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F. R.

ltr« V,rood


Miss Ef.bert



Would you please prepare an
analysis of the attached for the
Chairman; also draft a reply for
his signature,



K. J . M I T C H E I I

F. M . M U R P H Y


c//ome Oilmen

T E L E P H O N E STATE 4 2 0 6

- S U I T E 1611

June 13, 194-5
Hon. Marriner S. Eccles
Governor, Federal Reserve System
20th Street & Constitution Ave. N.W.
Washington, D.C.
Dear Sir:
Since February 194-4 we have been endeavoring to promote among institutional real estate
lenders a more flexible and equitable mortgage practice.
We believe this new home-loaning-mortgage philosophy is the cure for many of the present
infirmities in the urban-loan framework, including the downward spiral of interest rates,
over loaning, loan shifting and portfolio raiding.
Bankers remain adamant. There exists a laissez faire that is hard to combat. They
resist change, even while admitting that the national adoption of this new technique
would greatly contribute in stabilizing the real-estate-loan picture, come temporary
recessions and lulls.
Members of your Federal Reserve System have many millions of dollars in F.H.A. loans
in their investment portfolios. As these loans become seasoned, they are constantly exposed to the overtures of other lenders. I presume the chief reason why some F.H.A.
borrowers become fugitive is that they get fed up on paying the extra 1/2 per cent to
guarantee their lenders. And when they wake up to the fact their loans are paid down
to a safe position, they lend a ready ear to the inducements offered elsewhere. Frankly,
why should they do otherwise?
There is no particular reason why they should continue
in F.H.A. There is no tie-or bind between them and their lenders under F.H.A. They
lose nothing by going elsewhere - in fact, very often they gain.
Such loan shifting is unhealthy to and has a demoralizing effect on the entire urbanmortgage structure. We believe our Safety Loan Plan - which is the outgrowth of years
of experience in treating with thousands of HOLC borrowers - is a vital solution to
the problem of loan retention.
Knowing of your desire to keep the finances of this
country on an even keel, we would be interested in your analysis and reactions to this
new Plan.
Would you kindly read the enclosed article and give us the benefit of your views?

Very truly yours,

F. M. Mir^hy



Supplemental Agreement to (Original Jtlortgage Bnbefatebne&es Sngtrmnent
THIS AGREEMENT entered into between
hereinafter referred to as OWNER, andhereinafter called the MORTGAGEE.
WHEREAS, the MORTGAGEE owns a note (or bond) dated
hereinafter referred to as " b
"obligation" secured b a mortgage (
(or other security instrument)
lying and being in the County of
and State of

, 194.
on the following described Real Estate, situate,
, to wit:

WHEREAS, under the terms of said note (or bond) and mortgage (or other security instrument), there is/was owing as of the.
day of
, the sum of ($
including principal, interest, and advances, and which amount OWNER has agreed to repay in monthly installments of!$
including interest and principal on the
day of each and every month until fully paid, f^^^f
- •
AND WHEREAS, OWNER covenants and agrees (1) that he is now the OWNER of the premises upon which the aforesaid mortgage
(or other security instrument) is a valid first lien to secure payment of OWNER'S obligation (2) that there are no defenses, offsets or counterclaims to said note (or bond) or said mortgage (or other security instrument); and the OWNER is fully authorized to execute these
presents as such.
•/*:- " ;
NOW, THEREFORE, in consideration of the premises and of the covenants herein contained, it is mutually agreed as follows:
(A) That for their mutual benefit, both as a means of providing the OWNER with certain safeguards to better protect his equity in the security
property and as a further means of encouraging and inducing the OWNER to maintain his obligation in good standing, resulting in lower
collection costs to the MORTGAGEE, the OWNER shall be entitled to earn and accrue rights as set forth in paragraph B, Part One of this
agreement, to defer making principal payments on the obligation; (1 ) that such earned and accrued rights shall be considered cumulative, it
being the intent of both parties hereto that such cumulative rights operate as a safety reserve against adverse times and conditions.
(B) That the OWNER, at his option and if he so elects, may defer and postpone payment of that part of monthly installments allotted to
eduction of principal obligation, for a period or periods as follows:
Not to exceed 12 months after
Not to exceed 24 months after.
Not to exceed 36 months after.
provided, however, (1) that such right to defer payment of monies allotted to reduction of principal obligation shall not be exercised for any
one period during which less than three monthly installments shall accrue; (2) that the obligation and taxes be not default; (3) that the
OWNER shall have paid the monthly installments (including 1/12 of taxes) provided for in the obligation, at the designated place of payment, on or before due date thereof, which accrued in the 12 months immediately preceding the date or dates on which the principal deferment
rights, sought to be exercised, shall! have accrued; (4) that but one 12 month period of principal deferment shall be granted for each of
the above periods, described in paragraph (B) of Part One and in no event shall the total period or periods of deferment of principal payments exceed a maximum of 36 months before maturity of the obligation; (5) that* in lieu of monthly installments provided for in the mortgage obligation OWNER covenants and agrees to pay to MORTGAGEE on the date installments become due on the obligation, during any
period of deferment of payment of money allotted to principal, (a) a sum equal to 1/12 of the annual interest accrual, computed on the
remaining unpaid obligation at the same rate of interest provided for in the note and mortgage, and (b) a sum equal to 1/12 of the estimated taxes.
It is further mutually covenanted and agreed by and between OWNER and MORTGAGEE, (1) that in the exercise, by the OWNER,
of all or any part of the accrued principal deferment periods, non-payment of that part of the monthly installment allocated to principal
shall not constitute a default under the terms and provisions of the afore-described note and mortgage, nor a violation of any covenant
thereof, but shall extend the term of repayment of the obligation for the time required to retire any principal unpaid, by reason of the
exercise of the option, by payment of such additional monthly installments as may be necessary to fully pay such obligation.
(2) That during
the time the OWNER shall exercise his earned and accrued right or rights to make payments on a deferred principal basis, no further
earned rights shall accrue in favor of the OWNER, as set forth in Part One until such time as full monthly payments including principal,
interest and taxes shall be resumed, and (3) that time is the essence hereof and that the hereinabove described earned periods apply to the
deferments of principal payments only and (4) that in event any default of the monthly payments of interest and taxes be made and
continue for a period of
days, then in such event all sums of money and all indebtedness hereby secured shall be and become immediatelly due and payable, and the MORTGAGEE may enforce any of the rights which accrue to the MORTGAGEE under the terms of
the Mortgage.



It is further mutually covenanted and agreed by and between OWNER and MORTGAGEE, (1) that the OWNER shall notify the
MORTGAGEE by written notice, not less than 10 days before an installment date, of his intention to exercise the earned and accrued right
or rights to principal deferments, and (2) that such written notice shall indicate the duration the deferred principal payments are to run
and (3) that OWNER will' pay to the MORTGAGEE, upon demand, any and all costs (including title examination, attorney's fees and recording fees, if any) incurred and incident to the granting and effectuating this Supplemental Agreement.
It is further mutually covenanted and agreed (1 ) that none of the provisions of this Supplemental Agreement shall in any way impair
any of the MORTGAGEE'S rights under or remedies |on the note (or bond) and/or the mortgage (or other security instrument) except as
provided in Parts One and Two hereof, whether such rights or remedies arise thereunder or by operation of law, and (2) that none of the
OWNER'S obligations or liabilities under said note (or bond) and/or said mortgage (or other security instrument) except as provided in Parfc
One and Two hereof, shall be diminished or released by any provision hereof, afnd (3) that the provisions of this Supplemental Agrement shall
bind, and inure to the benefit of the parties hereto, the undersigned, their heirs, executors, administrators, successors, and assigns. Whereever the context hereof so requires, the masculine shall include the feminine and the singular the plural.
WITNESS our hands and seals hereto this


day of





, a Notary Public in and for said County in the

State aforesaid, do hereby certify that.
personally known to me to be the same person
whose name
subscribed to the foregoing Supplemental Agreement, appeared before me this day in person and acknowledged that
signed, sealed and delivered the said Supplemental Agreement as
free and voluntary act for the uses and
g ,
purposes therein set forth, including the release and waiver of the right of homestead.
Given under my hand and notorial seal this
day of
A.D., 194
Notary Public
My commission expires
Digitized BY FRANK M. MURPHY AND 1944


This article is protected by copyright and has been removed.
The citation for the original is:
Murphy, F. M. “Give a Little and Get Much: Home Owners’ Safety Loan Plan.” Savings and
Loans, August 1944, pp. 11-13.



Office Correspondence

Chairman Sccle s


Ramsay lubod


j n y 2,1

Subject: The "Home Owners 1 Safety Loan
Plan" of I.r. F.I:. lurphy

The "Home Owners' Safety Loan Plan" described by M r , lAirphy
would provide grace periods during the life of an amortized mortgage
in "Khich the borrower may elect to make no payments of principal although
he must continue to pay interest ( and taxes and insurance if these are
paid through the mortgagee). Three grace periods, each of 12 months,
would be provided, to come after the ratio of outstanding debt to original
value is approximately 30, 35»a n ^ 23 P e r cent. The term of the mortgage would be extended by the number of months during -which the mortgagor exercised his option to defer payment. The mortgagor would be
entitled to take advantage of the grace periods only if he had been
punctual in making the 12 monthly payments due immediately before the
rights of postponement accrued, although one might more logically expect
the perfect payment record to be required immediately before the option
is exercised.
The advantages claimed by Mr* Murphy for this plan are*
(1) It would give the borrower a feeling of security
and make individuals more willing to take on the
obligations of mortgage debt;
(2) it would prevent portfolio raiding;
(3) it would stabilize and maintain interest rates;
( 4 ) it would attract new business and hold old
business to institutions -which used the plan;
(5) it would prevent premature foreclosures; and
(6) it would relieve the mortgagee of the need to
review the facts and make a decision when the
borrower asked for leniency.
The primary purpose of the plan seeras to be to maintain interest rates by offering an incentive to the borrower to keep his
mortgage with the original lender rather than refinancing with a lender
who offers a lower interest rate or other more favorable terms. In other
vrords, Ur, Murphy believes that the borrower will value so highly his
right of deferring principal payment, which will typically come into
being only after the mortgage has run for some time, that he will not
be easily induced h-y lower interest rates to refinance; and that the
buyer of a house which is encumbered by such a mortgage will be induced
to assume the existing mortgage, even though lower rates are available.


Chairman Eccles

- 2 -

In fact, the plan seems to offer ve**y little to the borrower,
and mignt oe dirricult for the lender to administer. In general, a loan
which represents only 50 per cent of the value of the mortgaged property
should not be difficult to refinance as a straight loan, and it might
well be to the borrower's advantage, if he came on hard times, to refinance and pay only interest. This is even more true of a 35 ° * 20
per cent loan. Also, the grace periods offered under the plan are not
all gain to the mortgagor: as Mr* Liirphy himself admits, lenders do
make concessions from the strict terms of the mortgage note when borrowers are in difficulties. Under the plan (whose use is licensed under
copyright), mortgagees would presumably be prohibited from extending
leniency beyond v i a is written in the contract. This might easily
place the borrower in a worse position than he is in now, especially
since the early years of a mortgage are generally the most difficult,
whereas the grace periods in the plan come fairly late.
The plan could not be used with mortgages insured by the
Federal Housing Administration, since the exercise of the option to
defer principal payments would extend the original maturity date of
the mortgage, which is not permitted for FHA mortgages* Practically
the same result can be obtained, however, with more flexibility, under
an FHA mortgaget if the mortgagor at any time makes larger payments
of principal than are required, be may skip payments of the amount of
principal prepaid without being in default.
There seems to be little reason for national banks to adopt
the nHome Owners' Safety Loan Plan," since they may not make uninsured
amortized loans for more than 60 per cent of appraised value or running
for more than ten years. Under the plan, national banks would be allowed to make 60 per cent loans with an original maturity of not more
than seven years if three grace periods of tvrelve months each were to
be allowed, but they can make FHA-insured loans for as much as 90 per
cent of value and ruiming for as long as 25 years •
It is desirable that mortgage contracts be as flexible as
possible so that temporary misfortune will not jeopardize the position
of the borrower, but Mr. L&irphy's plan, at best, does not increase appreciably the safeguards to the borrower, and at worst, might substantially reduce them. If borrowers could be induced to believe that; the
plan offers them advantages, however, competition among lenders might
be reduced to some extent thus maintaining interest rates when they
would otherwise decline, and discouraging lenders from offering lower
interest rates on smaller risks*

July 11, 191+5-

Mr. P. H. Murphy
Home Owner*1 Safety Loan Plan
155 »orth Clark Street
Chicago 1, Illinois
Dear Mr. Hurphyi
this is in reply to your letter of June 13, 19U5 ia which
you asked for j y reactions to your "Home Owners1 Safety Loan Plan".
The idea of giving a borrower the right to defer payments
of principal from time to time is certainly an interesting one and
is worthy of study, but I think you offer the borrower too little
and expect too isuch in return* By the tine the borrower earns his
first right of deferment, his loan balance is down to about ^0 per
cent of the original appraised value of the security, and in most
markets he would be able to refinance, perhaps with a straight loan,
and probably on advantageous terms. The lender is not doing the
borrower much of a favor in being lenient at that point, yet for this
leniency you expect the borrower to resist any temptation to refinance
his loan at a lower rate of interest. The second and third rights of
deferment are still less valuable*
If you were to exercise your power to license users of the
plan so as to prohibit the lender from extending leniency beyond what
is provided for in the contract (and this seems to be implied in your
statement of the plan) the borrower would be in a worse position than
he is in now, and lenders themselves night suffer by being forced to
foreclose when good management might dictate forebearanee.
Tour plan reflects a realisation of the fact that, when the
risk of loss to the lender is small, the interest charged should be
less than when the risk is great. The plan, however, is directed at
preventing lenders from having to act on this fact by inducing borrowers to pay high-risk rates on low-risk loans. This, I think, is
undesirable. You say, "I presume that the chief reason why some
F.H.A. borrowers become fugitive is that they get fed up on paying
the extra l/2 per cent to guarantee their lenders." Does it make
much difference to the borrower whether he pays kg per cent Interest


Mr. F. H. Murphy, page 2

and l/2 per cent mortgage insurance premium on an F.II.A. mortgage or
pays 5 par cent interest on a 20 per cent loan because of the operation of your plan?
There are several courses of action which a lender can take
to hold his loans and protect his security! the lender can provide
an amortised loan in which the interest rate declines as the risk of
loss declinesj he can provide generous prepayment privileges so that
the borrower, when his income is high, may lessen his interest burden
and at the same time reduce the lender1s riskj and he can refrain
from lending the maximum amount which the borrower's present income
will support, so that changes in income will not be as serious as they
often are. And all of these courses of aotion can be taken by lenders
who lend on P.H.A.-insured mortgages.
A mortgage loan which incorporated your supplemental agreement could not be insured by the Federal Housing Administration, since
the actual term of the loan would be longer than the term of the loan
insured, national banks would therefore have little reason to use
your plan, since the maximum loan which they would be able to make
under the plan would be a 60 per cent loan for seven years which would
be extended to ten years if the deferment options were exercised.
The idea underlying the "Home Owners* Safety Loan Plan"
deserves further study. I do not think that the plan, in its present
form, is a cure for the ills of mortgage lending which you are concerned about.
truly yours,

Marriner S. socles