan fees, and the fines and forfeitures of 25 per cent to 50 per cent of the earnings on the stock, will result in a much higher actual cost than is shown in this table. (Clark and Chase, pp. 259–260.)

Regarding fines, fees, and forfeitures, the textbook says:

Fines are gradually disappearing. Fees of all kinds continue in use as a source of expense funds, and penalties, such as withholding a part of the earnings on shares, in case of early withdrawal, constitute an important part of the income.

The only reason forfeitures are continued to-day is that in 12 States the law permits their use as an additional source of revenue. In some States forfeitures are used surreptitiously.

With frankness that lends added weight to their statements, the authors go on to say:

The organizers of an association are interested first of all in securing a sufficient dividend rate upon their own shares to make the investment profitable to themselves and to other investors. Therefore, they attempt to fix an interest rate as high as "the traffic will bear," knowing that the borrower can see his way out of debt through the amortization principle in spite of the excessive rate.

Unscrupulous directors have at times taken advantage of borrowers by keeping the monthly payment low, while requiring an excessive number of payments. thus accomplishing the same thing as charging a higher rate in the first place. Charging too high a rate in the past has obliged some associations to liquidate their assets and go out of business, because the high rate was boycotted by borrowers and the money of the savings members could not be invested according to plan.

The average building and loan secretary has not taken the trouble to sit down with the borrower and figure out the total cost of a loan. It has been the custom to tell the borrower the rate of interest and to refer to the premium and such other costs as may be imposed as unimportant details. The average borrower from a building and loan association is making the only big loan of his life, and misleading or incomplete statements may make it possible to exact an exorbitant total price for the loan.

And their courage in putting this in their own volume as a guide and help to their members, it seems to me ought to be commended, no matter what side of the fence we are on in this discussion.

The authors continue:

Many of the States have passed special acts which permit the associations to charge more than either the legal or the ordinary contract rate in the form of premiums and interest. These special laws directly exempt the premium of the building and loan association from attack as usury.

The building and loan associations are not the sole makers of longterm amortized loans to home owners. From a study of the December, 1931, figures of the Department of Commerce, in comparison with the above tables, it appears that the 12 and 15 year insurance company mortgages are made at lower rates and for longer terms than the prevailing building and loan mortgages.

The Department of Commerce survey of 1931, based on replies from 84 life-insurance companies, shows the net returns on home mortgages, listed in table 2, those figures being lower in every case than the average net return on all city mortgages.

If you will turn to table 2 you will have it before you. It shows from 1926 to 1930 an average net return to the insurance companies on home mortgages of 5.738 to 5.792 per cent, with a range downward between these years.

66

Where an interest differential" allowance is made to the correspondent to cover his services, the gross interest rate to the borrower will be one-half of 1 per cent per annum higher than the net rate to the insurance company shown in table 2, or in a few cases, 1 per cent per annum higher. It was found by the Department of Commerce that the prevailing practice where the correspondent received an interest allowance, was to charge no commission to the borrower. In a survey of mortgage conditions on the Pacific coast conducted by the Department of Commerce last summer, the question was asked "What arrangements do you have for compensating your loan correspondent?" There were 64 replies which are classified in Table 3.

Twenty-six replied that no commission was charged; 13 replied correspondent retains one-half of 1 per cent interest; 15 replied commission paid the correspondent by borrower varies from 1 per cent to 5 per cent; 7 replied, mortgages purchased from banks and so forth, for commissions ranging from 1 to 3 per cent; and 3 replied, "No commission charged on loans, commission on life insurance suffices."

In the same survey a study was made of interest rates by all first mortgage lenders, including banks, mortgage bankers, and building and loan associations. The results will be found in Table 4, and we find 3 reports of 5 per cent, 13 reports of 512 per cent, 35 reports of 6 per cent, 23 reports of 612 per cent, and 60 reports of 7 per cent. Then, under building and loan associations, we find 2 reports of 7.2 per cent, 4 reports of 7.8 per cent, 16 reports of 8 per cent, 18 reports of 8.4 per cent, and 3 reports of 8 to 10 per cent, all on the Pacific coast in this survey made by the Department of Commerce

last summer.

Commission rates by banks and mortgage bankers obtained in the same survey of the Pacific coast are itemized in Table 5, and that shows under "completed buildings" on which no commission was charged, 27, probably where they had compensation from the interest differential as we have explained; 15 of 1 per cent, 31 of 2 per cent, 5 cases of 212 per cent, and 39 cases of 3 per cent; 3 per cent being the highest commission reported in that survey on the Pacific coast last summer. However, under "construction loans" we find 12 where there was no commission charged, 1 where there was one-half of 1 per cent commission, 11 where there was 1 per cent commission, 18 where there was 2 per cent commission, 2 where there was 212 per cent commission, 41 where there was 3 per cent commission, 5 where there was 312 per cent commission, 2 where there was 4 per cent commission, and 2 where there was 5 per cent commission, the additional fee probably being caused by the additional detail connected with construction loans, disbursing the funds, inspection during construction, and other services that you all know.

In Table 7 we have a comparison of average costs of mortgages itemized by 1,242 building and loan associations and by 884 banks and mortgage bankers. The average premium of 2.72 per cent per year charged by building and loan associations was computed by the writer from the Department of Commerce figures in Table 6. It is based on averages for the entire country, for we have found in Table 1 that there is a wide range in rates between the Eastern and the Western States. This average net premium of 22.89 per cent on a 10.1 year loan, may be compared to the average commission charges by banks and mortgage bankers established by the Department of Commerce as follows:

1

A comparison of these national averages shows, for a 10.1 year $3,000 loan:

2 Building and loan excess of 0.47 per cent per annum equals 4.74 per cent, or $142.20 on a $3,000 loan for 10.1 years.

NET RESULTS

As shown above, the Department of Commerce national averages reveal that on a $3,000 loan for 10.1 years, the building and loan charges exceed those of the banks and mortgage bankers by $693.91, or 23.13 per cent of the loan, without including

(a) Building and loan fines, fees, forfeitures, and penalties, which vary with individual cases and increase the building and loan costs accordingly. (Clark & Chase, pp. 125–161.)

(b) Building and loan cases where no stock earnings are credited on the borrower's monthly payments. (Clark & Chase, p. 159.) (c) Loss of interest by building and loan borrowers on dues paid weekly or monthly, but credited quarterly or semiannually.

It is only fair to remind you that these Department of Commerce figures represent national averages. Individual cases will produce a wide variation. Commissions to banks and mortgage bankers range from nothing to 1 per cent per annum, while building and loan premiums vary from less than 1 per cent per annum to over 10 per cent per annum. In associations where the percentage of borrowing members is greater or less than one-sixth, the prorata dividends to such borrowers will be increased or decreased accordingly.

An impression seems to prevail that building and loan associations make a regular practice of lending up to 80 per cent of the value of the property. As a matter of fact, in actual practice, many of the better-managed associations seldom lend more than 60 per cent. The percentages they do lend are more important to the prospective home owner, and in the consideration of this bill, than the percentages they can lend under the law.

Please see the report on foreclosures by the President's conference on home building and home ownership, on page 587 of part 3 of the Senate hearings. It shows how misleading, gross foreclosure figures can be. Much responsibility for the present real-estate conditions must be borne by those who spread these totals without explanation.

The addition of more tax-exempt securities to an already crowded investment market, would materially reduce Federal income. Due to the sliding scale of tax rates on incomes of differing sizes, it is impossible to determine the exact extent to which the Treasury would be deprived of revenue by reason of the tax-exemption feature of the bonds. However, under the revenue act now being considered by Congress, the rate of tax on incomes of the lowest class is 2 per cent. If a billion dollars of these bonds, bearing interest at, say, 4 per cent, were sold to persons whose incomes fall in this class, the total interest on the bonds would amount to $40,000,000. And the tax loss would be $800,000 annually. It is certain that a large part, possibly the greater part, of the bonds, would fall into the hands of persons of large income seeking to avoid the heavy surtax payments contained in the new tax bill. In such case, the annual loss would be many times $800,000. Should the total authorized amount of these bonds, $1,800,000,000, be issued, the annual tax loss would be increased accordingly. Ultimately it is intended that the 12 banks shall be owned solely by private enterprise. It becomes clear, therefore, that the sponsors of the plan intend the tax-exemption feature of the bonds as a permanent annual subsidy to those ultimately owning the system.

It is, of course, true that a considerable period of time will elapse before the Government could be retired from its partnership interest in the banks. It is proposed, however, that nothing shall be paid the Government for the use of its funds during the time it is a stockholder. Regarding the contention that the cost of this system to the Government would be negligible, it should be noted that the most recent financing of the Treasury cost over 3 per cent. Some funds are being borrowed at 2 per cent, so for the sake of conservatism we will consider the funds the Government advances will be worth 2 per cent. Should the Government be required to invest $100,000,000 in the system, it would cost the taxpayers at least $2,000,000 annually. Should the entire $150,000,000 be required, as seems more likely, the cost would be $3,000,000 a year. To this figure and that reflecting the minimum loss of tax revenue should be added at least $200,000 for operating deficit. Without including the original appropriation, the minimum total is $4,000,000 a year, a substantial subsidy for Congress to allow any group in the mortgage finance business.

Regarding new construction

1. A recent survey, which appears on page 503 of part 3 of the Senate Hearings, covers 272 reports from 116 cities in 37 States. Of these, 208 or 75 per cent report an oversupply of homes; 64 or 25 per cent reveal a normal supply; and one company reported a shortage.

2. In the recent survey by the Department of Commerce, over 50 per cent of the replies showed no need of new construction or remodeling.

3. The Department of Commerce estimates that 2,000,000 new homes could be built during the next five years, with the partial assistance of the proposed bill. We maintain such a building program would be disastrous.