This section is from the book "Real Estate Principles And Practices", by Philip A. Benson, Nelson L. North. Also available from Amazon: Real Estate Principles and Practices.
Several large firms and corporations in Chicago have specialized in the financing of building enterprises and the sale of mortgage bonds to the public. One of these firms is S. W. Straus & Co. who advertise extensively, the feature of their advertising being 6% interest to the investor and many years in business without a dollar of loss to an investor. The Prudence Company, Inc., a New York corporation, advertises Prudence Bonds which are issued against first mortgages in a manner similar to the Straus bonds. Prudence Bonds are guaranteed as to principal and interest by the corporation. The plan upon which these concerns operate may be briefly described.
Applications are received for first mortgages upon improved and income producing real estate. The property may be office, hotel, commercial or store buildings in good locations, high-class apartment houses, and well located industrial plants. Usual appraisals and examinations are made. In many cases careful consideration is given to the financial condition of the borrower. The loans are made for a term of years with a provision for periodic payments on account of principal. These payments at the maturity date will have reduced the loan materially or paid it in full.
The mortgages may be held by the lender or deposited with a trustee and bonds or certificates issued against them in various denominations.
The bonds or certificates bearing interest at 6% are then sold to the public. As payments are made on the principal of the mortgages, bonds are paid off. The profit to the lending institution is made by charges of a fee or bonus for the loan, or from another point of view, it might be said that the loan is made at a discount. It bears interest at 6% on the full amount and as the bonds are sold on a 6% basis, the profit comes from the fee or discount charged.
The success of the concerns mentioned and other concerns in the same business is due to the care with which their loans are made, the high character of the property accepted as security, the fact that such property is income producing and that the loans are constantly being reduced and strengthened by amortization. It would also seem that 6% real estate first mortgage bonds are considered attractive by a large number of investors.