Take care before investing in a building and loan association: While these entities, either insured or uninsured, can be a wonderful repository for funds, they can also be one of the most crooked investments in the country.
This statement is made from a detailed knowledge of several building and loan associations and their operators. Some months ago a scandal broke out in the Washington and Baltimore papers about two such associations with assets in the millions. The Securities and Exchange Commission took action against them and found, among other things, that in the portfolio of mortgages of the associations there were 86 nonexistent mortgages. They existed on paper only!
These associations dealt heavily in second mortgages. These might have worked out well, but a good number of them were supplied by a broker who bought them at a discount ranging up to 30 percent and then resold them to the building and loan association at or near par.
The broker got about as much interest out of the mortgages as the building and loan association; but, whereas the association had its money in the mortgages for a five year period or longer, the broker held the mortgages only long enough to sell them to the association. Sometimes he collected from the association and only then paid for them, so that he never had any of his own money invested.
He provided a guarantee on the mortgages, howeverfor the first payment! After that the association could worry about its money. In other words, if the association bought the mortgages direct and without the broker, it could have secured approximately twice the interest rate, and this higher rate could have been used to provide a cushion against losses. At twice the rate the second mortgage might have been a good investment, but not at the rate, which was left after the broker took his "fee."
In addition, these mortgages were on home improvements, and in the area in which the association operatedMarylandthe home improvement industry has been subject to some irregularities. Some home improvers have had to face criminal charges for trying to collect from the customer without having completed the job, for altering the contracts and for other offenses.
If an uninsured association were picked out of the air by the investor without any investigation as to its soundness, a reasonable rate of return would be somewhere between 12 percent and 18 percent per annum, compounded monthly. In some of the uninsured associations no one should risk a penny, so that if the investor should gamble on possibly getting one of these out of all those advertising, his fair rate of return should be 12 percent to 18 percent. Obviously no association pays such rates, and the very worst pay only 6 percent or thereabouts.
So, either examine fully and be sure of the financial soundness of the association in which you invest, or invest in a federally insured association. Any association handling second mortgages, particularly those on home improvements, can share the wealth a little and pay at least 8 percent to an investor, no matter how sound the association. It is time for a New Deal or a New Frontier for the small to medium income earner who is thrifty enough to want to save for the future, and he is entitled to a larger return.