The Washington times. [volume] (Washington [D.C.]) 1902-1939, 1925-05-02

Interest and Discount Rates
Reasonable for Risks, Say
District Bankers
Nv RICHARD HATTON.

question Oh nOLIl0 Duy1u6B CSpC
cially in the purchase of the class
of home within the means of the
large majority of Government EN-
and limited salaries.
That home ownership is desirable
and makes for the betterment OF
civic conditions In general is OBJ
vious and any movement designed
to assist the home buyer should
be encouraged. It was for the
very reason of encouraging, and
making possible home ownership
upon an easy payment plan that
the mortgage, both the first and
the second trust, came into gen
era1 use in such transactions.
Fortunately for the man of small
means, either in, or out of, the
Government service, there is, al
present ample money to be OBJ
tanned on first and second trusts
This also makes extended building
operations possible and enables the
constructor of small homes to
erect and to sell houses at rea-
sonable cost to the purchaser
Homes, naturally, cannot be con
structed today at anywhere near
the cost Of ten years ago. This
I d
in the money market or to exces
sive interest demanded for trusts
upon the property. but to a general
advance in the cost of labor and
material, according to local bank
ers. That rates of interest and
other charges upon second trust
in Washington are in no way ex-
cessive, when the risk involved in
the second trust is considered is the
very generally expressed opinion of
the foremost bankers of the city.
When it is considered that very
few. IL any, banks lend money upon
second trusts, the disinterestedness
Of the views OF these experts in
finance viii readily be apparent.
There is ample money available
for loans on second trusts" said
one prominent banker today. "This
may be obtained at rate of dis
count of approximately per cent
q year upon residences Of the class
usually occupied by Government
clerks. This class Of house is usual
~ put on the market by the builder
for cash payment of Is per cent
or more. II the builder has placed
q first trust upon the property OF
approximately one-half the sale
value to assist in financing the con
gtruction approximately IS per cent
Is taken by him in the form Of j
second trust to be paid in monthly
installments.
Generally it takes an average of
about six years to pay out the
second mortgage. This mortgage
would bear interest at the rate OF
8 or per cent and would sell at
from to 81 per cent discount for
each year that it had to run. In
the case of a house selling for
$1,000, $1,000 in cash and $3.50 in
a first mortgage and s., 500 in a
second mortgage in installments
taking six years to pay out, the
builder selling the second mortgage
on this basis would be getting the
equivalent of approximately $1,000
all cash over the first mortgage.
When the risk in the second
trust is considered the possibility
that the amount may be wiped out
entirely through default in the first
trust payments and the length Of
time covered by the installment pay
ments the profit of the builder does
not seem excessive. To furnish the
necessary overhead required in
handling the detail Of monthly pay
mentS and to allow for inevitable
losses due to the increased risk OF
second mortgages is a matter which
must be considered also and this
class of investments would not be
attractive at a rate lower than that
mentioned above.
Commenting upon the subject of
the second trust, another banker
said:
'"There is a great risk in the Sec
ond trust and banks do not concern
themselves with them. If, for ex-
ample, property values should drop
sharply, or, in some cases, even
slightly, the value of the second
trust would be impaired to an ex-
tent that would make it a very
shalxy risk. Therefore. it is not un-
reasonable to charge for the ex-
traordinary risks taken in this form
OF Investment. To reduce the in
terest on the second trust to any
appreciable extent would render
them very unattractiVe investments.
In general, the expressed opinion
of local bankers is to the effect that
the second trust is not an attractive
investment at any time, and that
any lowering of the present recOg-
nized rate would render such in
Vestments purely speculative. AS
expressed by one banker, ITO lend
money on second trusts at lower
rate than is generally accepted at
present would he either to gamble
or to do an act of charity, some.
thing which the average investor is
not likely to consider"
The whole question OF first and
second trusts seems TO be involved
with the never-failing and much
worked law of supply and demand
which keeps right on working upon
a scientific basis, and the subject
OF second trusts, colossal as it is
cannot be influenced or readjusted
by the injection of a few million
dollars into the market" declared
another financier. at must 'be
born in mind, when considering the
rate charged upon second trusts
that a foreclosure would entirely
been several glaring examples OF
this in Washington recently where
I'm the holders Of the second trusts
have lost everything. There may
be a few abuses in the matter Of
second trusts, but, in general. the
charges are justified by the nature
Of the risk.
II is stated that the rate charged
upon second trusts in the Distric
of Columbia is no higher than II
other sections OF the country, will
the exception of New England ant
that it would be impossible for /;
finance corporation or an individual
TO lend upon such risks at lowe
rate than at present generally dc