LENDERS MORE CAUTIOUS \TFH REAL ESTATE LOANS

Scys loseph Jones

Security-First Ngtionql Bcnk oI lori Angeles

(Reprinted from "Building Controctor of Cqlifornicr")

In the past year we have seen many changes concerning construction and real estate loan financing. Southern California has the most outstanding record of achievement in tbe production of homes of any section in the United States. The record of permits for new construction in I os Angeles County alone is as follows: ft was possible to build housing to the utmost of capacity since the end of the rvar because of certain definite conditions existing in this area. The first factor has been the apparently unlimited number of buyers for these homes, resulting from the pent up demand for housing, a net increase of approximately 300,000 in the population of Los Angeles County since January, 1946 resulting from inbigration, and the rise in incomes. The second very important factor in this program of development was the easy terms upon which money tvas available. Veterans could obtain at, or nearly at lffi/o of the purchase price. F.H.A. loans were available up to 90/o of the value under the special regulations under Title VI, created for this purpose. A third, and extremely important factor in this program of development, was the ability and willingness of lenders to provide the money needed for this purpose, relying on government guarantees.

The authorization of this number of housing units in two and three-quarters years provides sufficient housing for more than 600,000 people. The tremendous scope of this achievement is 'better realized when we remember that there were only 192,888 units authorized in Los Angeles County in the entire ten-year period preceding the war, from 1931 to 1940.

This production was accomplished only by the coordinated efiort of the various segments of the building industry, (1) those who produced the materials used in construction, (2) the contractors, (3) labor, (4) lenders who provided the necessary finance.

In the building field, like all others, however, changes do occur. Beginning about the middle of last year, 'interest rates as reflected in the securities markets, began to rise from the extremely low level to which they had fallen during the rvar. This change was dramatically emphasized on December 24, when the Federal Reserve lowered their support price on long term government bonds to about par. Lenders who made a practice of purchasing loans, such as life insurance companies, had determined by analysis that the yield from F.H.A. loans that they had been making vvas netting little more than 3/o after deducting acquisition and servicing costs. After taking into consideration tax advantages in certain kinds of bonds, and the absence oI the problems of servicing or possible foreclosure, the yield of F.H.A. loans was not attractive in comparison with the new yield possible from bond investments. It must also be remembered that lenders have suffered a serious increase in operating costs like everyone else, but without a compensating increase in the price of their commodity, money.

During the past year we found that the secondary market for loans practically disappeared. Many smaller lenders who made a practice of selling their loans and reinvesting in other loans were not able to continue their program. All of these things began to lessen the supply of real estate financing.

The scope of lending activity of banks prior to this change in the market is clearly revealed by statistics prepared by the Federal Reserve Bank. At the end of 1946, banks throughout the United States held 4.7 billion dotlars of real estate loans. By the year end of.1947, this had been increased to 9.3 billions, or nearly twice the amount. During the year 1947, banks actually loaned a billion dollars more upon real estate than the savings deposits increased.

This situation resulted in a careful study by the government agencies. S.E.C. released a report showing that in the first quarter of 1948, the individual holdings of currency and bank deposits had been reduced by approximately four billion dollars. This fact, coupled with the tremendous amount of loans that had been made during the previous year, gave rise to certain concern about further inflation of realty prices that would be caused by too easy credit. The Federal Reserve Board has issued warnings to all banks, recommending that greaer caution be used in the real estate loans. This was followed later by the imposition of increased reserve requirements on banks, which withdrew large amounts of funds available for loans or investments. It was followed still later by a regulation restricting installment credit of all forms, including loans upon real estate. The Federal Deposit Insurance Corporation also issued a warning to banks, cautioning them against the large amount of real estate loans made for long terms upon a commodity as high priced as real estate. The Comptroller of the Currency has issued a warning of a similar type. All oI this thinking and effort was directed toward curbing inflation of real estate, which already has attained' serious ProPortions.

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