(2) to have a wider field for lending, frequently at better rates than home conditions warrant, and (3) to have a constant stream of maturities which there is no obligation to renew.1

Several objections have been advanced against the operations of note brokers: (1) While the paper put out is not renewed, another series of notes may be issued, which amounts to a renewal on the part of the broker; (2) broader banking connections may be worth more than brokerage houses if a season of tight money comes along; (3) the competition between banks and brokers tends to demoralize rates and take away from local banks business which would otherwise be theirs.2

132. Stock brokers. Enormous sums of money are continually being loaned to speculators and speculative investors through the medium of stock brokers. At times these loans in New York City reach and pass the two billion mark. A man may think that 95 is a low price for United States Steel common stock. A hundred shares of it would cost $9500. A broker will carry it for him on a 15-point margin. That is if he deposits $1500 with the broker, the broker will buy the stock and hold it until it is paid for or sold. The broker either furnishes the $8000, which is lacking, or borrows most of it from a bank. Upon this unpaid balance the buyer of the stock must pay interest. Each month interest is charged at a rate which fluctuates according to what the broker must pay for his own loans. Since the charge is made each month on the unpaid balance, the broker's customer pays a rate compounded monthly. The stock is held by the broker as collateral for the unpaid balance. If the stock

1 W. H. Kniffin, Jr., Practical Work of a Bank, p. 462. (Bankers Publishing Co., New York, 1915.)

2 R. B. Westerfield, Banking Principles and Practice, pp. 984-990. (Ronald Press Co., New York, 1921.)

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falls in price from five to seven points the buyer will be called upon to pay the broker from $500 to $700 further on account in order to secure the broker against loss. If this payment is not made the stock will be sold provided it continues to fall in price and the difference between the price received and $8000 less commission, interest, and taxes will be paid to the buyer of the stock. Instead of depositing $1500 cash the buyer might have deposited as collateral about $2000 worth of bonds or stocks listed on the New York Stock Exchange, and the broker would have borrowed the entire amount.

In a transaction like the above the buyer risks not only a fall in the price of the stock he buys, but a loss due to the character of the broker. The broker may be dishonest or go bankrupt. There are honest, reliable brokers; great care must be used to find one, because there are usually plenty of unreliable brokerage firms.

If a person is not sure of a brokerage firm he should get his bank to buy his stock, and use it as collateral to borrow from the bank what money is needed to help pay for it.

133. Building and loan associations. In many cities the building and loan associations supply a principal source of money for loans on real estate. In making loans the same methods are followed as are used by banks and trust companies. The funds are accumulated in a different way, and loans are repaid in a different way. The true building and loan association is a cooperative organization. The members buy stock on the installment plan and make loans of the accumulating funds to some of its members for building purposes. The borrowers pay interest, and sometimes there are membership fees, fines for not paying installments on time, and fees for transferring stock, which add to the income of the association. At regular intervals the income less expenses

is proportioned to the members as dividends on their stock. As these dividends may amount to 5, 6, or 7 per cent it is seen that in states where such organizations thrive they are great competitors of savings banks. This is an illustration of how an association may operate. A share of stock is $100 but it can be paid for in 3, 5, or 10 years. A member can buy one or more shares. If he buys 10 shares and pays $26.00 a month, in three years it is paid up, if he pays $14.50 a month it is paid up in five years, if he pays $6.00 a month it is paid up in ten years. If a member borrows $10,000 he pays interest on the loan, and if he makes payments of $60.00 a month he has paid up stock at the end of ten years with which to cancel the loan. If the member has not been a borrower he can withdraw the value of his stock. Associations also sell stock paid up in advance upon which they pay dividends at the rate of five or more per cent.

In some cities many building and loan companies do what is practically a banking business. They attract deposits from people who are not stockholders, pay a guaranteed rate of interest, and lend the funds to borrowers who are also not stockholders. Loans made to borrowers are usually repaid in installments.

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134. Insurance companies. Among the best sources for loans in large amounts are the insurance companies. Many millions of dollars are collected in premiums, which are payable in advance. In the case of fire, casualty, and miscellaneous insurance large reserves are kept until the policies expire; in the case of life insurance large reserves are built up against the maturity of the policy, the payment of the cash value at time of surrender, or the death of the policy holder. In recent years more and more of the. loans of life insurance companies have been made on real estate. The life companies engage a representative in the section in which they wish to make loans to judge the

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security, and to place the loans in amounts of $5000 and upward. The loan is like any other real estate loan except that a life insurance policy for the amount of the loan may be a part of the transaction. The loan contract provides for repayment in installments which cover the insurance premium, interest, and a part of the principal. If the borrower dies before the expiration of the loan, the insurance fund cancels the loan, so that the borrower leaves behind him property rather than debt. The insurance feature is obtainable for from 1% to 2% a year.

135. Mortgage companies. There are three types of mortgage companies. One kind lends money on first mortgages and then sells the mortgages without recourse. The proceeds from the sale of mortgage loans are then available for new borrowers. The success of such a company over a period of years depends upon its ability to make loans in such a way that the safety of the funds of the buyer of the mortgage is safeguarded. It knows that one satisfied customer will bring others.

The second type of company not only makes the loan on first mortgages but it guarantees it to the investor who buys the mortgage note. The company in return for its guarantee retains out of the interest one half of one per cent a year of the principal. The company guarantees the interest and pays it regardless of its collection on the due date. The principal is guaranteed in full but there may be a provision in the guarantee to allow the company and borrower a period of eighteen months within which to replace the loan. One of the best companies reports that it has never needed more than three or four months to replace loans even in the tightest of money markets. This provision gives the borrower time if he needs it. The mortgage company guarantees interest to the date of payment and pays all foreclosure costs if foreclosure is ever necessary. Out of its one half per cent

the mortgage company pays the expense of looking after the payment by the borrower of all taxes, assessments, and insurance payments.

From the standpoint of both the possible borrower and the investor the restrictions of a large New York company are of interest:

"1. The amount of guaranteed mortgages outstanding shall not at any time exceed twenty times the capital and surplus of the company. Five per cent of all loans is the guarantee back of any loan that might happen to have had insufficient security.

"2. No loans are made on vacant land, churches, factories, theaters, hotels, clubs, or any other property which is either dependent for success upon management, and is therefore liable to mismanagement and failure, or which has only a special use, and hence a limited market. Mortgages shall be guaranteed by the company only when secured by real estate improved for business or residence purposes and situated within the present limits of the city of New York, or in Westchester or Nassau counties adjoining. This confines the company's operations to those classes of property which are essential to the existence of the community and are therefore sure of steady rentals.

"3. When a guaranteed mortgage approaches its due date the company communicates with the investor and the borrower to learn their wishes relative to an extension. If both desire to continue the mortgage for a further period, the company re-examines the property and makes a new appraisal. The building being found in good condition, the appraised value maintained or increased, and the company, after a careful review, having approved the security, an extension is arranged on such terms as may be agreeable, with the continuance of the guarantee and without expense to the investor. When the necessary papers are all completed they are sent by the company to