years his Company could not have sold its vast holdings of common stock, such as those of the New York, Hartford and New Haven, St. Paul & Pennsylvania Railroads, bank stocks and securities of a similar kind that have an active daily market on the New York Stock Exchange. At the time of his examination his Company was still holding these securities. He further testified that the profits of his Company on the sales of stocks had more than offset the losses but produced no figures to support that statement. The detailed figures introduced in evidence establish the contrary. They show that the net losses of the Company on stocks sold during the five years ending December 31, 1920, after crediting all profits were $1,040,581 and that there was a net shortage as of that date on the stocks still held over and above profits as of that date of $5,339,695. Part of the last named sum has doubtless since been recovered but none of the ascertained loss is recoverable.

During the same period the percentage of mortgage loans on real estate of this Company was the lowest of any of the five great Companies being only a trifle over 15 per cent as against the average investments on mortgage loans of all the companies in the State of 21.50 per cent and of the average of 44.1 per cent of mortgage loans by Life Insurance Companies of other States and as against the investment of the largest of the Companies, the Metropolitan Life Insurance Company, of over 40 per cent of its assets in mortgage loans.

There has been a constant reduction by the Mutual Life in its mortgage loans in favor of listed securities in the face of the experience of the past 14 years demonstrating that the former were vastly more safe, stable and conservative and have yielded an average income return of at about 25 per cent over the return from the securities in favor of which that Company insists in discriminating as against mortgage loans on real estate.

The proportion of mortgage loan investments to assets of the Mutual Life Insurance Company for the past ten years is as follows:

Another Company operating in a similar way is the Prudential Life Insurance Company of New Jersey which does a large proportion of its business in the State of New York.

The inquiry into the investments of the Life Insurance Companies has not, however, yet been completed by the Committee. Only the Presidents of the Mutual Life and the Prudential Life have been called to the witness-stand. The Committee has not yet had time to examine the officials of the other Companies as to investments but sufficient evidence has already been gathered from the examination into their accounts to satisfy the Committee as to the character of the legislation that should be recommended with respect to the investments of these Companies.

CHAPTER 12.

EXORBITANT CHARGES AND DISCOUNTS ON LOANS.

The construction of buildings continues to be further discouraged by the difficulties encountered by prospective builders in securing loans or other financial assistance. Life Insurance Companies, savings banks, and other lenders of money have imposed unusual conditions.

Although these transactions cannot be said to be in contravention of the letter of the law, they were without ethical justification. These transactions were accomplished by three different methods:

1. By the exaction of large bonuses for making the loan. 2. By compelling the borrower to accept as part of the loan real property generally unmarketable at high values or United States Government Bonds at par when they were selling far below par and could have been duplicated by the lender at the then market price.

3. By requiring the borrower to transfer his property to a corporation in order to avoid the Usury Law since corporations are not permitted to plead usury.

In many instances the lender would exact a bonus directly from the borrower. In other instances the lender would secure his bonus by participating in an exorbitant commission charged by the broker in negotiating the loan.

The first type of exaction is illustrated by the statements on the witness-stand of Abel King whose business was that of buying second and third mortgages, to the effect that he required and secured bonuses in some cases amounting to 50 per cent or more of the principal of the loan. Lists secured from him showed 161 such transactions amounting to over $300,000 in the past few years in all of which he secured large bonuses.

The second type is illustrated by transactions to which the Home Savings Bank of Albany was a party of which the following are illustrations:

In 1920 the Home Savings Bank loaned $250,000 on property at Syracuse exacting a broker's commission of $35,000 to cover all expenses. This commission amounted to about 14 per cent. Under an agreement between the broker and the bank the broker paid the

bank $20,000 of this bonus money. The effect of the transaction was that the owner received only $215,000 in cash for which he executed a mortgage for $250,000. He paid 6 per cent interest on the $250,000 up to the maturity of the loan and was then required to pay the $250,000 so that in addition to the bonus of 14 per cent which was deducted from the face of the loan he was required to pay 6 per cent on the $35,000 which he never received.

In 1920 the same bank loaned $200,000 on property in the Bronx at 6 per cent for five years. The total cost to the lender was $20,000 out of which the bank received $10,000 and the broker retained the balance.

This same institution in 1920 loaned $160,000 on premises at 529 and 535 West 55th St., New York City. The borrower paid $17,628.34 for commissions and expenses of the loan out of which sum the bank received a bonus of $9,000.

It should be borne in mind in this connection that the usual commission for securing loans of this kind in the City of New York is one per cent.

In numerous other cases savings banks refused to make loans unless the borrower would accept at par Government bonds that were then selling at a substantial discount and which the bank could have repurchased in the market at the same discount, amounting at times to as much as from 10 per cent to 15 per cent of the loan.

The second type of exaction was largely indulged in by Life Insurance Companies and savings banks that wanted to get rid of undesirable real estate which they had acquired under foreclosure or otherwise, by unloading on the anxious applicant for a loan.

Officials of these financial institutions testified that such properties were not forced upon the borrower but admitted that they would not have made the loans but for the inducement to get rid of the properties.

In August, 1920, the Mutual Life Insurance Company required as a condition of a loan of $1,440,000 on high-class desirable property on Seventh avenue, New York, between 30th and 31st streets, in which the loan amounted to well under 60 per cent of the appraised value of the property, that the borrower purchase from it upwards of twenty parcels of vacant property scattered in all directions, at the price of

$650,000. As the borrower required this money to complete
his building, the Insurance Company deducted $100,000
from the loan as a cash payment on the lots and took back
a mortgage for the balance of $550,000 of the purchase
price. The loan was at 6 per cent interest.
It was
admittedly as desirable a loan as could be had, in one of
the best neighborhoods in the city of New York and upon a
new building the value of which with the land was more
than double the amount of the loan.

About August, 1917, the Prudential Life Insurance Company required as a condition for lending $550,000 on a first mortgage of 6 per cent on property at the southwest corner of 59th street and Sixth avenue in the city of New York that the borrower should take a property owned by it at No. 68 Hudson street, Hoboken, N. J., at the price of $128,000, the borrower paying $15,000 in cash out of the loan and giving back to the Insurance Company a mortgage for the balance of $113,000 of the purchase price.

At about the same time in August, 1917, the same Company required as a condition for a loan of $540,000 on property at 905 West End avenue, New York city, that the borrower take a parcel of property at the corner of Market and Halsey streets in Newark, N. J., at a purchase price of $228,000, the borrower paying $15,000 in cash on account of the purchase price of the Newark property and giving back a mortgage for $213,000 for ten years.

Both companies were taking advantage of the loan market conditions in lending money on good security.

The Secretary of the Dimes Savings Bank of Brooklyn testified to eighteen instances of mortgage loans that had been made, all or partly in securities, in excess of the then quoted value of such securities, and to thirty-three instances in which the borrower was required to take from the Savings Bank real estate that it owned. All of these fifty-one transactions took place since the beginning of 1916.

The same bank required the borrower as a condition for a loan of $325,000 in 1918 on property at 255 West End Avenue to take in part payment of the loan property at Madison Avenue and 72d Street for $225,000 on which the borrower paid $25,000 that was deducted from this loan and gave back to the bank a mortgage of $200,000.