BUILDING ASSOCIATIONS.--WHY DIVIDENDS ARE LARGE AND INTEREST
LOW.--BUILDING ASSOCIATIONS AND SAVINGS BANKS.--ASSOCIATION
SECURITIES.--BUILDING-ASSOCIATION METHODS.--DIFFERENT
PLANS.--BORROWING FROM A BUILDING ASSOCIATION.--A
BUILDING-ASSOCIATION REPORT.
Building-association methods become more popular as they are better
understood. Savings banks are unnecessary in communities where building
associations are common. The savings bank will give place to the
building association, for the reason that the latter affords greater
security and more profit to the depositors at the same time that it
affords greater conveniences to the borrowers. It is often asked by
those not fully acquainted with building-association methods, "How is it
that the association pays such large dividends, and the borrower such a
small rate of interest? The profit is made by the loaning of money; and,
consequently, the borrower must pay a high price for his money, or the
association does not make large dividends."
This appears to be a logical argument. However, it is not true that the
borrower pays a high price for his money. The dividends declared are
made from the borrowers, by the rapid compounding of interest and other
sources of profit. Money paid in as interest is immediately re-invested
as a loan, and thus pays interest the next week. The interest on this is
at once put to use, and so on. It is compounded. The premium paid for
money is another source of profit. This comes from the borrower, and
represents a part of the cost of the money to him; but, unless the
premium is excessive, the earnings on his stock counterbalance the
amount paid as premium, so that in the end a borrower does not pay in
excess of the regular rate for his money at the same time that the
stockholder is more largely benefited.
A building association has only a tithe of the expenses of a bank. The
cost of doing business is very small. An association has a very great
advantage over a bank in its earning capacity in that it does not have
to carry a surplus. All of its money is invested at all times.
Frequently it is receiving interest upon money that is not a part of its
assets. This happens when an application for a loan has been accepted, a
building is under way, and the money not all paid out.
The percentage of loss in a building association is necessarily smaller
than in the best-conducted bank. Its securities are all first mortgages
on productive real estate, and loans are made to members only, and under
the condition that the immediate repayment of the loan be commenced. The
security begins to improve at once, by the repayment of a part of the
principal each week. It is usual for each member of a family to become
interested in the immediate repayment of a loan. The payment of
building-association dues is constantly in mind; as they become due from
week to week, they cannot be overlooked. The fact that the debt is
growing less, and, as well, the incentive to avoid small fines in case
of failure to make payment, contribute to the value of the security. A
loan on an ordinary basis, secured from a savings bank, insurance or
trust company for a long period, is not thought of in this way. The
usual thought in such a case is to pay the debt in a large sum at a time
in the future. The time of the repayment of an association loan is
always present. The security afforded to building associations is much
better than to savings banks and loan companies, even where the margin
above the amount of loan is less because of this difference in plan of
repayment. Again, the margin of security from the first is always
sufficient to protect a mortgage and the payment of all foreclosure
costs and charges. Furthermore, the rentals in case of foreclosure are,
or should be, sufficient to pay all dues and other fixed charges. This
will prevent loss, and in the end pay for the property.
Another element of safety in building associations is the small risk of
loss from the duplicity of the officers. This risk is unusually light,
for the reason that in a well-managed building association there is
little in sight to lose. The money is usually all invested. Any small
amount in the hands of the officers is there for only a short time.
There are demands in all well-managed building associations for all the
money in hand. While this is true, it is always required that the
officers who handle the association money give bond for a much larger
sum than it is possible for them ever to have in charge. This makes the
loss, if any, readily collectible.
It may be well to illustrate building-association methods, and thus call
attention intelligently to the points of superiority which one plan may
have over another.
The idea which first gave rise to associations is that of enabling
persons belonging to a class whose earnings are small, to place
themselves in a position where the process of gradual accumulation is,
in a certain sense, compulsory. The method of operation is simple enough
when it is understood. Say that a number of stockholders agree to form
an association with a thousand shares, each share to represent $200.
This would make a full capital stock of $200,000 when all paid in. The
various individuals forming the association subscribe for as many shares
as they feel competent to pay upon, it being agreed that for each share
of stock subscribed, fifty cents per week shall be paid until the
sum-total of the payments shall aggregate $200; at the end of which time
a division shall be made according to the original subscription and
subsequent payment. It is clear that if all are prompt in their
payments, the treasury will be ready for distribution at the end of four
hundred weeks. The period of four hundred weeks will, however, be
shortened if all the money paid in is at once invested at interest upon
safe securities, with the addition of interests compounded weekly, as is
the case with these associations. For instance, it may appear that at
the end of three hundred and twelve weeks, with a payment of fifty cents
a week, and the accrued earnings that are credited to the shares, they
are worth $200, the amount fixed for the value of the stock when it is
paid up. At such a time the depositing members withdraw their funds, and
those who are borrowers pay off their obligations to the association
with stock, and the mortgages are released.
Money in building associations is generally sold to the highest bidder;
that is, those who want to borrow bid a premium for the money. For
instance, a sale of money is advertised. Bids are then received on the
money to be loaned, and it is given to the highest bidder after the
security has been approved. Suppose one wishes to borrow a thousand
dollars. If each paid-up share is to represent two hundred dollars, five
shares must be taken out to represent the payment of principal on a
thousand-dollar loan. It may appear that the premium bid was ten cents
on each share. This means that the borrower must pay ten cents premium
each week, on each share, during the course of the loan, or until the
principal is paid out. Thus he would pay fifty cents a week as
principal, and ten cents a week as premium, and the interest on two
hundred dollars at six per cent, which would be twenty-four cents a
week. Thus he would pay eighty-four cents a week on each share; or on
five shares, four dollars and twenty cents a week. This would pay out in
about five years, depending upon the average rate of premium, the cost
of doing business, and other conditions which may be readily understood.
When the principal paid in, together with the accrued earnings,
represents two hundred dollars, the obligation to the building
association is released.
There are various plans of starting and arranging building and savings
associations, which differ one from another only in matters of detail.
The price of the share may be two, three, or four hundred dollars, or
any other sum. The amounts paid in a week vary from ten cents to any
larger sum. In the past, most associations have been started on the
series plan, which is defined as follows by Henry S. Rosenthal of
Cincinnati in his "Manual for Building Associations:"--
"In an association, organized on the terminating plan, all the
stock is issued as of one date. A terminating association is
organized on the presumption that all the stock will be subscribed
for at the open meetings. This, however, is seldom done. The
consequence is, that shares sold after the first meetings must be
sold at such prices as to make them equal in value to those already
issued. To do this a sum must be charged equal to the amount
already paid in in instalments by the subscribers to the original
shares. If the regular dues on shares should be one dollar per
week, a person subscribing for a share after the association has
been running ten weeks must pay ten dollars for the share. In like
manner, if the association has been running for a longer period, he
must pay an additional dollar for each additional week. Moreover,
if he does not subscribe until after the profits have been
declared, he must pay such an additional amount on his share as
will correspond to the earnings of the original shares up to that
time. The same rule holds through the entire existence of the
association, each year making it more difficult to enter. After an
association, organized on this plan, has run for a time, it is
impossible for many persons, who would gladly become members, to
raise a sufficient sum of money to pay up the back instalments, the
initiation fees, the accrued profits, and other incidental
expenses. In its practical workings, therefore, an association
organized on this plan is not well adapted to meet the conditions
of that particular class of persons who most need such an
organization, and are most likely to be benefited by it.
"In a terminating association all the shares are, of course, at all
times of equal value. Whenever the total amounts of the dues paid
in and of accumulated profits equal the par value of all the
shares, the association terminates and its affairs must be wound
up. Each stockholder who has not borrowed his money in advance
receives the full value of his shares. To those who have secured
their money in advance, their mortgages, cancelled and receipted in
full, are returned.
"PERMANENT ASSOCIATION.
"Building associations were established originally on the
terminating plan. It is obvious that working on this plan they
cannot, in some respects, reach their greatest degree of popularity
and usefulness. On this account there has been a gradual departure
from this plan. The first departure from the terminating plan
consisted in an arrangement for issuing the stock in series instead
of all from the same date. Associations were chartered for a
certain number of years, as before, and with a specified amount of
capital stock. But instead of selling all the stock as of the same
date, it was divided into series; one series being sold as of the
date of the beginning of the first year, the second series as of
the date of the beginning of the second year, and so on until all
the shares were sold. The issuing of a new series does not
necessarily occur annually, but at such periods as are made
necessary or desirable by the business of the association. The
serial issue may be monthly, quarterly, semi-annually, or
otherwise, as the directors may determine. By the time the last
series is issued and the stock is exhausted, the first one or two
or more series of shares, if the business of the association has
been prosperous, have usually reached their full value, and are
paid back and cancelled. Associations conducted on this plan
usually have the right to issue new stock to take the place of
that which is cancelled from time to time, and thus their
perpetuity is insured. A successful association working on this
plan can usually secure the issue of a new charter, and can thus
continue its existence. But there are manifest disadvantages and
risks under which an association operating on this plan must labor.
"Another plan of operation has been inaugurated which has proved
very popular, and which is being generally adopted by the
associations in the different States. Associations are granted
perpetual charters, the amount of the capital stock being fixed at
a certain sum. They are allowed to begin operations as soon as a
certain amount of stock is subscribed. After the association is in
operation, new subscribers are allowed to enter at any time on an
equality with the original subscribers, the stock of each member
dating from the time of his entry. Thus the business of the
association runs along from year to year, until finally all of the
stock is subscribed. After a time the shares first issued begin to
reach their full value. As they thus mature, the owners draw out
their money,--if they have not borrowed it in advance,--and their
shares are cancelled, and their membership ceases. If they have
borrowed their money in advance, their bonds and mortgages are
returned to them receipted in full. If a member, whose stock has
thus matured, has not borrowed his money in advance, and does not
wish to draw it out, a certificate of paid-up stock is issued to
him, and he leaves his money in the association as a matter of
investment. An association operating on this plan may, after a
time, when its original stock has all been subscribed through
application to the incorporating authorities, secure the right to
increase its stock. If, in the course of time, this increased stock
becomes exhausted, another increase may be secured in a like
manner, and so on indefinitely."
Herewith is given an extract from the yearly report of a successful
savings and loan association on the perpetual plan. It will illustrate
more fully the method and results of this method than could a less
formal description. It may be explained in this connection that in this
society the payments are uniform for depositing and borrowing members;
that is, instead of having the premium and interest added to the weekly
dues, the amount of premium and interest is charged against the weekly
payment of fifty cents. Ten cents is the limit of premium, the officers
and stockholders believing that to be as much as any one should pay.
OBJECT.
THE PLYMOUTH SAVINGS AND LOAN ASSOCIATION, NO. 2, is organized with
two main objects in view:--
FIRST.--To furnish a convenient, safe, and profitable method of
investing the savings of working people.
Members can come in and go out at will.
Subscriptions can commence at any time without having to pay back
dues or wait for new series.
Withdrawing members obtain their money without loss (fines
excepted), and are paid as promptly as the finances of the
Association will admit, without having to wait ninety days. In the
history of the Association there have been no delays.
SECOND.--To furnish persons who wish to borrow for any purpose the
means for doing so at a reasonable rate of interest. In other
words, it is an association composed of borrowers and lenders, and
established for their mutual convenience. It gathers together the
savings of the people, which, scattered and in small sums, could
not be invested to advantage, and loans the money thus obtained on
first mortgage security, and in sums to suit, to those who wish to
build, to pay off mortgages, or for other purposes.
All members of the Association are, therefore, divided into two
classes:--
_First._--Those who desire to use the society as a means of saving
or investing money. These are called _depositing members_.
_Second._--Those who wish to make use of the organization as a
means of borrowing money. These are called _borrowing members_.
MANAGEMENT.
THE PLYMOUTH SAVINGS AND LOAN ASSOCIATION is a strictly
co-operative or mutual organization. All the shareholders are _pro
rata_ owners of all the assets of the society. Every member is a
partner in the enterprise in proportion to the amount paid in by
him. He is entitled to his share of all the earnings of the
Association, and he must also stand his share of the losses, if
there be any.
The By-laws contain the rules and regulations under which money is
received and loaned, or otherwise disposed of, and the business of
the society is carried on by a Board of Directors, elected annually
by the members.
SHARES AND SHAREHOLDERS.
The amount of interest which each member has in the Association is
indicated by the number of his shares.
Shares are $200 each, and no member can hold more than twenty-five
shares. The weekly payment required is fifty cents on each share of
stock.
When a member joins the Association he indicates the amount of
weekly payment he desires to make by the number of shares for which
he subscribes. He may, however, if he wishes, pay more than his
shares call for, and such over-payments will receive dividends the
same as the regular weekly instalments.
Each member is supposed to keep up his payments until what he has
paid in, together with the dividends declared thereon, shall amount
to the face value of his shares, at which time he must cease
payments, and either take his money out, or, if the society be
willing, allow it to remain and draw dividends.
DIVIDENDS.
On the 1st of January and July of each year the net earnings of the
Association are divided _pro rata_ among all the members, and the
amount due each member is credited on his pass-book.
Persons joining the association between January and July must
continue payments until the following January before the dividend
will be credited, and those joining between July and January must
likewise pay until the following July; and if the money be
withdrawn before that time, the dividend will be forfeited.
The right to dividend also ceases from the date of the notice to
withdraw the stock.
When dividends are credited on the pass-books they are just like
money paid, and are themselves entitled to draw dividends the same
as cash payments. Thus it will be seen that all dividends compound
semi-annually.
The following table will show how long it takes to pay up a share
to face value by paying the regular dues only, supposing the
society to earn six per cent dividends per annum.[1] It also shows
the value of each share at the close of each year:--
First year Dues $26 00
" Dividends 78 $26 78
------ ------
Value at close of first year $26 78
Second year Dues $26 00
" Dividends 2 41 28 41
------ ------
Value at close of second year $55 19
Third year Dues $26 00
" Dividends 4 53 30 53
------ ------
Value at close of third year $85 72
Fourth year Dues $26 00
" Dividends 6 10 32 10
------ -------
Value at close of fourth year $117 82
Fifth year Dues $26 00
" Dividends 8 34 34 34
------ -------
Value at close of fifth year $152 16
Sixth year Dues $26 00
" Dividends 10 41 36 41
------ -------
Value at close of sixth year $188 60
Seventh year (16 weeks) Dues $8 00
" Dividends 3 40 11 40
----- -------
$200 00
Time, 6 years and 16 weeks.
Total dues paid $164 00
Total dividends 36 00
-------
$200 00
[Footnote 1: The present rate of dividend is nine per cent, with an
added surplus.]
METHOD OF LOANING MONEY.
The society loans money only to members. For each $200 share held
by a member he may borrow $200, secured by first mortgage on real
estate, interest on which is twenty-four cents per week.
The right to precedence in borrowing is sold at auction at stated
times at the office of the Association (notice of which is given
beforehand) to the member who bids or agrees to pay the highest
weekly premium in addition to the twenty-four cents per week
interest. Ten cents per week is the average rate at which money was
sold during the year 1887, and is now selling.
Members not desiring or not able to attend the sale of money in
person may have some one else bid for them, or they may leave a
written bid with the Secretary, on blanks prepared for that
purpose, who will make it for them at the sale.
The society also loans to depositing members in sums equal to
ninety per cent of the dues paid in. Security is had by the member
pledging his stock for the payment of the loan and interest due (if
any) on notes prepared for that purpose. Interest on such loans has
for the present been placed at the rate of eight per cent per
annum.
PAYMENTS.
The depositing and borrowing members alike pay fifty cents per week
per share. There are no additions for expenses, interest, premiums,
or fines. These are charged up at the close of each dividend
period, or at the closing up of an account.
Each borrower is required to pay at least fifty cents per week on
each $200 of loan made to him, which is credited as follows:--
First the premium and interest are taken out, the interest being
twenty-four cents. When the premium bid is ten cents, both together
would amount to thirty-four cents. Then the balance, which in this
case would be sixteen cents, is credited as a payment on the share
on which the loan is taken. These payments are continued until the
amount credited on the shares, together with the dividends thereon,
will equal the amount loaned. For instance, suppose the loan to be
$200, and the premium bid to be ten cents per week,--
The payment each week would be 50 cents
The premium each week would be 10 cents
The interest each week would be 24 cents
--------- 34 cents
--------
The credit on the share each week would be 16 cents
These credits of sixteen cents per week begin to draw dividends on
the succeeding dividend period, which are compounded semi-annually,
and the weekly payments must be continued until the weekly credits
of sixteen cents and the dividends thereon amount to $200.
Members are at liberty to pay every two weeks or monthly, and as
much beyond the required weekly payment as they may desire to. The
overpayments are credited like any regular payment and share in the
dividends.
This enables borrowers to pay their loans off as fast as their
circumstances will admit. This method is very helpful, as the
interest and premium will be stopped on as many full shares as are
paid off, and the cost of a loan is materially reduced thereby.
The minimum payment only is fixed. The borrower may at any time pay
the whole balance due on the loan and have it cancelled at once.
It is always good policy for a borrower to pay more than the weekly
dues if he can, in order that in case of sickness, loss of work, or
other unforeseen hindrance, he may be paid ahead, and hence suspend
payment for a time without being fined or in danger of losing his
property.
By the following table it is shown that with the premium at
twenty-four cents on each $200, and that the society is able to
earn six per cent per annum dividends (both of which are being done
now[2]), and the required weekly dues only being paid, a loan will
be paid up in fifteen years and six months. This time, as already
mentioned, can be shortened at the will and ability of the
borrower, and may be paid off at any time without any penalty
whatever. This is a great advantage, and the society can do this
only because of the great demand for loans, and the money does not
have to lie idle if a loan is paid off, but is immediately loaned
again. Here is a loan which you may take fifteen years to pay if
you wish, or you may pay it off at any time.
TABLE.
SHOWING COURSE OF LOAN OF $1,000.
Premium 50 cents per week.
Interest $1.20 per week.
Six per cent dividends compounded semi-annually.
FIRST YEAR:
Loan $1,000 00
Payments for year $130 00
Interest and premium $88 40
Less dividends 62
------
Net cost of loan 87 78
------
Principal reduced 42 22
[Footnote 2: Since this report was made the earnings have been nine per
cent, with an added surplus.]
SECOND YEAR:
Balance due at end of first year $957 78
Payments for year 130 00
Premium and interest 88 40
Less dividends 3 18
------
Net cost of loan 85 22
------
Principal reduced 44 78
THIRD YEAR: -------
Balance due at end of second year $913 00
Payments for year 130 00
Interest and premium 88 40
Less dividends 5 91
------
Net cost of loan 82 49
------
Principal reduced 47 51
FOURTH YEAR: -------
Balance due at end of third year $865 49
Payments for year 130 00
Interest and premium 88 40
Less dividends 8 79
------
Net cost of loan 79 61
------
Principal reduced 50 39
FIFTH YEAR: -------
Balance due at end of fourth year $815 10
Payments for year 130 00
Interest and premium 88 40
Less dividends 11 88
------
Net cost of loan 76 52
------
Principal reduced 53 48
SIXTH YEAR: -------
Balance due at end of fifth year $761 62
Payments for year 130 00
Interest and premium 88 40
Less dividends 15 12
------
Net cost of loan 73 28
------
Principal reduced 56 72
SEVENTH YEAR:
Balance due at end of sixth year $704 90
Payments for year 130 00
Interest and premium 88 40
Less dividends 18 60
------
Net cost of loan 69 80
-----
Principal reduced 60 20
EIGHTH YEAR: -------
Balance due at end of seventh year $644 70
Payments for year 130 00
Interest and premium 88 40
Less dividends 22 26
------
Net cost of loan 66 14
------
Principal reduced 63 86
NINTH YEAR: ------
Balance due at end of eighth year $580 84
Payments for year 130 00
Interest and premium 88 40
Less dividends 26 13
------
Net cost of loan 62 27
------
Principal reduced 67 73
TENTH YEAR: ------
Balance due at end of ninth year $513 11
Payments for year 130 00
Interest and premium 88 40
Less dividends 30 27
------
Net cost of loan 58 13
------
Principal reduced 71 87
ELEVENTH YEAR: -------
Balance due at end of tenth year $441 24
Payments for year 130 00
Interest and premium 88 40
Less dividends 34 65
------
Net cost of loan 53 75
------
Principal reduced 76 25
TWELFTH YEAR: ------
Balance due at end of eleventh year $364 99
Payments for year 130 00
Interest and premium 88 40
Less dividends 39 30
------
Net cost of loan 49 10
------
Principal reduced 80 90
THIRTEENTH YEAR:
Balance due at end of twelfth year $284 09
Payments for year 130 00
Interest and premium 88 40
Less dividends 44 22
------
Net cost of loan 44 18
------
Principal reduced 85 82
FOURTEENTH YEAR: ------
Balance due at end of thirteenth year $198 27
Payments for year 130 00
Interest and premium 88 40
Less dividends 49 41
------
Net cost of loan 38 99
------
Principal reduced 91 01
FIFTEENTH YEAR: ------
Balance due at end of fourteenth year $107 26
Payments for year 130 00
Interest and premium 88 40
Less dividends 54 99
------
Net cost of loan 33 41
------
Principal reduced 96 59
SIX WEEKS: -------
Balance due at end of fifteenth year $10 67
Payments for six weeks 15 00
Interest and premium 10 20
Less dividends 5 87
------
Net cost of loan 4 33
------
Principal reduced 10 67
------
Time, fifteen years and six weeks.
Total amount of payments $1,965 00
Total interest and premium 1,336 20
Total dividends 371 20
Net cost of loan 965 00
With the reasonable prospect in view that the Association will be
able to pay larger dividends at some future time, it will be easy
to understand that the cost and the time of payment of a loan will
thereby be correspondingly reduced.
MORTGAGES.
All loans must be secured by first mortgage on real estate in
Marion County, Ind. An appraising committee, consisting of three
members of the Association, appraise the value of all real estate
offered as security for loans and report to the board. No loan can
be made until the security has been approved by the Board of
Directors.
This Association is now paying four per cent semi-annual dividends,
and adding largely to its surplus.
A new feature in building-association work has recently been put into
practice. The association will buy for cash a house and lot, or buy a
lot and build a house thereon, and sell at a fair price to the member
whose application is accepted. Where the house and lot are bought at a
cash price, it is usual to charge a ten per cent bonus when selling it
on time to a member. The purchaser then completes the transaction by
securing the purchase money to the association, the same as in case of a
loan on any other property, except that instead of a deed from the
association he will receive a lease, with an agreement to sell and
convey to him the premises as soon as one-third of the purchase money
shall have been paid in regular dues on his stock. His stock will be
assigned as collateral security, and the payments will be credited as
rent until the deed is made. Then the purchaser will execute his
mortgage for the unpaid balance due on the property on the terms of his
original bid for the money. It is usual to require a cash payment equal
to the amount of the bonus; that is, ten per cent of the purchase price.
This is a valuable feature in building-association methods. It adds to
the profits of the association. This plan is adaptable to private
enterprise, and is liberal in its terms to the purchaser.
In most associations organized on the perpetual plan, as previously
described, the demand for funds is greater than can be supplied from
depositing members. This has given rise to the "paid-up stock" feature
of building associations. Under this plan one may invest money in any
sum according to the terms of the charter and secure from the
association a certificate of paid-up stock which participates in the
regular dividends of the company. In this way, funds in larger amounts
may be secured than come from the ordinary payments by regular weekly
dues. It is not unusual for individuals to purchase paid-up stock to the
amount of several thousand dollars. This is a great help to an
association which is short of funds, as it serves to increase its
membership by addition of borrowers. There is no better place to invest
trust funds than in the paid-up stock of well-managed building
associations. Primarily, for the reason that each stockholder is pledged
in the amount of his stock to pay principal and six per cent interest on
all withdrawals; hence, the funds may be withdrawn at any time, and six
per cent interest thereon demanded. Furthermore, building-association
stock is not taxable in most States.
Individual and moneyed corporations are coming to consider the matter of
loans, and means leading to their repayment, on the building-association
plan. This will be brought about largely by the low price of money
throughout the country at this time. Savings banks, mortgage companies,
and life-insurance organizations are finding it difficult to loan their
funds at a price that will pay their fixed obligations; hence, they are
seeking means which will lead to a more profitable investment of their
funds. The building-association plan of loaning money is one solution of
the problem. The low price of money is one of the elements which within
the next few years will enable nearly every one who so desires to secure
a home through the building association, or some plan which has its
outgrowth therefrom.