126. Substitutions

Collateral loans and especially Wall Street loans are subject to constant change in the collaterals. A broker will find in his daily transactions on the exchange that he needs sundry stocks, which he has hypothecated, in order to make delivery of the stocks he has sold on the exchange, and will have other stocks which he has purchased. He is allowed the privilege of substituting other collaterals for those originally deposited, according to the terms of his note, and so sends the stocks he has, with a substitution slip duly signed, to the bank. The substitution blank is shown in Figure 103 on page 208. If the stocks sent to the bank have a value equal to or greater than the stocks to be withdrawn, and if the stocks substituted are as desirable as the ones to be withdrawn, the loan clerk will make the substitution. He should check or initial the securities deposited and withdrawn on the substitution blank and post the same to his cards or loan sheets when convenient during the day. It is customary to file these substitution blanks in the loan envelope with the note and securities. It will be readily seen that if the substitution slips are arranged in chronological order, and the original list of securities be retained, the securities actually in the loan at any date may be verified. Some brokers have their accounts audited by expert accountants or audit their accounts themselves, and when doing so request the bank to verify the securities held for their account.

These requests for reconcilement rarely go back of the current day so that a card as shown in Figures 99 or 101 on pages 202 and 205 will be the only necessary-record to keep, in order to be in a position to check up these reconcilements without upsetting the current work.

127. Filing Of Loans And Correspondence Thereon

As mentioned above, it is customary to file the note, substitutions, the correspondence, if any, and such securities in the loan envelope. Large blocks of bonds are usually bound together by large rubber bands or bands of webbing with buckles, and the envelope slipped under the strap. It would be very convenient in many ways if the envelope were made large enough to accommodate the note and stocks without folding.

128. Loans On Real Estate

One of the essential marks of difference between national banks and state banks is that the former are prohibited from loaning on real estate security, while the latter may do so under certain limitations.

Section 17 of the National Bank Act reads as follows:

Sec. 17. Limitations as to Real Estate and Mortgages: A national banking association may purchase, hold, and convey real estate for the following purposes, and for no others:

First: Such as shall be necessary for its immediate accomodation in the transaction of its business.

Second: Such as shall be mortgaged to it in good faith by way of security for debts previously contracted.

Third: Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings.

Fourth: Such as it shall purchase at sales under judgments, decrees, or mortgages held by the association, or shall purchase to secure debts due to it.

But no association shall hold the possession of any real estate under mortgage, or the title and possession of any real estate purchased to secure any debts due to it, for a longer period than five years.

In Section 27 of the New York banking laws, paragraph 3, we read as follows:

3. No corporation to which this chapter is applicable except a building and mutual loan corporation or association or a co-operative savings and loan association shall hereafter make a loan, directly or indirectly, upon the security of real estate upon which there is a prior mortgage, lien or incumbrance, if the amount unpaid upon such prior mortgage, lien or incumbrance, or the aggregate amount unpaid upon all prior mortgages, liens and incumbrances exceeds ten per centum of the capital and surplus of such corporation, or if the amount so secured, including all prior mortgages, liens and incumbrances shall exceed two-thirds of the appraised value of such real estate as found by a committee of the directors or trustees of such corporation; but this provision shall not prevent the acceptance of any such real estate securities to secure the payment of a debt previously contracted in good faith. Every mortgage and every assignment of a mortgage taken or held by such corporation shall immediately be recorded in the office of the clerk of the county in which the real estate described in the mortgage is located. After the first day of November, nineteen hundred and eight, no loan shall be made, directly or indirectly, upon real estate security by a bank having its principal place of business in a borough in any city in the state which borough had according to the last preceding state or United States census a population of eighteen hundred thousand or over, if its total direct and indirect loans upon real estate security exceed, or by the making of such loans will exceed, fifteen per centum in the aggregate of the total assets of such bank, or by a bank having its principal place of business elsewhere in the state if its total direct and indirect loans upon real estate security exceed, or by making of such loan will exceed twenty-five per centum in the aggregate of its total assets.

The following comment on the real estate provisions of the federal law, from Pratt's Digest for 1908 (page 28), sets forth the arguments for and against loans on real estate very clearly:

The prohibition against loans on real estate is a feature of the law which has been much criticised in some quarters; and as evidence that this restriction upon the powers of National banks is unreasonable and unnecessary, it is urged that real estate is the best kind of security; that savings banks, trust companies, and insurance companies are authorized to make such loans; and why, therefore, should not the National banks be permitted to do the same? But, by the great majority of bankers, the restriction is deemed wise and salutary. The objection to real estate security is not to its sufficiency, but to the kind. As the obligations of the banks are largely payable on demand, it is necessary that the securities it holds should be readily convertible into money; and while a mortgage upon real estate may be good security, it cannot be made immediately available, in case of an emergency. Personal securities of the kind usually taken by banks can be quickly assigned, and promptly realized upon; but the transfer of any interest in real estate is always attended with more or less delay. It has not infrequently been the case that banks have been compelled to suspend when their assets were more than sufficient to pay their debts, simply because a large portion of the assets were real estate securities, upon which it was impossible to realize at the proper time. In the case of insurance companies, trust companies, savings banks, and similar corporations there is not the same necessity for having the assets in a convertible form, but it is rather desirable that a large portion of the investments shall be of a more or less permanent character; and, therefore, real estate loans are well adapted to their purpose.

There are really two ways of loaning on real estate security. First, as an investment of capital funds; second, as an investment of deposits of customers. In the former case the institution makes or buys the mortgage and expects to hold it till maturity. In the latter case the mortgage is given as collateral security to a note which may be paid long before the mortgage is due. Let us follow a transaction in which the institution is loaning for capital investment.

Figure 104. Application For Real Estate Loan.

John Brown contracts to buy a piece of property with buildings on it for $100,000 cash. He has $50,000 which he can pay down and must raise the balance. He knows the value of the property, and that a loan of $50,000 would make a valuable investment for a trust company, and so makes application for a loan of this amount. He is requested to fill in a formal application blank similar to the one shown in Figure 104 on page 213. This application is then turned over to the executive committee of the company, who have a standing sub-committee for appraising property offered as mortgage security. This committee visits the property, inspects it carefully, and endorses on the back of the application their joint conclusion as to its value, and the amount they recommend as a safe loan. This committee should consist of two or three men who are experienced in real estate and they should all sign appraisals and recommendations made by them. In large companies, where many such loans are presented, the duty of appraising the property may be delegated to an experienced clerk, who devotes his entire time to making appraisals.

An excellent form for preserving these appraisals is to record the result of the investigation in a bound volume, with printed headings to show the different features desired. Every mortgage should be numbered when accepted, and this number may be used in this appraised valuation register.