The Financing of Large-Scale Rental Housing

Abstract

In i93o approximately $6,ooo,oooooo of real estate mortgage bonds, issued to finance apartment buildings and other rental housing properties, were in the hands of the public. In fact, at this date, except for a comparatively few large insurance company loans, practically all such mortgage financing involving loans of $Ioo,ooo or more was done by real estate bond houses such as S. W. Straus & Company,' Greenebaum Sons' Investment Company, and American Bond & Mortgage Company. Many of these bond houses had enviable records over many years, when their business had been comparatively small and conservative. The growth and collapse of these bond houses is an interesting and instructive chapter in twentieth century financial history. Before igoo most of the financing of apartments and tenements was by savings banks and insurance companies. It is estimated that in 1913 the total volume of real estate bonds outstanding amounted to but $i5o,ooo,ooo, and in 192i it was only $5oo,oo,ooo. But the high yield of these bonds, generally always 6%/, the increasing demand for mortgage loans for large apartment buildings resulting from the rapid growth of our cities, and the success of the early issues of the mortgage bond houses, resulted in the belief among hundreds of thousands of small investors throughout the country that there was no security to compare with a mortgage gold bond. The typical mortgage bond financing involved an issue of first mortgage bonds in denominations of $5oo and $iooo bearing 6% interest, due in eight or ten years, the loan being partially amortized at a rate of five or ten per cent annually by calling the bonds by lot, with an occasional serial bond issue. The final payment of principal in the early issues was easily refinanced. Since there was no satisfactory depletion or depreciation fund provision, nor any requirement for retiring bonds when surplus earnings were large, owners were able to milk properties during the boom period. The bonds were secured by the property placed in with a corporate trustee, frequently a wholly owned subsidiary of the bond house, under a trust agreement