George A. Hurd

Legal Restrictions - Practice in Europe - Necessity for Close Appraisal - Rentals as a Factor - Influence of Panics - Depressed Values - Changes in Neighborhood - Deterioration of Buildings - Delays in Foreclosure - Prices at Forced Sales

The margin of security on any particular real estate mortgage loan depends on the needs of the borrower and the willingness of the lender to meet those needs. As a result of this many loans are made for only a small percentage of the value of the property securing them, because the needs of the borrower are small. In any community, however, and on any class of property, the greater part of the mortgage business consists of loans approaching the limit of safety, as that limit has been ascertained by experience. This is the natural result of the competition of lenders. Since the limit of safety must be closely approached in a mortgage business of any size (unless extraordinary attractions are offered to borrowers through low rates), it becomes of the highest importance to examine not only the margin required by general custom or by law for trustees and institutions, but also the separate elements of risk against which the margin is to guard.

We are not considering second mortgages, or first mortgages which are made for an exceptionally large percentage of the value of the property in return for exceptionally high interest rates or commissions, the latter being, in effect, the combination of an ordinary first mortgage and a second mortgage in one transaction; nor purchase money mortgages where an unusual percentage of the selling price is allowed to remain on mortgage as a special inducement to effect a sale, such transactions being outside of the ordinary scope of the mortgage business. Disregarding such exceptional cases then, it may be stated that the smallest margin required by law or observed by custom anywhere in the United States is on New York City mortgages, where loans by trustees are limited to two-thirds of the value of the security, and this legal provision has established that percentage of the value as a proper one to be followed by other mortgage lenders. The loans of savings banks in New York City are further restricted to 60% of the value of the property, and it is only a few years since the law restricted savings bank loans to 50% of the value. In the largest American cities, other than New York, 60% of the value is not often exteeded - that is, in such cities as Chicago, Philadelphia, Boston and St. Louis, while loans on the best class of security in smaller cities, and the best type of farm loans in such States as Ohio, Illinois or Iowa, are limited to one-half of the value of the security. In the smaller cities a still larger margin is generally required on residence loans which are ordinarily from 25% to 40% of the value of the security, and about the same percentage is loaned on farms in the more remote or less highly developed agricultural districts.