California's Dependence on Capital Imports for Mortgage Investment

This article is in large part derived from a report Financing of Nonfarm Housing in California, prepared by James Gillies and the author for the Governor's Commission on Housing Problems. Thanks are due to the Commission for permitting the use of these materials. The full report will be published by the Commission with reports and working memoranda on other subjects.

Because data on out-of-state funds employed by savings and loan associations are available only for 1960, it is also impossible to construct estimates comparable with those in Table I for earlier benchmark periods, say 1950. For this reason, it cannot be stated whether California's dependence on out-of-state funds for mortgage investment has increased or declined over a longer period of years.

The loan participation program for savings and loan associations was initiated by the Federal Home Loan Bank Board in 1957 by authorizing any association insured by FSLIC to acquire participating interests in mortgage loans originated outside its regular lending area and held by another insured association. Later, insured associations were also permitted to sell participating interests to pension and trust funds. Figures on loan participation activity are published for Federal Home Loan Bank districts but not for states. At the end of 1960, the date of our estimates, net loan participations sold by members of the San Francisco Home Loan Bank to members in other bank districts totaled $246 million, and the amount has greatly increased since that time.

This “guesstimate” is based mainly on two considerations. It is assumed that most of the mortgage holdings by individuals, still of considerable importance, would be domestic since few individuals engage in long-distance lending. On the other hand, the amount of domestic funds in individual holdings would be partially offset by the California portfolio of government-underwritten loans held by commercial banks and savings and loan associations domiciled outside the state.

The projections are those of the California Department of Finance, Preliminary Projections of California Areas and Counties to 1975 (Sacramento, January 3, 1962), supplemented to 1980 by the Department's special estimates for the Governor's Commission on Housing Problems. For the transformation of these projections into household growth and gross additions to the housing supply, I am indebted to a report to the Commission on Housing Trends and Related Problems, by Foley Donald L. Smith Wallace F. Wurster Catherine Bauer . In this report, the demolition estimates are based on the 1950–1960 experience and do not include any special allowance for stepped-up slum-clearance and urban renewal activity.

The opposition is explained mainly by three factors. First, the FHA system brought increased commercial bank competition into the residential mortgage market. Second, savings and loan associations have always been authorized to make loans at high ratio of property value and therefore felt they did not need the FHA insurance protection to make such loans. Third, because they had access to Federal Home Loan Bank advances for liquidity purposes, the associations were not interested in the greater marketability of FHA loans as compared to that of conventional loans.

Grebler Leo , Housing Issues in Economic Stabilization Policy, National Bureau of Economic Research, Occasional Paper 72, 1960, Appendix A.

For example, when FNMA bought a certain type of FHA loan at 99 in the Northeast, it acquired the same type at 97 1/2 in California (and other parts of the West).

Cf. Grebler Leo Blank David M. Winnick Louis , Capital Formation in Residential Real Estate (Princeton, 1956), p. 229. Also Jones Oliver Grebler Leo , The Secondary Mortgage Market (Real Estate Research Program, University of California, Los Angeles, 1961), pp. 89–90.

Source: “Preliminary Releases of the U.S. Bureau of the Census.” In the 1950 Census, the median rates on conventional first mortgages on owner-occupied residences were reported to be 6.0 per cent in the Los Angeles area and 5.0 per cent in San Francisco as well as New York and Chicago. Conventional loan rates are quoted since the maximum (and actual) contract rates on government-underwritten loans are uniform throughout the nation, with regional differentials expressed in discounts and other variables not captured in the census data.

Federal Home Loan Bank Board, Combined Financial Statements, Members of the Federal Home Loan Bank System, 1960.

As was pointed out earlier, however, some portion of the savings in California associations represents out-of-state funds (see Table I). When the estimated out-of-state savings are subtracted from the $8.8 billion, the domestic total is reduced to $7.4 billion, which still maintains the leading position of California savings and loan associations in this respect.