Savings banks specialize in mortgage loans which are loans secured by real estate. A mortgage is a conditional deed conveying the property of the mortgagor, the borrower, to the mortgagee, the bank. The instrument is conditional in that it is void if the borrower meets the conditions imposed, namely, the payment of interest and principal when due. The papers incidental to a mortgage loan are the note or bond which is the evidence of debt; the mortgage duly executed which is the security; the abstract of title, which indicates that there are no prior liens against the property; the insurance papers which protect the bank against loss if the mortgaged property is destroyed by fire. In applying for a mortgage loan, the applicant describes the property and states the amount of money desired. The value of the property is then estimated by the bank's appraiser, while an attorney, or a title insurance company makes a "search" to determine if the owner's title is "clear." Only first mortgages are permitted as investments by savings banks. The amount of money that may be loaned is also limited by law varying from 50% to 60% of the appraised value of the real estate. The essentials of security in a mortgage loan consist of such considerations as the up-keep of the property, its location with respect to transit facilities, chances of depreciation in neighborhood values, adaptability of buildings for more than one use, etc.

As a banking problem, mortgage loans offer an interesting field for investigation and discussion. How is it that loans based upon the best security in the world, improved real estate, cannot be so regulated as to permit commercial banks to invest in them? The argument against such loans by commercial banks is that they cannot be readily converted into cash in case of need; they are for long periods, and in case of foreclosure, which is the sale of the property in case the principal or interest is not paid, there is a considerable amount of time lost in the legal proceedings involved. For these reasons national banks have not been permitted to loan money upon real estate mortgages. Recently they have been given permission to make such loans subject to certain restrictions, provided under the Federal Reserve Act. The difficulty has been that mortgage loans have been allowed to drift into the class of permanent investments. Provided the security is good and the interest has been paid promptly, the banks have been content to allow the loans to run. The borrower, instead of paying off his mortgage loan when he is in funds, has thus been tempted to invest in more property, paying back the loan only when he sells the property that has been mortgaged. Abroad, the borrower begins to pay back the loan in installments at each interest period, the result being that mortgage loans are as liquid an investment as are bonds in this country.

As has been stated, certain bond issues are designated by law in many states as legal investments for savings banks. While municipal and railroad bonds are given the preference it does not follow that all bonds of these classes are acceptable, nor is the discrimination made along arbitrary lines. Railroads must measure up to a high standard of efficiency and management before their bonds may be designated as legal investments for savings banks. So also with the bonds of a city or state. The total bonded indebtedness of the city must not exceed a certain percentage of the value of taxable property.

The accumulation of a reserve or surplus by a savings bank is very essential. Conforming to the accounting principle that both sides of the statement must always balance, the bank must have a dollar of assets for every dollar of liabilities at all times. The market value of the investments of savings banks, consisting largely of securities, are subject to fluctuations, hence it is necessary that a margin of safety shall be provided in the surplus fund which is created out of the earnings. Bonds are rarely bought at par value; if the interest paid is fairly high and the security very good, bonds will sell at a premium. Let us suppose an issue of bonds is bought by a savings bank as an investment at 105. That means each $1,000.00 bond has cost $1,050.00. If the bonds fall due in twenty years, at the end of that time the savings bank will not get back $1,050.00 for each bond, the price paid, but $1,000.00 or par. How, then, shall the savings bank account for this apparent loss of $50.00 on each bond? Out of the interest. At each interest period, or once each six months, the interest coupons being usually paid twice yearly, a part of the income is applied to the premium that was paid for the bond, so that by the time the bond matures the entire premium of $50.00 is restored. The process by which this is accomplished is called amortization. The same principle is applied but with reverse effect, when a bond is bought at a discount or at a lower price than par.

Enough has been said of savings banks, their purpose, methods of receiving deposits and making loans to indicate that they perform a very important service in the business world. They accumulate the small savings of the multitude of wage earners, money which, if hoarded or squandered, would be of use to nobody. Through the loaning power that savings banks acquire, the result of the thrift of their depositors, men are able to borrow money with which to build and own their homes. The home owner is a much more valuable member of society than the man who owns no property. These same savings, that have come out of wages, are often turned back into the very business or industry that has produced them through loans made by savings banks. If there were no funds to purchase bonds there would be little industrial or civic development in the shape of railroads, telephone, electric lights, reservoirs, sewage systems, schools and a hundred other modern conveniences that not only add to our comfort and pleasure, but also furnish employment for thousands. Thrift, then, is more than an abstract virtue; it is an economic necessity. Men who are thrifty are usually industrious, self-respecting, sober and law-abiding. Hence, we find that the savings banks are beginning to spread thrift propaganda through advertising and in other ways, not only because it helps their business, but because it has a tendency to raise the standard of the people in general. Schools are installing savings systems that make it possible for very young children to open savings accounts. They are thus not only taught the value of the saving habit at an early age, but they become familiar with banking methods.