Evening Star Newspaper, October 8, 1935, Page 22

B—+4 MDONALD SCORES MORTGAGE RACKET F. H. A. Administrator Hits Second Liens as “Usury Trap.” Declaring the “second mortgage racket” is definitely killed, Stewart McDonald, Federal housing adminis- trator, last night urged American rent payers to “go out and buy a home.” Speaking in the National Radio Forum, arranged by The Star and broadcast over a Nation-wide net-| work of the National Broadcasting Co., McDonald said there is no rea- | son why a “man with a decent job shouldn't buy a decent home.” Under the Federal Housing Administration | plan, he asserted, a man who has| saved 20 per cent of its cost can buy & home, paying the balance over a 20-year period in installments no larger than his normal rent. “Usurious Charges.” Proposing the F. H. A. “single mortgage system” as the solution of modern home-owning problems, the housing administrator said there ‘is no place today for a second mortgage, which “formerly was a convenient receptacle to squeeze in extra charges and excessive costs. It was here that the unseen commissions, usurious | charges and prices way in excess of | honest appraisement values, as well as scores of other traps for the un- wary, were packed in,” he added. Under the new system, he pointed out, there is but one mortgage, the buyer is given 20 years to pay it off and the Government appraises the property and insures the private loan. Text of Address. The text of McDonald’s address follows: There are two contracts & man makes in his life that transcend in importance everything else—his mar- riage contract and the contract for a home. The Federal Housing Ad- ministration has no desire to change the procedure in regard to the former, but we certainly feel that it is high time to apply ordinary common sense to the latter. These last six years have pretty well shattered faith in home owner- ship. It does no good, however, to keep looking backward. We all know what happened. It serves no purpose to decry home ownership as onerous. There never was, and never will be, anything wrong with home owner- ship. On the contrary, it is the only right thing. The trouble was with the mortgages—mortgages which were written under an antiquated system. First mortgages were written for & short period and came due in three or five years. They were written for only 50 or 60 per cent of the ap- praised value of the property, thereby necessitating second—and even some- times third—mortgages on top of that, thus creating a wholly fictitious paper value. And frequently there was downright usury, or false values, all packed in here along with bonuses, expensive renewal fees and a whole bag of tricks and other schemes and skullduggery. Mortgage lending is an honorable business and & Very necessary one. The men of high caliber in that busi- ness, as well as those engaged in the business of selling houses, were among the first who called a halt on this antiquated system. The real trouble was in a second mortgage, that never should have been there at all Mortgages as “Nightmares.” Thus through the faults of a sys- tem the word mortgage became a synonym for nightmare. Deputy Federal Housing Adminis- trator Arthur Walsh tells of a darkey who had to make his last payment on a farm. The real estate man came around to see him and said, “Now, Sam, I can give you the deed to your property.” “No, suh” said Sam in great alarm. “I don't want no deed. I wants 8 mortgage.” “No, Sam,” replied the real estate man; “you evidently don't know the difference between a mortgage and a deed.” “Oh, yes, I does,” sald Sam. “I once | [ had a deed on the house and another fellah had the mortgage—and he got the house—so I don't want no more deeds.” And none of us want any more of that kind of mortgage. There is no blame to attach to the lender, seller or borrower. They all took the rap in the collapse of a sys- tem. They all thought it was work- able. No one dreamed that in a coun- try proud of its alert financial leader- #hip in other lines, so large a segment of its financial structure could be based on so fundamentally wrong a premise. No one could believe that we were all contributing to a disorganized and misdirected contraption of finance when we went in for second and third mortgages on a large scale. Argument for Ownership. But that is no argument against home ownership. There is no reason, and as a matter of fact, never will be, why & man with a decent job shouldn't buy a decent home, if he has saved as little as 20 per cent of 1its cost and can continue to pay for it out of income. Nor is it conceivable that intelligent financing will jeopar- dize his chances of home ownership by compelling him to pay the piper in high interest rates, bonuses and re- newal charges, but, in addition, having the very dickens scared out of him every three or five years, by the threat of mortgage foreclosure. The very best place for a man's savings is in a home, and a mortgage on a home where there are regular, moderate payments on the principal and where monthly charges are within the reasonable ability of the home owner to meet, has always been, and always will be, the safest way to put money to work. A sensibly written mortgage has a collateral superiority over almost any other form of invest- ment, ranking close to Government bonds. And you don’t find Govern- ment bonds with interest rates like highly speculative stocks. So why should mortgages be subjected to usury, high fees, renewal charges and other costs? discourage home ownership? THE EVENING STAR, WASHINGTON, D. C, TUE'SDAY, OCTOBER 8, 1935. Urges Renters to Buy Homes STEWART McDONALD, Federal housing administrator, who, in a National Radio Forum address last night, urged rent payers to “go out and buy & home.”—S8tar Staff Photo. make home mortgages attractive and safe for private capital, and, home financing available, as it never has been before on a sensible long-term basis for the home buyer. Highway to Ownership. The old mortgage system was, in effect, a device for taking homes away from people. The new system is & straight broad highway, down which those who desire to own a home can see every step to the end and the end is debt-free ownership achieved by paying in easy monthly installments. This plan has brought together the architect, the builder, the financial in- stitution, the real estate man and the manufacturer and dealer of building supplies, all into one mutually helpful group, enabled now under the na- tional housing act, to meet on a com- mon ground and solve the problem of home ownership on a sound basis, in- suring well-designed, well-constructed and sensibly financed homes at a lower cost for financing than ever before was possible. This is the “single mortgage sys- tem.” This is the only kind of mort- gage advocated and insured by the Federal Housing Administration. By this method the home owner pays off his mortgage in monthly installments precisely as though he were paying rent. And in most cases, the drain on the family budget is actually less than rent. Yet at the end of a period of years a miracle has happened. The home is fully paid for and there is no more rent due. ‘The second mortgage racket is defl- | nitely killed. | With the Federal Housing “single | mortgage system” there is no place for a second mortgage,* which for- merly was a convenient receptacle to squeeze in the extra charges and ex- cessive costs. It was here that the unseen commissions, usurious charges and prices way in excess of honest appraisement values, as well as scores of other traps for the unwary, were packed in. They were all wrapped up into & neat bundle, notarized, sealed, tied up with tinsel cord and called a “second mortgage.” ‘The holder of the first mortgage, if he knew anything about it at all, thought that it was of little concern to him, that he was protected and safe. It never occurred to him that a secondary lien on the property could 50 bear down on the home owner as to make the man himself a poor risk, and it certainly never could have oc- curred to him that preservation of his investment value was clocely allied with maintenance of property, and that both were inherent in the own- er'’s ability to pay. Second Mortgage Pitfalls. The new Federal Housing Admin- istration system seeks to do away for- ever with the hidden pitfalls and tricks of the second mortgage. But to accomplish all this meant that the new “single mortgage system,” the Federal Housing Administration system, necessitated one mortgage for a higher percentage of the appraised value than was customary in the old- style two-mortgage system. And in order to make these higher loan values safe and inviting for the lender, three things had to be done. First, instead of the mortgage com- ing due in three or five years, the home owner, under the new “single mortgage system,” is given as much as 20 years to pay for the home. However, he starts reducing the mortgage, in very small amounts of course, but nevertheless reductions from the very first month. And these continuous small monthly payments, along with a percentage of interest, taxes and fire insurance, which are accurately figured out, cause the principal amount of the loan to com- mence shrinking immediately, but in such an easy manner that the pay- ments are hardly noticeable to the home buyer. ‘The second real and most essential change was to establish a scientific home appraisal system to be operated under the unbjased supervision of the Government, absolutely fair both to the lender and borrower. For this purpose, the Federal Hous- ing Administration has organized the most efficlent, fair and scientific ap- praisal system that has yet been de- vised. It guarantees to the money lending institution that its funds are being placed in a sound mvestant and on sound values. To the home buyer, it means that the house has more than just a silver lining. The whole transaction 1is marked “sterling” in exactly the same sense that the word is stamped on a plece of silverware. There are no short weights and no short changing in Federal Housing Administration appraisals. So here is a standard of home “It’s going to be TERRIBLE ' i values that has been established and can be depended upon. Both the which it rests. All this has been accomplished with real co-operation and assistance that great body of real estate deal- ho engaged in an honorable every one in the busi- ness of building, selling or financing homes has a right to a legitimate profit for his part in the transactlon. It is only exorbitant and unwar- ranted prices and practices, distort- ing true facts, that would be ex- posed by the Federal Housing Admin- istration appraisal, such as would be inimical to the legitimate interests of the real estate operator, a8 well as to the home buyer. The Federal Housing Administra- tion, therefore, offers a service to home owners, to mortgage lenders, and to real estate dealers, that has never before existed, and which only the untrustworthy need fear or avoid. The “third” innovation consisted in the establishment of the mutual morte gage insurance, or Federal Housing Administration insurance. The bor- rower pays a small premium of one- half of 1 per cent in addition to the interest charge. These accumulated payments become a fund which the Government guarantees, so that if through any unforeseen mischance, the borrower is unable to make the payments as agreed, the maker of the loan is fully protected by the insur- ance, This in & nutshell is how the Fed- eral Housing Administration has re- constructed the home mortgage busi- ness. Business Stimulated. ‘Under its stimulation new homes are being bought by people who have been cured of the speculative mania of the late 20s, by people who have acquired wisdom through the depressing un- certainties of the early 30's. They are buying homes within their means and paying their money stead- {ly—not spasmodically—in fees, re- newal costs or other charges. They are consistently making a month-by- month investment that is paying divi- dends in home ownership. They will own their homes automatically when the time comes, and, as I have said before, the monthly drain is usually less than the rent they formerly paid. Now that the Federal Housing Ad- ministration plan, the “single mort- gage system,” has made home owner- | ship so simple, consider for a moment | what & modern new home gives you, | or for that matter an old home that has been modernized under the Fed- | eral Housing plan—and any banker will explain this to you. | Few appreciate or realize the many i mechanical and modern inventions | that have been developed to relieve modern housekeeping of its many arducus and strength-consuming tasks.. We all know of the almost revo- lutionary changes that have taken place in the construction of automo- | biles during the past 10 years. Almost | precisely this same advancement has occurred in the home building indus- try. Today for four, five or six thousand dollars a new home will contain con- veniences that even a Rockefeller could not have bought at any price several years ago. 8o go to see one of these new and modern homes. Everything from the bath room to the kitchen will astound you in the way of modern inventions and conveniences that take the drudg- ery out of housekeeping, and at prices that are simply amazing compared to the standards of a decade ago. Progress in England. During the past few years of this terrible depression almost no new homes have been built in America. The figure is trifling—Iless than 50,- 000. It might interest you to know that in England new homes at the rate of approximately 250,000 per an- num have been built during the last few years. The Federal Housing Administra- tion believes in home ownership. It is meant to convert renters into owners. That is the very foundation it rests upon. It believes that value in homes lies 1n his country is the best type of citi- zen and that the stability and unity and livableness of the home reflect in all his contacts outside the hom and 80, react to the credit of the com: munity. Home ownership spells citizenship and good character, f« in addition to the comfort and pride n home ownership, there is financial security and independence. This then is the plan of the Federal Housing Administration and although it has been in operation only & few months it 18 unnecessary to tell you how it has worked. A year ago it was practically impossible to borrow money to build or modernize a home. I will not bore you by quoting figures, more than to say that the total loans in- sured by the Federal Housing Ad- ministration in these few months have hnllre‘dy passed 300 millions of dol- All you have to do is go out on & suburban countryside to see contrac- tors, carpenters and bricklayers hap- pily busy. And the “sold” signs will give you a pretty good idea of the ac- tive part the real estate agents and the investors have had in this great change. Funds From Private Capital. Much of this activity is, or will be, financed through Federal Housing Ad- ministration insured mortgages. And let me say to you here again that the Federal Housing Administra- tion does not lend Government money. All these funds are furnished through private capital. But the revived courage and in- terest reflect the Federal Housing Ad- ministration influence, and the re- newed confidence of those banks, life insurance companies, building and loan associations, and other financial institutions working through it, to bring about this remarkable recovery. So, in parting, my advice to you is to buy yourself a home. No matter where you live, whether it is in Wy- oming, or Washington, or Maine, or California, consult your local banker or real estate dealer. If you are able to pay rent and are steady in your habits, there is no reason on earth why you cannot own a home under the “single mortgage system,” which is the Federal Housing Administration system. 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