8/14/2019 Savings Banks Real Estate Loans by Orra Eugene Monnette President Bank of America Los Angeles

1/7

2t2 Tke nea,It! BIue Book of Californin

ORRA EUGEN! MoNNETTEPresidmt B@hkol AnrericaLos Angelec

8/14/2019 Savings Banks Real Estate Loans by Orra Eugene Monnette President Bank of America Los Angeles

2/7

Thened]ta Bl,ueBook ol Co,Lifonritl 2I3

Savinss Banks as Related o RealEstate LoansBy OREAEUGENEMoNNETTE

Umitatiorrs ol Sarings Banks-IJiberulizo"tion ol Bank-ing laus-Operatiens of Bank Act-Ve,lue rs. Specul,atior1-Valxntion ol Loak Property-Appreisala-StabiUtu of RealEstate Val,ues-Lodns oll AncompleteiLProiec*-SaoingsBa.nkSemice.

(- i AVINCS banks,as popularlyknown, and with full legalsigrifica-:l tion, are exclusively tale bank organizations. They are crea(ed- by and organizpd olelyunder state avrs. They pxist as single,complete institutions engaged in saving bank business, or, as per-idtted by the Bank Act of California, as a department of a Californiastate bank, whiqh may at the same time be elgaged in one or moreother phasesof tlle banking business, such as commercial banking ortrust business. I-lIT1TATIONS

A-e onl adistinguishecl irh national banks, he sa\ ngs bank is-a specially authorized and empoweredkind of banking institution, ILibanlirng operations are directeal by ancl imited by state law, while thebuslnessof a national ballk has it-g egal authority resting i4 and itsoperationsguided and controlled by the statutory law of the .UnitedStates. The national bank was instituteal originally as a purely com:mercial banking proposition, that is, the loaning of money upon whatis ordinarily known as the commercial or unsecuredbasis. The nakrror makers of the obligation to the bank obtain the loan upon the basisof credit foundations which are established by the history of opera-tions in business,assets and liabilities, and other credit fundamentals'whichare presentedto the satisfaction of the loaning institution. Byextensionof the original system national banks have departed some-rhat from this original idea and in a limited maMer ergage in otherphasesof the banking business. They do receive money on aleposits,similar to the sayings bants, and pay interest therefor, and they areperrritted under cer-tain limitations to make real estate loans, buttheseare restricted in many wayF and not at all comparable to tlleprivile$;sand liberal laws as applied o savingsbanks.

LIBERALIZATION OI' STATE BANI(TNG ],AWSAs a matter of fact the competition existing and grcving out ofhatural causeshas served to break down the lines of demarcation be-

8/14/2019 Savings Banks Real Estate Loans by Orra Eugene Monnette President Bank of America Los Angeles

3/7

TlLeReaLtABLueBook ol Cd,Iiforhiatween national banks and state savings banks. The tendency hasbeen for the national banks to seek and obtai[ le!.lslation favorableto the extensior I lheir powersand operations,;nd,ikewise, bestate bankrng laws have been liberalized in a similax manner forsavings banks, so that the restrictions in eachcase as odginally con-sidered and designed by lsw have been removdto a certain extent.The origiDal theory of a savingsbank underthe Califomia lawswas that it should be limited to a bank organized for the pur?ose ofaccumulatingand loaning he funds of its stockholderB nd to receivedeposits of mony. Thes oans were originally to be restricted uponreal estate security. It was not originally contemplated to permit asavings bank to engage n commercral oan business n aDy way, or tohsndle and deal in commercialpaper and bank acceptances.However,the growth and development f the bankingbusiness, nder competi-tion, has changed this conception of a savfugs bank, and ,with moreliberal enactments of law the state savings bank now does a quasicommercialbanking business n addition to the major and primarysavingE usinesswithin strict iDtelTretation hereof.A lack of under-standing of these difierentiations occasionsconsidersble confusion ofthought on the part of customers and patrons of state banks in Cali-fomia. A savings bank, with only the single departnent, ca[ only docertain things as permitted by law and its business is restricted asabove ndicated. If it be a state bank with departments,that is to say,with commercial,savings and trust depaltrnents, it can do more for itscustomersthan any other kind of bank, Within the proper limitatiorsof state aws such a bank can do any kind of banking businessandcan do many things which are not permitted to or within the prov-illce of a national. Therefore, oDe who seeks banking relationship\r'ith a stat bank must keep n mind the kind or character of his busi-tress with reference to the powers and limitations of the institutionwith which he is proposing to deal. The ignorance of a prospectivcustomer as to the poweN of a bank and the failure of the bankoffciak, oftimes, to explain the legal limitations under which the bankmaytreoperating.often bring about unpleasant ttitudesof mind v.'ithrespect o the service which thc bank is supposedo render 10 thepublic.All banksseeknew business nd new customers, nd service sthe watchword or slogan employed to attrect business,but what abank is not permitted to do by law is not to be considered a failureon the palt of that bank to extend ull and coml)leteser-vice o itspatrons.

OPERATIONSOF BANK ACTUnder the Bank Act of California a savings bank may loanr&ney upoD real estate. This comeswithin the section pemitting asavings bank to loan money on adequate security of real or personalproperty. The first restnction is that no such loan, as applied to realestato, shall be msde for a period longer than ten years. This applies

to all state savingtsbanks. It has been he custom,generally, in Cali-fomia, for savings banks to arbitrarily limit loans upon real estateto a maturity of three yeaN. This has grown out of an experierlcealrd judgment which detemine that real estate valueshave an apbrcx-imate change either of appreciation or depreciation within a thfee

8/14/2019 Savings Banks Real Estate Loans by Orra Eugene Monnette President Bank of America Los Angeles

4/7

The Redt! Bl,ueBook of Cadfornia 215year periodJ and the requirements of conservative banking businessitrdicate tllat the bank should have the opportunity at the end of threeyea!6of re-deter.rnining he [ecessity and advantage of either requir-ing ihe loan to be paid or of having it renewed upon some differentbasisaslhe conditions may then justify. However, a loan once madeupona three-year basis becomesmore or less a fixed loan and there isa g"owing belief and larger vievpoint among state bankeN to the ef-fect that even the three-year period is too long.

VALI'NSVS.SPECI'LATIONValups in Califofnia have changdvert' Iapidly wilhin recentycars. ndmost orlunately ave ncreased,nt Lherps and hasbeena[ element of speculation which t}Ie banker must take into account.It is moreadvantagouso a savingsbankand, Irom the broader on-siderations.[ more ea]value o thecllstomer,o make avinssoansfor a shorter period. Another element which enters into the lonEperiodand fixedsavingsbank oan s tle fact thal as an offset o thiithe savings bank attrscts tune or tenn deposits upon which it paysinterest, and which to a certain degree are more or less fixecl is'astablebalancp n. the bank. as against which savingsand real estateloanscan be made-

VAI]'UATIONF LOANPROPERTYOne of the sources of larger dispute, more or less pleasanfly orunpleasantly at times betwen a bank and its customer. is the valuewhicha banl< laees pona pieceof real eslateas ls baslsas scr"uritvfor a real estate oan. The Bank Act oJ Califomia providescertai;rcstrictionsupon t}le amount which can be loanedas asainst lealeslare aluations.The customer lwayshas n mind he;alesvalueof tle propertyon which a loan s soughtand most reouentlva sDecu-laliveor problematical aluewhich his faith in lhe future erowth otthe state seems o justify to him. With this appreciated notion of itsvaluehe approaches he bank with a desire to obtain a loan comrnen-sulate rrith the supposeclenhancedvaluation. The savings bank can-rot loan upon- hat th\oryor else it is certain to blry tht real estate,instead of making loans thereupon. No state savinss bank wants tobuy real esiale or desires o bring loreclosure roceedings, r caresfor,anl4h ng else han that its loan. principal ;nd interpst.shall beparoprcmptLyon matuTrty. APPIIAISAL- Therefore,he appraisal nadeby the bank is atwaysbaseduponsuCh valualion which is within the widest range of possibilitt ofsale nd realjzation n cashof the ploperl,y f fie bank siompelledonthe $aturity of the loan and failure of pa]'nent to foreclose its claimad to satisfy the same out of the property sold under foreclosure.Tlerefore, the costs of the possible foreclosure, attomeyg fees andother expelses,delinquent taxes and assessments nd other continsent

itemsmist be_kept n mind so that when the bank finally reacheJtheof satisfaction of its debt there must be sufficieni to ctear aliagainst the property. This necessitatesa very conservativer in ih frst inst'Ice and a wise.prog.nostication- n the partthe oaningbank as to what the property will be actuallyworth'ancl

8/14/2019 Savings Banks Real Estate Loans by Orra Eugene Monnette President Bank of America Los Angeles

5/7

216 The Redlt! Bhk Book of Cdl,i.forni&at what figure t can be readily soldat the time of the maturitv of theobligation.With thempidlychanging ondij ionsn Calitor-ni values,i t is a wisebanker$|o (an judgeof $har thp sibuation i l l be hreeor four -years_hence,f a loar be made of so long a maturity. Theresult of this is that the bankers are very conser.v;tive in the matterol real-eslaleoansand \ery frpoupnllyare unwill ing o loan morelhan lhir ly jo lony ppr cenrof a \pry rat ionalaudcal.elul aluationof Ihe prcpcfiy. n the l ightof all condirions orpor lcss ontinsentarldsonel mes"emote.

IMPRO\'EMDNTSFACTORN DETERMININQALUEIn the matter of.improvements lon real estate, ostof construc-tioD must al\:raysbe examiled into as reiated to aost of labor andmaterialxrhich has ncreasedn recentyears; also he deDreciationnvalue l improvemenlsvera period f years s an importanlelementwhich musLbp scriously akel into a.counl,. The bot-rowerwhoapproaches bank for a loar is in only one state of mind. He wantswhat he wants and when he wants it. He is not at all iDclincl o con-sidr the legal limitations of a savings bank in attempting to makea loan and very seldomcan he comDrehendhe necessityor a con_servali\evrluaj- io by rhpbink uponh:s properly n undprlAkinComakea_pr'o_posedoan. Even houghhis own rnoneyma3r e on ilep-ositin the bank, based n a faith of a conservativemanagemeDt f theinstitution which must rest upon the elementof safetyin loaning hefunds.of the_institution,yet he is most trequentlyunwittiDg o rea.trzethai the banke{ cannotaccommodateim just as he desirei. but oDlvupon he prir, . iplp f safeandconsen l vebanking.DEPARTI'RE FROM RUITES INADVISABITE

One of the most unfortunate and unsound situations with respectto loaning moneyiy savings banks iies in any departure or attem;teddepadure from the prin(iplcs of sa\ ings banL joars, e\en with lhel iberal izal ionoI thp la\ s which do adnir of olhar' oans bv a savinssbank {han lhestr icl l) rpal ps1a1elorn. Therehasnor beenany nte"nron the part of the framers of the lalv to pemit savings banks to loanmoney except upon adequaiese(uri j) . The lemptat ion jo artraclDusrness.o pleacp ustomers. nd to populcrize he insritul ion is verystrong,but in ihis l ies hc darger.of exlending .rpditor of earrvinson i ls blrsinessr a haza"dous d uncer' lainmanner.

STABILITYOFR&{L ESTATEVALUESReal estate, generally speaking, in Califor-nia, has approachedmore stable valups ha,r at any t ime herelofore. A pieceof land or. i ly property favorably lo.aied and having within it nol alonp hepossibil:ty of enhancedvalue, but the necess;rv elementof Drocluctionvalue. is mosL r.opel.ly a basis [or a savings bank loan. ihe spenu-

lative and problematical elements of its value must be omitted anclare not entitled to any consideration in the makins of a Ioan.In the previousdiseussion pference as bepi had entirelv to aloan to be made upon the security of real estate, with its im;rove-ments.where i t is in a state of complet ion.

8/14/2019 Savings Banks Real Estate Loans by Orra Eugene Monnette President Bank of America Los Angeles

6/7

Tke Reqf,tu Blue Book ol Ca.li,fortLi.lI,OANSON UNCOMPLETED ROJECTSNow there is a further field in which somesavinEsbanks haveembarked, nder lhe pressureand demandof expansion nd matcrial

upbuildingof the communities f the state. The housingpropositionhas a relation to savings banks. Buitding loans arc required to meetthe necessities f the situation. Just ho\r'far a savincsbank shouldgo n loaning is lunds uponuncompleleduildingproposit ionss aserrous ueslionor savjngs ankeTs ocafeful ly onsider.There smuch djfficulty in making the loan in such a way, and with :tdequateprotection o the bank,so that the frnal issueuponcompletiono? theimprovmentsshall shov the loan to have been ully safeguarded,andrlot only within legal but alsowithil conservativebankint limitations.This kind ot loan rannol be encouragedo too gaeat n extent bysavingsbanks. It is a loan more property made bj' finance and mori-gage companiesas coming peculiarly within the scopeand characterof their businesses. t may not be properly declined o a deservingcustomerof the bank, but if undertaken,t shouldbe safeguarded teverypoint, analsomesavingsbalk institutionsgo so far ai to refuseto make he commonlycalled building loan."SAVINCS BANII SEEVICECalifornia is a rapidly growing state,being enlargedday by dayby its development anal he influx of new money and many, many newcitizens, bringing their wealth and abilities to produce. The savingsbank has a high and important service o render in business pera-

tions, anal in this \vonderful developmett of a fortunate and blessedcommonwealth. Conservative bankers desire to be a Dart of thisgro\-dhand progress. The savingsbanksal:Adoing thpir part mostlo,'ally and the members of the real estate organizations of the citiesof the state, and of the state itself, shou:ld realize the nature aDdcharacter of real estate and savings loans and to know thet each sav-ings banh can and will make loanswithin legal limitations and rithinsafeand conservativeegulations o aid in the upbuildingof the stateanal t6 commutities and in extension of busiDessoDerationsand theenhancpmenl,f vslupsall along hp l ine of "conori icand healthfuldevelopment.

8/14/2019 Savings Banks Real Estate Loans by Orra Eugene Monnette President Bank of America Los Angeles

7/7