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toward the goal of providing every American family with a decent home.
There is still a big job to be done but it is not a staggering one. For assuming the continuance of the same rate of progress we have had, the goal which heretofore has never been reached in any country of the world is within our grasp. The provisions of the pending legislation that the national chamber is endorsing should greatly help to speed up and make sure the accomplishment of this goal. The question before you gentlemen is which methods will prove quickest and most effective, and which ones will contribute most to the stability of our American economy. The continued addition of a million or more privately built and financed new houses a year combined with a vigorous program of upgrading the quality of the existing housing and removing housing that no longer can be economically maintained in good condition is the best method of doing this job. Any other method can have no more than a token effect at best.
Mr. Chairman, I would be very glad to answer questions, if I can. The CHAIRMAN. Are there questions?
Mr. PATMAN. Mr. Chairman.
The CHAIRMAN. Mr. Patman.
Mr. PATMAN. This flexible interest rate, you referred, I presume, to the section that fixes 212 percent as a margin between the Government long-term yield and the mortgage rate?
Mr. MASON. That is correct, Mr. Patman.
Mr. PATMAN. Hasn't 112 percent been customary in the past? Hasn't it been almost a traditional policy that 12 percent is sufficient, Mr. Mason?
Mr. MASON. Well, the figures prove, and our investigations prove, that 111⁄2 was not adequate.
Mr. PATMAN. Well, that is what we have had in the past, isn't it? Mr. MASON. I cannot answer that part of the question. I can just say that 12 percent would not have been adequate.
Mr. PATMAN. Well, 12 percent has been used in the past, and this is 22. That is an increase of 1 percent, isn't it?
Mr. MASON. In the past
Mr. PATMAN. Obviously it is an increase of 1 percent.
Mr. MASON. Mr. Patman, in the past we have had a fixed interest rate, rather than a flexible one. We are asking for a flexible one now. Mr. PATMAN. Well, you are asking for 22 percent above the longterm bond yield.
Mr. MASON. I am sorry, we are not asking for 212 percent. We are putting a limit of 22 percent on because we believe that when the Government insures a mortgage that it cannot have an entirely free rate, that it has to have a stopping place somewhere.
Mr. PATMAN. You do not expect it to be less than 21/2, do you?
Mr. MASON. Under present market conditions, I certainly would expect it to be less than 212 percent.
Mr. PATMAN. Well, 212 percent seems to me to be rather high, especially in view of the fact that 12 percent has been customary in the past.
I figured up the other day, on a $9,600 home mortgage, with a borrower who pays one-half of one percent additional on a 25-year mort
gage, he would be out about $814 over the entire period of time. He could have used that money for an extra bedroom. Is that in accord with your figures?
Mr. MASON. I don't have those figures in front of me, of course.
Mr. PATMAN. I thought maybe you had a table that would show it. Mr. MASON. No.
Mr. PATMAN. If that is correct, and I believe it is approximately correct, a 1 percent increase would be $1,626 more than a borrower would have to pay on a $9,600 mortgage over a period of 25 years. That is really a substantial sum. The way I view it, when you take that $1,628 away from him in interest, you are preventing it from going into the bloodstream of the Nation's commerce and to be used to purchase goods and commodities and necessities of life, and thus expand our economy and maintain full employment.
Mr. MASON. Well, it is our belief and our observation, Mr. Patman, that the necessity is to have funds available so that people can borrow to build houses, and that the fixing of an interest rate at any figure which means that you do not get money is an illusory thing, that you really don't work to the benefit of the borrower when you do that.
What happens is then you have subterfuges and other steps taken in order to get those funds.
Mr. PATMAN. What is your concern, Mr. Mason?
Mr. MASON. My company?
Mr. PATMAN. Yes, sir.
Mr. MASON. I work for the William P. Proctor Co. of North Chelmsford, Mass. They are in the retail lumber business.
Mr. PATMAN. And I guess you do a lot of this title I lending? I mean, you service a lot of those title I loans, $2,500 modernization loans?
Mr. MASON. Yes, sir.
Mr. PATMAN. That is rather popular, isn't it?
Mr. MASON. It is an excellent thing to make possible for your people the making of repairs to keep their property up to date.
Mr. PATMAN. It occurs to me that that interest rate is rather high, 9.7 percent, for what is tantamount to a riskless loan. The banks carry that paper principally, do they not, Mr. Mason?
Mr. MASON. Yes, sir; I think they do.
Mr. PATMAN. Don't you think that is a pretty high interest rate, 9.7 percent?
Mr. MASON. Again, if it were too high other forces would come in to relieve this situation. We are advocating also, as you observed here, the use of the open-end mortgage, which would make lower priced money available.
Mr. PATMAN. I am going to ask you about that next. But this 9.7 percent seems to me pretty high, especially when the banks create the money on their books. You know the banks are the biggest manufacturers in this country. They manufacture paper money. They create their own money, and when they can create money on the basis of several dollars to one it occurs to me that 9.7 percent on a riskless loan is a rather high interest rate.
Mr. MASON. Just offhand I couldn't quote you the exact figures, but certainly the automobile loans, there is a great deal more money involved than in these title loans.
Mr. PATMAN. And these shotgun loan offices have even higher rates. On the open-end mortgages, Mr. Mason, how many States will permit the open-end mortgage provision to be effective?
Mr. MASON. Well, certainly, your State does not. Most of the others do.
Mr. PATMAN. Do you have a list of the States that permit them?
Mr. PATMAN. Well, it occurs to me that that is a rather important question. Are you on the Advisory Committee?
Mr. MASON. Yes, sir; I was on the President's Advisory Committee. Mr. PATMAN. Did the Advisory Committee make a report indicating how effective this would be, the States where it would apply and the States where it would not apply?
Mr. MASON. Yes, sir.
Mr. PATMAN. Where is that information?
Mr. MASON. I do not have it here with me, certainly.
Mr. PATMAN. Mr. Chairman, do you know where it could be found? Does Mr. Hallahan, the clerk, have it?
Mr. HALLAHAN. I think I can get a compilation of it.
Mr. PATMAN. I would like it in the record at this point.
The CHAIRMAN. It may be obtained and, without objection, may be inserted at this point.
(The following excerpt from the September 1953 Legal Bulletin published by the United States Savings and Loan League contains a résumé by Horace Russell and William Crather of the open-end mortgage and the court decisions or statutory provisions applicable to their operation in each of the States in the United States.)
THE OPEN-END MORTGAGE
An open-end mortgage is a contract between the lender and the borrower providing that future borrowings after the original loan may be secured by the original mortgage. It means that once a homeowner has qualified for a mortgage on his property, he is enabled thereafter within varying limitations in the different jurisdictions to increase the amount of his mortgage to cover the cost of modernization or needed improvements or for other purposes.
The open-end form offers advantages material to both parties. To the borrower, it allows modernization on a long-term credit basis, easy payments with no money down, and an economy in or elimination of refinancing costs. To the lender, it offers a large source of additional investments and an opportunity to give additional service to the public; it tends to prevent an overextension of credit on the part of the borrower, with consequent arrears and foreclosures. The economy and ease of additional financing often provide a strong incentive for the borrower to keep his loan with the original lender instead of going elsewhere, thus enabling the lender to retain seasoned loans with an enhanced value to the original security.
LIEN STATUS OF ADDITONAL ADVANCES
There are three major kinds of future advances: (1) where the lender is, by the terms of the mortgage, obligated to make certain advances; (2) where the lender has the right to make certain advances to protect the security, independently of the will of the mortgagor; and (3) where future advances may or may not be made, depending on the future agreement of the parties. We will not deal extensively with the first, inasmuch as the law appears to be uniform throughout the country: where the lender is contractually obligated to make certain advances, the advances if properly made take precedence over any lien
or incumbrance arising after the date of recording of the mortgage," and usually even where the prior mortgagee has actual notice of the intervening incumbrance. An example is the construction loan, where in many instances the lender is obligated to disburse funds as the building progresses. In holding that an obligatory advance is a part of the original debt and that the lien relates back to the date the "entire debt" was created, the courts reason that it would be manifestly unsound to hold that even actual notice of a subsequent lien would deprive the mortgagee of his lien for advances which he is compelled to make. Neither will we consider extensively the second type of advance, where, by the terms of the mortgage, the mortgagee reserves the right to make further advances or expenditures which are necessary to protect the security or the priority of the mortgage, whether or not the borrower shall request or desire the same. The situation could arise, for example, in a construction loan where the mortgagor has abandoned the work, the mortgagee having the right to protect his interests by making additional expenditures to complete the structure and to have a lien therefor which is superior to intervening incumbrances. Payment of delinquent taxes and assessments and the making of essential repairs often fall within such cases." Although the matter has been little litigated, it is clear that in such cases there is a contractual interest which is as entitled to protection as an option to purchase. When such an interest is put on record there is little reason to believe that a subsequent incumbrancer could impair it, irrespective of the mortgagee's notice thereof."
24 "Where a mortgagee is obligated, by contract with the mortgagor, to advance funds to be secured by the mortgage, such mortgage will be a valid lien from the time of its recording, as against all subsequent incumbrances, even though the mortgage money is paid to the mortgagor after such subsequent incumbrances have attached to the mortgaged land. This holds true even though the mortgagee is actually aware of the existence of the subsequent incumbrances at the time he pays out the mortgage money. Land Title & Trust Co. v. Schoemaker, 257 Pa. 213, 101 A 335. Because of the mortgagee's obligation to pay out the money, the mortgage debt is regarded as being in existence from the very beginning." Kratovil, Real Estate Law, Sec. 332.
25 "A mortgage, duly recorded, given for definite future advances which the mortgagee is obligated to make, is entitled to priority for the full amount of such advances over a subsequent mortgage, recorded after the former one, though prior to the making of such future advances." Connecticut General Life Insurance Co., 101 NE (2d), 408 (Ohio 1950), quoting Kuhn v. Southern Ohio Loan and Trust Co., 101 Ohio St. 34, 126 NE 820. In Schaeppi v. Glade, 195 Ill. 62, the court said, ". where the mortgagee is bound to make the advances, the lien relates back to the date of the mortgage recordation, and is superior to any subsequent lien or conveyance." Other cases upholding the priority of "obligatory" future advances, even where the mortgagor has actual notice: Peaslee v. Evans, 82 N.H. 313, 133 A 448; Brinkmeyer v. Browneller, et al., 55 Ind. 487; Guaranteed Title & Trust Co. v. Thompson, 93 Fla. 983; Chartz v. Cardelli, 52 Nev. 1, 279 P 761; Omaha Coal, Coke & Lime Co. v. Suess, 74 NW 620, 54 Neb. 379; Gerrity v. Warham Bank, 202 Mass. 214: Boise Payette Lumber Co. v. Winward, 47 Idaho 485, 276 P 971; Antrim Lumber Co. v. Claremore Federal Savings and Loan Association, (Okla. 1951), 230 P (2d) 274 (LEGAL BULLETIN, May, 1953); Cedar v. Roche Fruit Co., 16 Wash. (2d) 652, 134 P (2d) 437 (1943); Elmendorf-Anthony Co. v. Dunn, 10 Wash. (2d) 29, 116 P (2d) 253, 138 ALR 558; Hance Hardware Co. v. Denbigh Hall, Inc., 17 Del. Ch. 234, 152 A 130; Land Title & Trust Co. v. Schoemaker, 257 Pa. 213, 101 A 335; Anglo-American Savings and Loan Association v. Campbell, 13 App. D.C. 581; and other cases listed below in table of approximate state positions.
26 In many instances provision for such advances has been made by statute. See, for example, Sec. 14 (3) Colorado B&L Act. "An association may pay taxes, special assessments, insurance premiums, repairs and other similar charges for the protection of its real estate loans. All such payments may be added to the unpaid balance of the loan and
shall be equally secured by the first lien on the property."
See also Sec. 45-54, S.C. Code, where the law uses the words "[Such advances] shall be secured by the mortgage and have the same rank and priority as the principal debt secured thereby
27 One of the most excellently reasoned cases on this subject is Cedar v. Roche Fruit Co., 16 Wash. (2d) 663, 134 P (2d) 437 (1943): Whether advances made under a mortgage are obligatory or optional usually depends upon whether or not the mortgagee is contractually bound to make them; however, advances are considered obligatory when the mortgagee is obliged to make them for his own security. "We believe the advances made .. can be said to have been obligatory in the sense that they were necessary to protect the previous loans and advances made." Court held that even actual notice of intervening liens would not jeopardize the priority of later advances. See Lidster v. Poole, 122 Ill. App. 227.
See also 1, Jones on Chattel Mortgages, Sec. 97: "Advances made by a mortgagee after he has actual notice that others have acquired rights in the property will be postponed to the rights acquired by such other persons, unless the mortgagee be under a binding contract to make the advances, or it be essential to his own security to complete the advances contemplated by the mortgage." (Italics ours.)
The decisions on their facts covered herein contain little at variance with this view," although on occasion the courts have mistakenly applied to this type of advance the rules governing optional advances rather than the more appropriate rules governing obligatory advances."
It is with the third or optional future advance that we are primarily concerned, where the mortgage contains a provision that the mortgage shall stand as security for such sums as the mortgagor shall thereafter desire to borrow and the mortgagee shall be willing to lend.
OPTIONAL FUTURE ADVANCES
Under common law, it is clear that if first mortgages are properly drafted to secure original advances and if they properly describe optional future advances up to a limit stated in the mortgage, such advances may be made safely by the lender and remain secured as a first lien until the mortgage is cancelled. It is sufficient that the mortgage clearly show a contract between the parties that the mortgage is to stand as security for both an original debt and such additional indebtedness as may arise from future dealings between the parties. Provided such mortgages are properly recorded, they are notice to the world of contractual obligations and agreements according to the stated terms, and if a subsequent purchaser or incumbrancer fails to take notice, he is not entitled to protection. This would be the almost universal law today, were it not that several states have dealt with the matter by statute with varying degrees of effectiveness.30 In an effort to form a general rule applicable in all state jurisdictions, it may be said that a mortgage which by its own terms is given to secure optional future advances is valid everywhere as between the parties and, duly recorded, will prevail against subsequent purchasers and incumbrancers if the mortgagee be without notice, actual or constructive, of such subsequent conveyance or incumbrance; and that in jurisdictions where the point is undecided, record notice of such subsequent conveyance or incumbrance might, and actual notice thereof probably would, give to the subsequent purchaser or the junior lienor a prior, claim as to advances made after such notice."
PROBLEM OF SPECIFICITY
Most courts hold that a mortgage to stand validly as security for optional future advances, a full expression of the parties' intention must be set out in the mortgage, clear enough so that it will serve as notice to anyone exercising common prudence and ordinary diligence, not only of the parties' intent that the mortgage shall secure future optional advances, but also of the upper limit or aggregate amount of the advances contemplated." Cases have varied from one
28 See Bellamy & Sons v. Cathcard, 72 Iowa 207, 33 NW 636, where such right to advance was upheld, because even though bondsmen had not obligated themselves to advance money to complete a bridge, they had the right to do so upon threatened default by the contractor for their own protection. Also Rowan v. Sharp's Rifle Mfg. Co., 28 Conn. 282; Hyman v. Hauff, 138 N. Y. 48, 33 NE 735 Hamilton v. Rhodes, 72 Ark. 625, 83 SW. 351; Tolson v. Pyramid Life Insurance Co., 254 SW (2d) 53 (Ark. 1953).
29 Elmendorf-Anthony Co. v. Dunn, 10 Wash. (2d) 29, 116 P (2d) 253, 138 ALR 558. 30 "A mortgage for future advances was recognized as valid by the common law. believed they are held valid throughout the United States except where forbidden by the local law." Jones v. New York Guaranty Co., 101 U. S. 622. In Leeds v. Cameron, 3 Sumn. 492. Mr. Justice Story declared, "Nothing can be more clear, both upon principle and authority, than that at the common law a mortgage, bona fidé made, may be for future advances. by the mortgagee, as well as for present debts and liabilities." See also Lawrence v. Tucker, 23 How. 14, 16 L. Ed. 474.
31 Jones states the general rule somewhat more strongly-with the warning, however, that it is "subject to qualification": "The rule that a recorded mortgage expressed to cover future advances has priority in all cases over subsequent conveyances and encumbrances, has full support in recent discussions, and must now be regarded as a settled rule of law. Notwithstanding all the distinctions and refinements which have been introduced into the law on this subject by the many conflicting adjudications upon it, there is strong reason and authority for the rule that a mortgage to secure future advances, which on its face gives information enough as to the extent and purpose of the contract, so that anyone interested may by ordinary diligence ascertain the extent of the encumbrance, whether the extent of the contemplated advances be limited or not, and whether the mortgagee be bound to make the advances or not, will prevail over the supervening claims of purchasers or creditors, as to all advances made within the terms of such mortgage, whether made before or after the claims of such purchasers or creditors arose or before or after the mortgagee had notice of them Jones on Mortgages, Sec. 457.
33 Jones on Mortgages, Vol. 1, Sec. 450 (8th ed.): "Future liabilities intended to be secured should be described with reasonable certainty. If the nature and amount of the