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:”—