Mortgages: Types of Lending Institutions

Approximately a fourth of all of the outstanding mortgages are carried by individuals, that is, not institutions. For the remaining three-fourths, a number of different types of institutions are involved. These include the following: Commercial banks (national and state)

Mutual savings banks

Savings and loan associations

Life insurance companies

Among these different types of lenders there are varying institutional policies, different types of funds loaned, and sometimes different geographic areas covered. Different types of institutions have different practices and are governed by different regulations, depending upon their primary purposes. Some regulations also vary from state to state.

Commercial banks play a predominant role in short-term financing of building operations, particularly construction loans. They usually expect to "unload" their mortgages and convert them into permanent financing.

Insurance companies, as a group, represent the largest body of institutional investors in the nation, in part because they hold a substantial proportion of the mortgages on commercial properties. As will be shown later, the proportion of residential mortgages they hold has been increasing substantially in recent years.

The first three types of institutions mentioned are bound by law to operate within certain geographic areas. Insurance companies, however, are not as limited in their scope of operations. On the other hand, the basic investment policy of insurance companies is determined by the needs of the insurance end of their business, namely, safety rather than liquidity. Therefore, they are primarily involved in the secondary mortgage market, discussed later. Their interest in mortgages, even at that level, however, depends upon the yield they can obtain. For this reason, they frequently prefer corporate bonds, revenue and municipal bonds, and Government securities over home mortgages, even the guaranteed ones.

Commercial banks and savings and loan associations are active in the mortgage field in all of the regions of the country. However, they are more active in some regions than others. Figures are not available for the proportion of mortgage debt they hold on nonfarm houses, but are available for nonfarm mortgage debt in general. Some general causes of these regional variations can be surmised. For example, the mutual savings banks have become firmly entrenched in the New England and Middle Atlantic states, where most of these banks are located, and therefore they have a high proportion of the mortgages in these areas. The commercial banks have a high proportion of the mortgages on the West Coast because the policies of these banks are more liberal there than elsewhere in the nation, especially the East. Savings and loan associations have become relatively strong in all regions because of their liberal policies. This has made them especially active in areas of new growth (although the proportion of their business has been kept down on the West Coast by commercial banks, for the reasons indicated). Also, savings and loan associations (like mutual savings banks) are interested in "servicing" mortgages, and this tends to relate the amount of their business to the rate of new construction. The investment pattern of life insurance companies is also governed in large part by the volume of new construction. This makes them especially strong in the South and West (as against the East).

Mortgages sometimes are arranged by banks or mortgage brokers who do not invest their own funds but, probably using their own name, invest the funds of others. They "originate" the mortgage, find the ultimate investor and frequently "service" the loan (e.g., collect monthly payments from the home buyer). (A real estate man for example, may represent one of the life insurance companies.) This arrangement has the advantage of balancing out, to a limited degree, mortgage funds in different parts of the country. It permits the flowing of funds from areas like New York to areas of frequent scarcity as the South and West. (While a few life insurance companies maintain representatives in different cities, most of them rely on bankers. Such bankers are termed "correspondents.")

The mortgages carried by individuals (representing the one-fourth of the total referred to earlier) are usually more conservative than those carried by institutions. Most of these mortgages represent low-risk loans of only 50 or 60 per cent of the value of the property. This is in part the result of the fact that individuals are not set up to service the loan; that is, to maintain elaborate accounts, make collections, and follow up on delinquencies. This loan servicing function becomes a very important one to many financial institutions.

Source: Housing: A Factual Analysis