The building and loan association is an important financing source for families in this group. These organizations make a practice of lending considerably more than half the property value where such loans are required, and they are, therefore, discussed in connection with the second group of borrowers.

The building and loan association is an organization created for the promotion of thrift and home ownership. It accomplishes its worthy objects by providing a method of saving and by lending its funds for the purchase and construction of homes.....

Various plans for obtaining funds are employed by the associations. Under the plan in most common use members subscribe for "shares" and make regular stated payments on them until the sum of these installment payments, added to the dividends obtained through the lending operations, equals the matured or face value of the shares. Some associations require no share subscription but accept deposits in almost any amount and at any time; others derive funds from the sale of full-paid shares or investment certificates. Frequently where their funds are insufficient to supply the demand for loans, associations borrow for the purpose at a rate lower than their own charge.

1 This is the name most widely used, but many other similar names have been adopted by the various organizations throughout the country. The following are a few examples: "Savings and loan association," "Building loan and savings association," and "Loan and building association." In Massachusetts the associations are known as cooperative banks and in Louisiana as homestead associations.

Building and loan associations usually pay a higher rate of return to their depositors than is obtainable from other savings institutions, and prospective home-owners who place their savings in the associations may often accumulate sufficient funds to make the first payment on their homes more quickly than is possible by any other method affording equal safety.

Lending policies and methods differ among the associations. Applications for loans usually are received only from members, but in many associations the home buyer may easily enter the membership and apply for a loan at once. The loan-application forms frequently call not only for data regarding the site and the existing or proposed building but also for information as to the health, occupation, and income of the prospective borrower. The element of personal responsibility is often given considerable weight, especially where the loan applied for is large and the borrower's equity in the property small. In a number of associations the application is examined by the board of directors, and if the proposition appears sound on its face the appraisal officer or committee is instructed to report on it, and title to the property is ordered examined. Appraisals are usually made by personal inspection. As in the case of savings banks and other institutions lending on real estate, the valuation reported depends somewhat on the attitude of the particular association toward the existing realty market. Many building and loan associations appraise property at the full market value and are willing to lend on the basis of two-thirds or more of their appraisements. In some cases as much as 80 per cent of a fair valuation is loaned. The monthly amortization plan1 enables the associations to lend a very large percentage of property value and yet provide a high degree of safety for their investments. They find that these frequent payments on the loan more than offset depreciation of the property and declines in market value.

Association loans are made for periods as long as 12 years. The interest rate is often slightly higher than that asked by savings banks, trust companies and insurance companies, and a "premium," or commission, is sometimes charged. The associations justify these higher charges by calling attention to the fact that, as their loans are made for long periods, the borrower is saved the expense of renewals. They also feel that in making loans representing two-thirds or more of property value they perform a greater service than do institutions lending not more than half the amount of their appraisements and are, therefore, entitled to a higher return. Borrowers seeking construction loans often find it to their advantage to pay the slightly higher rate asked by building and loan associations, as most of these organizations are specialists in this type of lending and their service and advice in connection with the building project frequently save the home builder much inconvenience and expense.

1 See Present Home Financing Methods, Appendix, p. 17 for amortization tables.

Many associations require the borrower to subscribe for shares having a matured value equal to the amount of the loan. In such associations the monthly payments cover interest on the debt and installment dues on the shares. Interest is calculated on the full amount of the loan throughout its term, but the borrower is credited with dividends on the amounts applied toward his shares. When the shares are matured they are used to cancel the loan. Other associations apply the monthly amortization payments directly against the loan and charge interest on outstanding balances. The amount of interest paid by the borrower under the first arrangement is, of course, larger than that paid under the second where the dividend rate is lower than the interest rate.