program, the rehabilitation project for a residential section in Baltimore may be cited: Toward the end of 1938, the Baltimore Housing Authority, with the cooperation of the Home Owners' Loan Corporation, the United States Housing Authority, and several municipal agencies and organizations, determined to conduct a survey and planning project for the Waverly area of Baltimore. The project was designed to provide that neighborhood with a detailed inventory and analysis of its present condition and future prospects, and to develop a general plan for protective development and betterment. With the assistance of a WPA project and the contribution of supplies, equipment, and technical personnel services from the above-mentioned agencies, the program was started in March 1939. Covering an area of 54 blocks, containing approximately 1,600 properties, the survey has procured general physical and economic data for each property and for the neighborhood as a whole. The planning project has analyzed and studied the accumulated data, has established the varying degrees of incipient blight present throughout the area, and has determined the isolated spots of excessive deterioration. Furthermore, in order to provide economic protection to the neighborhood in the future, ways and means of arresting blight, of recouping and stabilizing values, and of maintaining good standards have been specified. Paralleling the survey and planning work, there has been conducted a program of encouragement to organizations and parties interested or located in the area to develop an organized determination on the part of the neighborhood itself to undertake rehabilitation and maintenance for mutual protection. A like program, again with the assistance of the Home Owners' Loan Corporation, is being developed for the Woodlawn area of Chicago, and municipal and civic bodies in Cleveland, New Orleans, Memphis, and Louisville have indicated an interest in similar undertakings. 2. SAVINGS AND MORTGAGE FINANCE During the past fiscal year the operations of home-financing institutions were marked by a continuing influx of savings, on the one hand, and by keen competition in the mortgage market, on the other. More and more, the problem before these institutions has become how to find sound and safe mortgage loans rather than how to obtain funds for such loans. Increase of Individual Long-Term Savings The flow of savings is a matter of primary importance to home finance. For decades the large majority of urban homes in this country have been built out of the savings of the great mass of our people, and each year a considerable portion of individual long-term savings is being invested in thrift and home-financing institutions. The trend of such savings over the last decade is indicated in the following table. which includes savings in financial institutions either specializing or participating in home finance, and selected types of investments that are directly competitive to savings deposits and investments in homefinancing institutions: 1929. 1930. 1931. 1932. 1933. Year Changes in selected types of individual long-term savings 1 1 Savings in life-insurance companies, mutual savings banks, all other banks, savings and loan associa tions, postal savings, 21⁄2 percent postal-savings bonds, and United States savings bonds. For explanatory notes, see Exhibit 8. There has been a very pronounced recovery in these types of savings in the last few years. The annual increases from 1934 to 1938 have more than offset the depression losses in the three preceding years, and at the end of 1938 the amount of accumulated long-term savings reached an all-time high in the history of American finance, exceeding the $50 billion mark. The largest annual increment of savings in this recovery period occurred in 1937. During 1938 the growth was somewhat smaller, reflecting the decline in business activity and in national income in the latter half of 1937 and the first half of 1938. To a large extent, these savings represent the accumulated resources of our middle and lower income groups—a fact which places special responsibility on the institutions to which they are entrusted, and on the public agencies, Federal and State, charged with the supervision of financial institutions. In 1938 the average cash value of life-insurance policies was $300, the average investment per private investor in savings and loan associations, $780, the average savings account in mutual savings banks, $832, and the average savings account in national banks, $421. All in all, the more than 50 billions of dollars of accumulated long-term savings in the country represents approximately 115 million accounts." The distribution of accumulated savings over the various types of institutions and investments and the changes during 1938 are shown in Exhibit 8. The largest rate of increase was in holdings of United States savings bonds, which grew by 49.6 percent during the year. Life-insurance companies, which account for most of the growth in the dollar amount of savings during the last decade, showed an increase of 6.6 percent. Private investments in all savings and loan associations rose by 2.6 percent, and savings deposits in commercial banks by 2.5 As a number of savers may hold several accounts, this figure includes some duplications. percent. The volume of postal savings and postal-savings bonds and deposits in savings banks fell slightly. Within the field of specialized home-financing institutions, the rate of increase in individual long-term savings during 1938 varied substantially among the different types of institutions. Federal savings and loan associations, which are of comparatively recent origin, showed the largest rate of increase-21.3 percent for an identical group of 1,309 institutions. Insured State-chartered associations ranked next, with a gain of 6.4 percent for an identical number of 547 associations. The flow of private funds into 901 identical noninsured member associations of the Federal Home Loan Bank System grew at the rate of 0.5 percent. All together, private investments in the above-listed member associations of the Federal Home Loan Bank System increased by 10.3 percent." Growing Competition in the Mortgage Market The steady increase of savings is partly responsible for the highly competitive conditions that have recently developed in the homemortgage market and that have become more pronounced during the past fiscal year. While financial institutions of all types had an overabundance of funds available for investment, immediate opportunities for the profitable employment of such funds were very limited. Low yields on Government bonds, which today constitute a major portion of the portfolio of commercial banks, mutual savings banks, and life-insurance companies, and the scarcity of industrial and commercial loans have made investments in home mortgages more attractive to these institutions. In consequence, they have reentered the field of home mortgage lending to an increasing extent, encouraged in part by Federal mortgage insurance under the National Housing Act of 1934. Similarly, trust and pension funds, endowments, and individuals have been more actively engaged in making home-mortgage loans. In general, there is a growing recognition of mortgage loans as a worth-while long-term investment, and there is a tendency for large insurance companies even to go into direct building; this latter tendency is evidenced by New York State legislation permitting domestic life-insurance companies to invest up to 10 percent of their total assets in housing operations on a full ownership basis. As a result of competition, the financing costs of home ownership, which had already decreased in preceding years, have been lowered further in the reporting period. Interest rates have dropped, amorti 7 See Section III of this report (p. 79). Because of the increase in number of Federal savings and loan associations and insured State-chartered associations during the year, identical groups of associations operating throughout the year provide a more equitable basis of comparison. zation periods have been lengthened, and down payments have been reduced by higher percentage loans. All this, coupled with other favorable market factors, has contributed to the revival of newconstruction and the real-estate market. In many regions of the country, particularly in the Northeast and in the larger communities, nominal interest rates for new home-mortgage loans have fallen to 5 percent, and in the spring of 1939, some. savings banks in New York, where interest rates have regularly been lower than in the rest of the country, reduced their rates for selected home mortgages insured under the National Housing Act to 4% percent. At the same time financial institutions have begun to assume part of the costs incident to the making of the loan, resulting in a reduction of effective interest charges. Through the amendment to Title II of the National Housing Act of February 3, 1938, the maximum nominal rate for insured home. mortgages, excluding the insurance premium, has been revised from 51⁄2 to 5 percent.8 Together with this reduction in interest rates, the. amortization period for mortgage loans on small, new, owner-occupied, one-family homes was lengthened from 20 to 25 years and the maximum loan limit raised from 80 to 90 percent of the appraised value. of the property. Although only part of home-mortgage lending was. directly affected by this legislation, competition has operated to adjust loan terms more closely to those for insured home-mortgage. loans within the limits set by existing State and Federal statutes. governing the lending powers of financial institutions. Thrift and home-financing institutions also have more widely adopted the practice of lending at variable interest rates, based on risk rating for each individual mortgage loan, instead of lending at a. uniform rate. This has tended to lower interest charges particularly for selected loans. To assist in the reduction of interest rates, the Federal Home Loan Bank Board in May 1939 adopted a regulation under which savings. and loan associations obtaining new share investments from the Home Owners' Loan Corporation are required to lend these funds on the. direct-reduction plan at an effective interest rate of not more than 6 percent. This rate includes interest, premiums, initial loan fees, and other charges for the use of the money. In comparisons of interest rates, scrupulous care must, of course, be taken to distinguish between nominal and effective rates which include. premiums, loan fees, service charges, prepayment penalties, delin Effective August 1, 1939, this rate was further reduced to 4% percent for all home mortgage loans insured, under Section 203 of the National Housing Act. quency charges, and other items. Also, interest rates vary not only among the different regions of the country but also by localities and neighborhoods. Mortgage rates on homes in selected areas tend to be lower than in deteriorating neighborhoods. Rates in small communities are generally higher than in larger localities. With respect to loan terms, mortgage loans on older structures normally require quicker amortization than those on new and modern properties, because they involve a greater risk of obsolescence. Likewise, amortization periods for mortgages on lightly built structures are shorter than for mortgages on solid structures. Only if due weight is given to all these factors can the comparative cost of home financing as between different groups of lending institutions and as between different loan types be appraised. The large number of elements determining interest rates and loan terms explains why over-all comparisons of financial costs are gravely misleading. Another factor is the size of mortgage loans. The initial cost of making small loans and the cost of servicing and record-keeping of such loans is relatively higher than on larger loans. Small loans, therefore, frequently demand a relatively higher rate than large ones. In this connection, the following figures on the average size of new mortgage loans made by the various types of lenders are pertinent: Average size of nonfarm mortgage loans by types of lenders 1 1 Division of Research and Statistics, Federal Home Loan Bank Board. Based on recordings of nonfarm mortgages of not more than $20,000. It is evident from this table that the average size of mortgage loans made by savings and loan associations is lower than that of any other type of financial institution. Reduction of Dividends of Home-Financing Institutions The effects of competition on thrift and home-financing institutions have been manifold. Competition has been an incentive to improve management and efficiency and thus to induce these institutions to operate on a lower spread between cost of money and interest rates charged. A more aggressive attitude toward the acquisition of new lending business has been developed, and advertising is being used to a greater extent. Many institutions have found it useful to simplify |