Mortgage Matters

Early in 1931 New York's Governor Franklin D. Roosevelt called up a lawyer friend in Rochester, told him he had a little work for him. The Governor wanted George Slingerland Van Schaick (pronounced Skoik) to be his insurance commissioner. Over a lengthy luncheon Lawyer Van Schaick protested that he had never held public office, that he knew nothing about insurance. Tut, tut, replied the Governor, there were plenty of insurance experts in the department. What Mr. Roosevelt wanted was an administrator. So at one of the most critical periods in insurance history George S. Van Schaick took over the insurance department of the biggest insurance State in the Union. Governor Roosevelt's one order: "I want the department conducted right."

Last week in Manhattan George Van Schaick was the chief witness in a State investigation to determine whether he had faithfully obeyed that order. Governor Lehman had ordered the investigation at Commissioner Van Schaick's own request. But the curious thing about the probe was that almost no one had ever criticized the Commissioner's supervision of New York's big life companies. What had drawn fire was a business tucked away in the department's "miscellaneous bureau"--guaranteed mortgage companies.

The sorry plight of the mortgage companies arose from the fact that they had guaranteed 35% of all the mortgages in New York City and that by 1932 this $3,000,000,000 contingent liability had largely ceased to be contingent. Underlying mortgages defaulted, foreclosed property became practically unsaleable and investors demanded that the companies make good their "guarantees."' When the situation threatened the whole banking equilibrium, Manhattan bankers, backed by the RFC, made futile credit gestures. By that time, however, most of the large companies were quite insolvent. With a sigh of relief Commissioner Van Schaick clamped down on them during President Roosevelt's March Moratorium.

Hastily Governor Lehman secured legislation creating a quasi-public protective committee to salvage something for the hundreds of thousands of investors who had bought mortgage bonds on the strength of the "guarantee." In August a flock of small solvent companies were permitted to reopen. The rest with 97% of the outstanding guarantees were taken over for "rehabilitation."

No sooner had this been done than a deafening hue & cry arose in nearly every court in the State. The constitutionality of the enabling legislation was challenged. Commissioner Van Schaick's rehabilitation plans were attacked at every step. "Protective committees" mushroomed on every side, tried to oust Commissioner Van Schaick in favor of Federal bankruptcy trustees. Individual investors demanded the property underlying defaulted mortgages. The mortgage business in New York threatened to become a lawyer's holiday.

Meanwhile it became apparent that not all of the big mortgage companies had failed with honor. In their books Commissioner Van Schaick found good and sufficient reasons to do some suing on his own account--against the old managements. But why, howled the Van Schaick critics, had not the Commissioner, who examined the books periodically, discovered all this crockery before the final crash? Why did he permit companies to sell mortgages with both interest and taxes in ar rears? To juggle foreclosed property into subsidiaries so that no loss was apparent? To break the law by lending more than 10% of their assets to a single borrower? To let their guaranty funds fall below legal requirement? Above all, why did he permit Bond & Mortgage Guarantee, New York Title & Mortgage, Lawyers Mortgage and Lawyers Title & Guaranty to pay $13,150,000 in dividends to stockholders while they were invoking the 18-month grace period provided in their guarantees?

When these evil smelling questions were put to Commissioner Van Schaick on the witness stand he answered frankly that: 1) in some cases the laws were inadequate. 2) The insurance department was woefully understaffed. Twice he had been forced to borrow personally money to pay temporary examiners until State funds were voted. His small staff had not discovered the most glaring irregularities until after the companies were taken over. 3) He had believed (and his opinion was backed at the time by the biggest Manhattan bankers) that the closing of the big Manhattan mortgage companies would precipitate a nation-wide banking catastrophe. "I was willing," he said, "to permit a company . . . in the situation confronting us to do whatever legally could be done to hold on during that troublesome period."

Commissioner Van Schaick faced the same problem that harried the U. S. Comptroller of Currency and all State banking officials night & day throughout the Depression--to close or not to close. His problem was more acute because if he closed one company he would have had, in fairness, to close all. The cue from Washington was clearly not to close, and his experts reminded him that the mortgage companies had ridden out every previous depression on the anchor of the 18-month clause. Close he did not, and final judgment on his wisdom awaits the time when historians finish with the ways of Herbert Hoover in Depression.

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