In many cities there are a number of mortgage companies and title companies which conduct a successful business in guaranteed mortgages. The outstanding guaranteed mortgages of some of these companies run into hundreds of millions of dollars.
These companies accept applications from borrowers for a great variety of loans. Some companies loan on improved property only while others loan on both improved and unimproved property. The percentage loaned on improved property is usually not more than 60%, and on unimproved property not more than 50%, based on valuations fixed by the company's appraisers. A large proportion of the loans are on buildings fully completed, but building loans are also made in large numbers. In fact, the title companies and mortgage companies have been important factors in the development of many cities and their suburbs by financing the construction of new buildings, especially dwellings, apartment houses and stores.
The rate of interest on the loans is the prevailing market rate for mortgages, usually not less than 5%, nor more than
6%. A fee is charged the borrower to cover the cost of examination of title and preparation and recording of necessary papers. In the case of building loans an additional fee is charged to compensate for the extra work involved.
The loans made by these companies are offered for sale to investors with principal and interest fully guaranteed. The rate to the investor is usually 1/2 of 1 % less than the rate called for by the mortgage, this 1/2 of 1% being the premium charged by the company for its guarantee. The company pays the interest when due whether it has collected it or not. It also attends to the fire insurance and sees that the taxes, assessments and water rates on the property are paid by the borrower. The mortgages usually run for three years. At maturity the investor can ask for payment of the loan. Many of the loans are extended for further periods of three years. Under the agreement of guarantee, the company has the privilege of taking a reassignment of the loan from the investor. The usual practice of the companies is to pay the principal of the mortgage to the investor at maturity if he desires it, but in order to avoid being called upon to pay the principal of guarantees at a period of financial stress, they may take a certain number of months (eighteen months is the rule with one company) in which to collect the principal from the owner of the property.
Guaranteed mortgages are purchased by individual investors and institutions. While the rate of interest to them is 1/2 of 1 % less than the mortgage bears, they are assured both safety and freedom from trouble and worry.