and modernize their loan plans. In these endeavors, they were greatly assisted by the constructive guidance of the twelve Federal Home Loan Banks. For mortgages on new buildings, a more complete "merchandising technique" has been developed, including selection of suitable designs and building materials, architectural advice, and supervision of construction. The Federal Home Building Service Plan, described in an earlier section of this report, should greatly aid in the development of such services. Finally, the downward trend of interest rates on home mortgages in many cases has led to a reduction in the rate of return paid to investors in home financing institutions. In line with the general downward movement of yields on long-term investments in the last few years, dividends paid by savings and loan associations have gradually been reduced to lower levels. The average annual dividend rate paid by Federal savings and loan associations, for instance, decreased from 3.69 percent in 1935 to 3.50 percent in 1937. In 1938, this tendency toward lower dividends was reflected in decreased average rates in 23 out of the 46 States for which comparable data for Federal savings and loan associations are available. There are also indications that a number of State-chartered associations have revised their dividend rates to conform more fully with present conditions, particularly in combination with insurance of accounts afforded by the Federal Savings and Loan Insurance Corporation. Insurance of accounts naturally provides an effective medium through which long-established dividend rates on share investments can be reduced, by virtue of the greater shareholders' confidence instilled by a Federal guaranty. An increasing number of home-financing institutions recognize that lower dividend rates are necessary to meet the competition for mortgage loans and to secure good loans which are a sound investment protecting the safety of the funds in custody of the institutions. It has also been recognized more widely that savings are entrusted to financial institutions because of the safety of principal and regularity of returns rather than because of expected high returns. Experience has shown that because of the greater emphasis placed on safety, moderate reductions of dividend rates in the long run are unlikely to affect materially the flow of funds into home-financing institutions. To a certain extent, the dividend policy of home-financing institutions is determined by the rate of return paid on competitive types of savings. United States savings bonds, if held for ten years to maturity, return a maximum of 2.9 percent. During the fiscal year 1939, the interest paid on postal-savings deposits was a flat 2 percent. For complete information, see Section IV, pp. 98 and 99. Mutual savings banks were paying dividends ranging between 2 and 3 percent, with the average close to 2 percent. Commercial banks insured by the Federal Deposit Insurance Corporation are permitted to pay maximum rates of 2%1⁄2 percent on savings deposits, but in many cases the rates are below this maximum. Until recently, the return guaranteed on life-insurance policies of legal reserve com-panies has usually been about 3 percent, but during the fiscal year 1939, several companies have reduced the return guaranteed on new policies to 21⁄2 percent. A reduction of dividend rates paid by home-financing institutions to 3 or 31⁄2 percent, depending on local condi-tions, would still maintain the traditional margin above the return paid on other types of savings, without loss of competitive advantage. Moratorium Laws In view of the full revival of the mortgage market, a gradual removal. of the still existing moratorium laws appears to be warranted. Mora-toria on mortgages were introduced at the bottom of the depression. when incomes were at an extremely low level and refinancing by privatemortgage lenders was practically impossible. At that time, moratoria were believed to be well justified to stem the tide of foreclosures and to prevent the dispossession of hundreds of thousands of home ownersin default. These conditions are no longer present. The national income is much larger than in 1932 or 1933, home-mortgage lenders have plenty of funds ready to invest, and refinancing of extising loans. at advantageous terms is easy. Therefore, no real hardship to homeowners is to be expected if moratoria are gradually lifted. On the other hand, the elimination or modification of moratorium laws would go a long way toward restoring normal conditions in the mortgage and real-estate market and would thus contribute to the attainment. of full economic recovery. During the past few years, a number of moratorium laws have expired. In addition, the moratorium laws of Iowa, Kansas, Mississippi, and Nebraska have been declared to be unconstitutional.. Arkansas has repealed its moratorium act. However, on June 30, 1939, moratorium laws were still in force in thirteen States: Alabama, Arizona, California, Louisiana, Michigan, Minnesota, Montana, New York, North Dakota, Ohio, South Dakota, Vermont, and Wisconsin. Home Mortgage Lending Activity The fact that home mortgage lending is a highly localized activity and that the average loan involves a comparatively small amount of money has for a long time tended to obscure the importance of the aggregate volume of home-mortgage lending. However, this total volume has always been considerable, and in the last few years when most other sectors of the private capital market were sluggish and inactive, home-mortgage lending has attained an outstanding place. This is evidenced by the following comparison: the average annual amount of all corporate securities issued by railroads, utilities, and all other corporations in 1937 and 1938 was only $2,255,000,000, including new securities as well as securities issued for refunding purposes. On the other hand, total mortgage loans on one- to four-family dwellings made by financial institutions and individuals in each of the calendar years 1937 and 1938 amounted to approximately $2,500,000,000. With such volume, home mortgage lending has exceeded the aggregate amount of corporate finance. The flow of money into housing is of great national importance not only because it enables our population to meet its housing needs to a larger extent, but also because it helps to overcome one of the basic difficulties which our economy is facing. As explained in a previous section of this report, the Nation is saving large amounts each year, irrespective of minor fluctuations in economic activity and national income. During the last few years, these savings were only to a limited extent put to productive use. For a number of reasons, long-term capital investments in durable goods, which are normally financed out of accumulated savings, have been small. Large unutilized savings, on the one hand, and small capital investments, on the other, could not but create an unhealthy situation reflected in a low level of employment and of economic activity in general. If savings are idle, men and machinery are out of work. The absorption of investible funds by housing may well contribute to a solution of this problem. Normally, investments in housing represent a considerable portion of total capital investment. This is evidenced by the fact that in the period from 1919 to 1935, which comprises years of high and low building activity, residential construction, including major alterations and repairs, accounted for more than onefifth of total domestic capital investment; from 1922 to 1928, a period of substantial residential building, the share of residential construction in total domestic capital investment exceeded 28 percent.10 Larger investments in housing which appear to be forthcoming at the present time will, therefore, be an important factor in the much needed 10 Total domestic capital investment is equal to "gross capital formation" as estimated by Simon Kuznets in "National Income and Capital Formation, 1919-1935" (National Bureau of Economic Research), after deduction of changes in business inventories, in stocks of gold and silver, and in net claims against foreign countries. Data on residential construction comprise debt financing as well as equity financing. establishment of a balance between savings and capital investment in general, and help to restore employment and prosperity. Chart XVII presents the record of home-mortgage-lending activity from 1929 to 1938. The chart illustrates the extent to which homemortgage lending had dropped in the early Thirties and the degree of recovery in recent years; it also shows the extent of the refinancing operations of the Government-owned Home Owners' Loan Corporation in relation to the volume of private home-mortgage lending. CHART XVII ESTIMATED VOLUME OF MORTGAGE LOANS MADE ON NONFARM ONE TO FOUR 1929 1930 1931 DIVISION OF RESEARCH AND STATISTICS In a comparison of lending activity in the last few years and the lending volume of 1929 or 1930, account must, of course, be taken of the reduction in real-estate prices which has taken place in the meantime. Average prices per dwelling and dwelling unit have decreased, and a loan volume of $2,463,000,000 in 1938, therefore, means much more in terms of number of properties and mortgages than it would have meant in 1929. Actual figures underlying the above chart are shown in Exhibit 9. Throughout the ten-year period from 1929 to 1938, savings and loan associations represent the largest single group of mortgage lenders on one- to four-family dwellings. With an estimated volume of $798,000,000 in mortgage loans made in 1938, they accounted for 32.4 percent of the total amount of home-mortgage loans made during that year. "Individuals and others" ranked next. Homemortgage lending of commercial banks and their trust departments in 1938 is estimated at $560,000,000, and that of life-insurance companies at $242,000,000. Mutual savings banks in 1938 made $105,000,000 of home-mortgage loans. The highest rate of increase from 1935 to 1938 was in the loan volume of life-insurance companies and commercial banks, due largely to particularly active participation of these institutions in lending on home mortgages insured under the National Housing Act of 1934. Mortgage Recording Studies The figures presented in the above section are revisions of previous estimates prepared by the Division of Research and Statistics of the Federal Home Loan Bank Board. Such revisions have been made possible through the institution of a survey of real-estate-mortgage recordings which has been undertaken each month from December 1938 and will be continued as a regular service. This is the first time that data on mortgage recordings have been collected and compiled in such detail on a nation-wide basis and it is hoped that this service will be a valuable contribution to our knowledge of developments in the mortgage field. Because of the lack of adequate data, Government agencies and lending institutions have been too much in the dark in formulating their policies and in analyzing the market in different States and localities. The new mortgage-recording studies permit not only a more exact determination of the share of the various types of lenders in total activity, but also a classification of mortgage lending by States. Through the cooperation of savings and loan associations, the support of the United States Building and Loan League and the Mortgage Bankers Association, and endorsement by the National Association of Title Companies, the coverage of mortgage recording data has gradually been extended until in June 1939 it included 482 counties which contained 52.5 percent of the total nonfarm population and were located in 45 States and in the District of Columbia. The national and State figures given in the following paragraphs are estimated on the basis of statistics received from reporting counties." Mortgage-recording statistics collected by the Division of Research and Statistics include mortgages of not more than $20,000 on non 11 The estimates are based upon original reports received each month from field cooperators. Summaries of these reports are prepared for each State, by type of mortgagee, and from the totals of reported statistics, estimates representing total mortgages recorded in each State are developed on the basis of the relation of the nonfarm population in the sample to the total nonfarm population in the State. Adjustment factors are employed in the calculation to correct for the concentration of type of lenders and for the influence of metropolitan areas. |