Loan broker business, such as buildings and loan associations insured by the government, pay up to 4.6% return, sometimes more if the savings are left in the association for a period of time. This rate is about .6 of one per cent higher than that of the highest rate savings banks in the country, and the building and loan associations provide comparable safety and liquidity. If you are a very cautious individual who wants to be sure he gets back the same number of dollars he invested when he wants them back and with a government guarantee, the insured building and loan association is the place to put your money for the highest rate of return.

About 25,000,000 Americans deposit in insured building and loan associa­tions, and the total assets of these associations amounted in 1959 to $63,472,000,000. This total represents a rise from $5,733,000,000 in 1940 and $16,893,000,000 in 1950.

To give you an idea of loan broker business, the savings capital of all of these associations combined amounted to $2,243 per investor. The building and loan association is the chief outlet for the funds of the small investor and the medium and small income earner. On interest day there are tremendous lines of investors in many building and loan associations anxious to have the interest added and to see how much they have up to the present accumulated.

The growth in a fund deposited in an insured building and loan association over a period of years is surprising, as we can see from the table. This table has been prepared at various rates of interest obtainable in the year 1962, and in­terest has been compounded semiannually. Compounding simply means adding. If $10,000 is deposited at 4% and interest is compounded semiannually, at the end of the first six months 2% has been earned, and the total is now $10,200. At the end of the next six month period the 2% is based on $10,200, and $204 is added, whereas only $200 was added at the end of the first six months. This compounding has a cumulative effect. Every time interest is added it is added to a larger amount.

At the rate of 3M% your money doubles in 20 years (of course taxes have to be paid as the interest accumulates each year and this tax lowers your net return, depending on what tax bracket you are in).

Over a period of time the difference between 3½% and 4% is great. Over a 20 year period, at 4%, $10,000 has become $22,080, while at 3½% it has become $20,016-$2,064 less. This difference amounts to over 20% of your original in­vestment of $10,000.

When looking at loan broker business because a slightly higher rate means so much over a period of years, it is best to seek out the highest paying insured building and loan associations. They should be all insured by the Federal Savings and Loan Insurance Corporation, and if they are, there is not the vital necessity to invest only in the largest and soundest associations. There have been only 39 building and loan association failures since 1934 on which the FSLIC has had to pay off. Most of these failures were caused by embezzlement.

Where the investment has to be watched, in conditional sales contracts, for instance, the investment should be nearby; but where the investment is insured by the government it does not make a great deal of difference where it is, and many of the highest rate associations are in California.

The Financial Federation, Inc., 5150 Wilshire Boulevard, Los Angeles 36, California, is a group of 11 federally insured building and loan associations, which were paying 4.6% in 1962. One check up to $110,000 in total amount ($10,000 for each of the 11 associations) could be mailed to the Federation and would be distributed by the Federation among the group at no charge to the investor.

GROWTH OF INVESTMENT IN BUILDING AND LOAN ASSOCIATIONS IN A 20-YEAR PERIOD
COMPOUNDED SEMI-ANNUALLY

Other groups of insured associations are represented by brokerage organiza­tions. Some of these organizations are:

Joseph H. Meyers Corporation, 170 Broadway, New York, New York.

Amott, Baker & Co., Inc., 150 Broadway, New York 38, New York.

Ernst I. Cahn, 29 Broadway, New York 6, New York.

B. Ray Bobbins Co., Inc., 500 Fifth Avenue, New York 36, New York.

Greater Miami Savings Center, 174 East Flagler Street, Miami, Florida.

Insured Investment Associates, Inc., 176 West Adams Street, Chicago3, Ill.

B. C. Morton and Co., 131 State Street, Boston 9, Mass.

These loan broker business organizations put out brochures, and some of them not only list every building and loan association they represent, but present its latest financial statement together with other pertinent facts. All the brokerage organizations will send literature on request.

While it is true that all federal building and loan associations are insured, there have been some failures in the past, and this means a delay in getting back your money, although all money has been returned.

There is one difficulty with insured building and loan associations which militates against immediate liquidity of your funds. They can delay paying you back for at least 30 days and with perfect legality, and some associations make this the rule in the case of large withdrawals. If you must get your funds quickly for an investment that will not wait, you may not be able to draw out your funds in time.

Further considering difficulties with investing in loan broker business, when one realizes that the reason for this delay is the fact that funds placed in building and loan associations do not just sit there in cash waiting for you to withdraw them and that they are not in easily liquidated investments, a further difficulty with the building and loan associations appears. Let us analyze their investments. In 1959, out of total assets of all associations of $63,472,000,000, $53,087,000,000 was in mortgages—84% of all the assets. Mortgages by then-nature are long term and often cannot be liquidated easily, so that any sub­stantial withdrawal of funds from a building and loan association would require time to dispose of the mortgages. Delay would be encountered. It should be pointed out that of this total mortgage figure only 5.6% was in FHA insured mortgages and 13.5% was in Veterans' Administration guaranteed mortgages. The rest—81%—was in uninsured mortgages. This fact is brought out not to in­dicate that the building and loan associations are insecure because they hold uninsured mortgages, but to show that there is nothing whatever the matter with investing in uninsured mortgages. The record of building and loan associa­tions is an excellent one.

A number of associations pay an extra percentage if the money is kept in­vested over a period of years. Recently, one brokerage firm represented a build­ing and loan association that paid 4½% to start but added three-quarters of 1% if the money was left in for one year, making the long term rate 5¼%. Another association paid 4½% plus another ½%if the money was left in for a year—making 5% in all. Ernst I. Cahn represents the same association.

The Greater Miami Savings Center represents Service Savings and Loan Association of Summit, Illinois, and this association has a similar 5% plan.

If we go back to the table it becomes apparent that at 5% $10,000 becomes $26,820 over 20 years—more than 2½%times the amount originally invested, and at 3M% it just doubles. The difference is $6,804-68% of the original $10,000 in­vested; so watch the interest rate.

One further fact about insured building and loan associations should be brought out. When you place your money in them you are the owner of shares of the association. In this respect you are like the purchaser of common stock except that the value of that stock does not fluctuate with the stock market. But the rate of return can be changed by the association, and it is changed from time to time. The table on page 137 indicates the rate history of one association from 1930 to 1961.

On the other hand, a deposit in a commercial bank is a fixed obligation of the bank to repay. It is like a loan to the bank and is not a purchase of the shares of stock of the bank. It is more liquid, and the banks generally do not restrict repayments to you when you want to withdraw funds except in the case of time deposits, which will be discussed later.

The interest periods can be of some importance. If interest is added quarterly the plan is better than if it is added semiannually. If we take a rate of 4% per annum on $10,000 compounded semiannually, at the end of six months the in­terest earned is one-half of 4% or $200, and the new balance is $10,200. At the end of the next six months the 2% rate is applied on $10,200, and the interest is $204. At the end of the first year your capital is thus $10,404. If, however, interest is added quarterly, 1% is added each quarter, so that at the end of the first quarter your interest is $100 and your total capital is $10,100. At the end of the second quarter you have 1% of $10,100-$101-and your capital is now $10,201. At the end of the third quarter you have earned $102, and your capital is $10,303. For The Following Schedule Shows the Average Annual Rate of Dividends Paid by Beverly Hills Federal Savings and Loan Association Since It Was Organized

the final quarter your interest is $103, and at the end of the year your capital is $10,406. When interest is added semiannually your capital is $10,404. Over a period of years compounding quarterly results in many dollars more than compounding semiannually. More important, however, compounding quarterly allows you a good deal more flexibility. You can add your interest each three months and then feel free to withdraw any or all of your funds for other invest­ment. Where semiannual compounding is used you may not want to withdraw on say December 1, when interest for the six-month period is added only on December 31.

Specifically within the category of loan broker business, the building and loan association, as opposed to savings and loan, will usually lend you on the basis of your deposit book for a short period at nominal interest so that you do not lose the interest for the entire six-month period.

While federal insurance is limited to $10,000 per depositor, your wife can also deposit $10,000 and have full coverage, and you can have a joint account of $10,000 and have this account insured too. If you have children, you can have joint accounts with them or they can have their own accounts—all insured.

A final advantage in investing in insured building and loan associations is that they will pay you from the first of the month even though you do not invest until the tenth or fifteenth, and sometimes even the twentieth of the month.

We now come to another type of loan broker business, specifically another type of building and loan association—the uninsured association. While some of these may be insured by private insurance companies, they are not insured by the Federal Savings and Loan Insurance Corporation. About 65% of all building and loan associations are government-insured, but these hold 94% of all building and loan association assets. There are 6,300 build­ing and loan associations.

It must be made plain at the start of this discussion on uninsured building and loan associations that many of them are just as sound financially as the federally insured ones. The federal insurance, however, means a great deal, perhaps not in the boom times of the 1950's and early 1960's, but if and when a real depression sets in. For that reason if the dividend rate is the same as between an insured association and an uninsured one, there is little point in putting money into the uninsured one. The guarantee provides almost 100% peace of mind. The real reason for the existence of the uninsured as­sociations is the payment of a higher rate of return. The First Western Savings and Loan Association at 118 Las Vegas Boulevard South, Las Vegas, Nevada, was uninsured until 1961. It paid at least 5% per annum and sometimes ran above this rate, compounded quarterly. As in the case of all building and loan associations, deposits and withdrawals could be handled by mail. In 1961 this associa­tion became federally insured. It was sound before 1961. This guarantee makes it sounder now.

The First Savings and Loan Association, 109 Shields Building, Meridian, Mississippi, pays 5% as does the Phoenix Building Association, Phoenixville, Penn­sylvania, the Newton Savings and Loan Association, 11 High Street, Newton, New Jersey and the Southern Savings and Building Association, 506 West Jef­ferson Street, Louisville 2, Kentucky.

Note, when looking at investing in loan broker business, you cannot put any funds into uninsured building and loan associations safely without a full examination of the association. You can start by asking for a financial statement (statement of condition). These are some rough tests to apply to the financial statement:
Do cash and government bonds amount to at least 10% of savings accounts,
since cash is required to meet demands of the investors?

Do reserves and undivided profits amount to at least 5% of savings accounts?
Where the association is a stock company stock can be included to make up this 5%.

Is a large proportion of the funds tied up in real estate? This may not be
readily convertible into cash in time of need and may represent over lavish buildings and fixtures.

How long has the association been in existence?

Has it grown in size and in the soundness represented by the above criteria?

This is a rough guide only, and more will be discussed in relation to financial statement analysis in the chapter on Judging Credits and Making Collections.

You must examine into the reputation of the building and loan association in its community through securing the usual credit reports discussed in earlier chapters and making inquiries in the city.

While the building and loan association, either insured or uninsured, can be a wonderful repository for funds, it can be one of the crookedest 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% 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, however—for 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 operated—Maryland—the 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.

Looking at investing in loan broker business generally, 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% and 18% 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% to 18%. Obviously no association pays such rates, and the very worst pay only 6% 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% 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.