The MSVR described above for bonds is also used to cushion the fluctuations of common stock, though in a somewhat different fashion. Life companies are required to place the realized and unrealized gains from common stock holdings into the MSVR until the reserve reaches a maximum of 33-1/3 percent of holdings; thereafter, gains may be credited to company surplus. Conversely, any losses on common stock are first taken against the MSVR and when that reserve is exhausted, charges are made against company surplus. In this way, the surplus account is cushioned against a large share of fluctuations in stock prices.

# e. E' mmercial **Real Estate Mortagaes**

Because mortgage loans traditionally have had maturities of 20, 25 or 30 years, they have always been viewed as an ideal investment medium for the long-term obligations of whole-life policy reserves. At the end of 1990, mortgage holdings were $268 billion or 19 percent of total industry assets. The bulk of such holdings (about $200 billion) was in the form of mortgages on commercial real estate such as office buildings, shopping centers, industrial warehouses, hospitals, hotels and resort properties. Other mortgage operations include loans on apartment dwellings, single-family homes, and farm properties.

For the first 25 years after World War 11, life insurance companies held first place as the largest institutional lender on commercial properties, and they have continued to provide between 25 and 30 percent of commercial real estate financing in the United States. In the 1950s, lending to finance retail stores and new shopping centers was the main thrust of life company activity, providing the support services for new community development based on the sharp upturn in homebuilding. The focus shifted toward office buildings in the late 1960s and early 1970s, but retail store financing again has become the largest single form of commercial mortgage lending by life companies in recent years.

State investment laws governing mortgage lending by life companies have followed a conservative course, limiting mortgage loans on commercial properties to 66-2/3 percent of appraised value until 1964 when New York State raised the permitted loan-to-value ratio to 75 percent. Many states impose quantitative limits on total mortgage loans held by life companies; the percentage in New York was 40 percent until it was lifted to 50 percent of assets in 1964. More common was the legal limit on lending on any single parcel, usually 2 percent of assets but sometimes a percentage related to capital and surplus. Such restrictions apply to any form of mortgage lending, and not just to commercial mortgages. The current New York limit stands at 2 percent of assets on a single property, but other states are sometimes higher.

Commitments on commercial mortgages are usually made in advance of construction, with funds paid in installments as the work is completed, and proceeds used to repay short- term construction loans from commercial banks. Loan maturities normally ran in the 20- to 25-year range until recent years, when liquidity considerations led life companies to limit the bulk of their commercial mortgage lending to 10-year maturities.

# **f.** Residential Mortgage **Lending**

In the years immediately following World War II, life companies became important lenders on home mortgages, financing a large share of the postwar boom in housing construction. The primary outlets were mortgages insured by the Federal Housing Administration (FHA) or loans guaranteed by the Veterans Administration (VA). Along with the safety of government backing, these loans commanded attractive yields for the time. Conventional home loans, i.e., those without government guarantees, were 19