MORTGAGE FINANCE

Dominion, Volume 28, Issue 112, 5 February 1935, Page 6

MORTGAGE FINANCE

National Corporation Proposal SCHEME CRITICISED Investment Interests’ Viewpoint RURAL REHABILITATION The Government’s proposals for the establishment of a National Mortgage (Corporation and the rehabilitation of farmers’ finance have been investigated by a committee representative of commercial, financial and investment interests, ,-which has issued for publication a - statement setting out its views and .conclusions on these questions. The committee states it is not convinced of the necessity for the establishment of a semi-State Mortgage Corporation, nor is it sanguine of its success if it be established on the (lines proposed. The committee regards the Government’s scheme for the rehabilitation of rural finance as unsound, unjust and dangerous.

A national conference of commercial and financial interests assembled under the auspices of the (Associated Chambers of Commerce of New Zealand set up the investigating committee. The particular interests represented at the conference were the Associated Chambers of Commerce, the Associated Banks the New Zealand Life Insurance Offices Association, the New Zealand Law Society, the Stock Agents’ Association, the New Zealand Fire and Accident Underwriters’ Council, the New Zealand Investors’ Protection Association, the Building Societies Association, and investment companies. The statement prepared by the committee has the unanimous approval of the conference and the full concurrence of its executive of the Associated Chambers of Commerce. , ~ , The committee’s statement, is divided into two sections, one dealing with the National Morgtage Corporation proposal and the other with the rehabilitation of farmers’ finance. It says that the scheme has been presented by the Minister of Finance, Rt. Hon. J. G. Coates in such a manner as to suggest the two proposals are interlocked. That, the committee states, is definitely not so. The Minister informed the committee that two entirely separate bills were to be presented to Parliament and the committee therefore deals separately with the two proposals. The committee urges anyone considering the Minister’s proposals to divorce the Mortgage Corporation from any scheme for the rehabilitation of farmers’ finance. Adjustment of Mortgages.

Dealing with the Mortgage Corporation proposal, the committee states it is convinced that it is possible to evolve a scheme for the final adjustment of mortgages without creating the proposed corporation. “The committee believes, and has urged on Mr. Coates, the statment continues, “that there me. no producers to-day who are efficient and competent men, and who have sufficient equity in their properties, who cannot borrow, at very low rates of Interest, whatever money they can use profitably in their businesses. Mr. Coates’ pamphlet advances as the reason for the present position of the producers the unparalleled drop in the world ’values of primary produce. So far as New Zealand is concerned, this is only half the story. Admittedly, low prices are a factor.” After outlining the reasons that have been advanced as justifying the creation of the new institution, the committee states it does not believe that the Mortgage Corporation will be able, permanently, to stabilise mortgage interest rates at a low figure. Facilities for Refinancing.

“In the view the committee has taken there will be no necessity to create any new institution. If settlements are arranged between mortgagors and mortgagees on a sound basis there is to-day, in the opinion of the committee, and will continue to be, ample facilities for the necessary refinancing.

“Undoubtedly attempts are made at the present time to bring political influence to bear on the Government lending departments. In the opinion of the committee the introduction of a so-called independent board of directors will not minimise improper political pressure on the part of mortgagors. On the contrary, the aggregation of mortgages into one channel will greatly facilitate and accentuate political pressure from mortgagors. Capital Indebtedness. “Much criticism has, in Mr. Coates’ pamphlet, been levelled at the existing mortgage system, and the advantages have been stressed of long-term table mortgages. The advocates of this system have apparently overlooked the following points:—(a) The mortgagor who has, in recent years, been unable to pay his interest in full could not have paid such interest plus a reduction in capital indebtedness; (b) it has been, and will continue to be, impossible to prevent mortgagors borrowing money on second mortgage to meet first mortgage interest and repayments of first mortgage principal. “A substantial part of the mortgage debt in the Dominion is already on ti table basis, and it has for long, been possible for the borrower who wished to raise a mortgage on a. table basis to do so. We think, on investigation, it would probably be found that in the majority of cases where long-term table mortgages have been entered into that either the property has been sold before the expiration of the term, or alterations and improvements nave so changed conditions that the property has had to be refinanced before the expiry of the term. There are advantages and disadvantages to the borrower under every system of borrowing, and many mortgagors have deliberately, and for sound reasons, adopted the flat mortgage basis. Lower Interest Rates.

“Mr. Coates summarises Ills expectations from the establishment of the corporation in the following words: — ‘lt is hoped that the operations of the corporation will result in stabilising mortgage rates of interest at lower levels,’ and a section of the farming community is anticipating, a substantial reduction in the interest rate on farm mortgages. The committee is unable to see how this can be effected. The pamphlet anticipates that Mortgage Corporation bonds will carry interest at approximately the same rate as better-class local body securities—say, to-day, 3 J per cent. “If the Mortgage Corporation can issue bonds on a 3i per cent, basis, the committee is satisfied that it will require to charge its farmer mortgagors 4J per cent, interest, or more. This allows 1 per cent to cover administrative costs and contingencies, and largescale lenders have found this scarcely

adequate. In addition, the mortgagors will have to pay the annual reduction on account of principal and the proportionate amount fo the contributions of the reserve fund. ' “Even if the bonds could be sold to the public on a 3 per cent, basis, which is lower than the average market yield of Government stocks to-day, it is very doubtful if the corporation could re-lend to- its borrowers at substantially less than 4-j per cent. The committee would point out that on this basis the amount to be paid half-yeaily by the borrower would be slightly higher than the half-yearly payment under the original State Advances tables. At the present time there is, the committee is satisfied, a large amount of money available for investment on mortgage at H per cent, per annum, and lower. Issues of Bonds. ‘•The committee is of opinion that the bonds will not find a ready sale at a- low rate of interest. Unless the bonds can be sold at a low interest rate the corporation cannot lend at a low rate and prosper. The committee is verj’ much afraid that the corporation will inevitably be unweildy in size and impossible of sound and economic management.” The committee says it .considered the question of a State guarantee of such importance that it asked for, and was given, a definite assurance that neither principal nor interest of the bonds would be guaranteed by lhe State.

•• V very grave difficulty arises in connection with the taking over of the securities of existing • Gov erument lending departments. At the outset, the whole board of corporation will be appointed by the State, and that board will have to negotiate the contract to be made with the State in regard to the taking over of these securities. The State will, in effect, therefore, be both vendor and purchaser. Whatever the personal qualification of the board members, the conflict of interest makes absolutely independent, judgment impossible.” Alternative Proposals.

After stating that it regards the proposals not only as unnecessary but as unsound and dangerous, the committee submits the following alternative suggestions “The committee is of opinion that under existing legislation the difficulties between private mortgagees and their mortgagors are in course of settlement. Although in many cases these settlements are stated to be temporary only, the committee believes that final settlement will in due course eventuate on the lines of. and as an outcome of. temporary settlement. The position between the State and its mortgagors is entirely different, and the committee therefore thinks that private mortgages and State mortgages should be dealt with separately. “To secure uniformity of administration, eliminate inter-departmental competition, and also to eliminate political interference, if that be possible, the committee suggests the amalgamation of the mortgage lending activities of the various departments, and the control of' those' activities by an inde‘pendent board. .“In view of the large sum's involved, the committee is of the opinion that the best results would be obtained if more than one board were created. For this purpose the Dominion might be divided into districts, each with its own board, the districts being so arranged that each board would have approximately the same amount of mortgages under its control. To secure unformity, the chairman of all the boards should form an advisory committee for the whole scheme. . . . .J„i No Elaborate Process. ’f

“If the principle of this suggestion be accepted, there will be no necessity for the elaborate process of the new board taking over mortgages and.issuing debentures. The boards should administer the existing mortgages, answering to the respective departments in the same way as the Public Trustee handles mortgage investments which are outside the Common Fund. “With regard to new business, the committee contemplates that a. department having funds for investment on mortgage wmild invest through the boards—the department not coming into -ontact in any way with any prospective borrower.

Hie foregoing suggestions are in such form that all departineutal mortgages can be taken over.

“The boards should be given full powers (comparable with those possessed by individual mortgagees) of varying mortgage contracts by mutual arrangement with the ' respective mortgagors.

“In these proposals . the Committee contemplates achieving the. same result ns is mentioned in Mr. Coates’ pamphlet. The Minister’s , proposal was that the bonds allotted to the State would be sold, and the proceeds used to repay the loans raised, for instance, by the State Advances Department. The Committee contemplates that the repayments of principal received by the boards in respect of State Advances mortgages would be applied in repaying the loans .raised by that Department, so that eventually this liability would be extinguished. On the other band, other departments are, and will be, continuing concerns,,and will have from’ time to time further funds for investment. Satisfactory Adjustments. “The committee has already expressed the opinion that necessary adjustments between private mortgagees and their mortgagors are proceeding satisfactorily under existing machinery. All that is necessary to complete the programme of adjustment is some modification of the existing machinery, “The committee is satisfied that there is ample finance available at cheap rates to effect the refinancing of existing mortgages as and when this becomes necessary and advisable. If it should be found that there are insufficient facilities at present for long-term-lending on a table basis, the committee considers the.proper course is to encourage the formation of new private institutions of modest size on a district basis and free of Governmental control.’’ Rural Finance. The committee next deals with the question of rural finance. “Mr. Coates, in his pamphlet, stresses the danger of competent farmers who, through no fault of their own. have got into difficulties, being dispossessed of the land Into which they have put their life’s savings,” states its statement. “We believe that the risk of a really competent and efficient producer (even if he actualy has little or no present equity in his property) being put off his property is infinitesimal Th= best interests of the mortgagee demand that such a man should be kept on his property, as the mortgagee would be in a worse position if a good farmer had to leave his farm. “As regards incompetent farmers, it is very doubtful whether it is in the interests of the community generally. of the farmers themselves, or of their mortgagees, that they should be allowed to remain mi their farms producing uneconoinically. “This whole section of Mr. Coates’s pamphlet appears to be based on the novel view that the relationship between present mortgagees and borrowers is one of partnership in sharing losses, but not in sharing profits. Many farmers have succeeded in borrowing the full value, and more than the full value, of their properties. We very much doubt if it be possible to create machinery which will distinguish between those who are worthy of help and those who have arrived in their present situation through incompetence, mismanagement and extravagance. Settlement of Claims. “In the Bankruptcy Act there is on

the Statute Book adequate machinery for the settlement of creditors’ claims if a person be insolvent. “It is the considered opinion of the committee that if the present Mortgagors’ Relief Act were repealed today the number of farmers who would find it necessary to file in bankruptcy would be very few; not only so, but of those who did tile few would be dispossessed of thenfarms. The conscientious, capable farmer would be almost invariably reinstated by his first mortgagee, on the property the moment he got his discharge. “Assuming that there is some real necessity for further legislation, the committee considers the proposals should not be limited to one section of the community, namely, the farmers.. If there be an’v reason to make special concessions "to mortgagors, the committee cannot see any logical reason for discriminating between farmer mortgagors and other mortgagors. Why should not similar concessions be made to struggling country storekeepers who have done thenshare toward keeping the farmer on the land, and whose difficulties lire largely due to the inability of farmer customers ro pay for goods bought? In the opinion of the committee, if the proposals ?o through in their present form, they will involve the ultimate bankruptcy of a large number of country storekeepers. Equality of Sacrifice. “It it be necessary that sacrifice should be made to maintain the farming industry, then it should be national and should be shared by the whole community. Under the rehabilitation proposals as explained in Mr. Coates’s pamphlet, sacrifice is demanded of one class of the community only,, namely, the farmers’ creditors. The committee would stress that the sacrifice will fall not only on mortgagees of land, stock aiid chattels, but also on all the unsecured creditors of the farmers.

“This principle is unsound and inequitable. Hitherto the special assistance extended to the farming community has been at the expense of the community nt large, and if further special assistance should be given it should not be at the expense of the class which has already suffered great losses in the financing of the man on the land. “The proposal that one class of the community (the farmers’ creditors) should bear the cost of the rehabilitation of the farming industry, is inequitable and unjust. The committee believes that such procedure would have far-reaching effects and would cause widespread distress among many classes, as well as among mortgagees. In the long run the effect may very well be further to damage farm credit and ultimately to injure rather than assist those whom the proposals are designed to benefit.” “Astounding Suggestion.”

“The proposal that an insolvent person should be allowed to retain 20 per cent, of the value of his assets is an astounding one. If a trader or a professional man has, through misfortune, to

invoke the protection of the Baiieruptcy Act, he is entitled to retain furniture, clothing and tools of trade to a value not exceeding £5O. On the other hand, an insolvent farmer whose assets are valued at, say £lOO,OOO, is to be allowed to retain £20,000 at the expense of his creditors.

“The committee is very strongly of the opinion that the proposal that the Mortgage Corporation be authorised to take over, at its discretion, existing mortgages, financing these at a low rate of interest, up to an amount not exceeding 80 per cent, of the security ax re-valued, the State accepting a contingent liability for one-eigth of such mortgages, is utterly and totally unsound. “The pamphlet is silent on the question of what is to happen if the mortgagor effects a sale of the mortgaged property during the period of supervision. The rehabiliation proposals are based on the assumption that it is in the best interests of the community that the farmer should be kept on his farm. If of his own aceord lie disposes of the property during the period a “stay order” is in force, then it is the considered opinion of the committee that the “stay order” should cease to operate, and the ordinary processes of law should be allowed to take their course. The fanner, in such case, should be permitted to take only the surplus left after all his creditors have been paid in full. “Unjust and Dangerous.”

“It will be understood from the above that the committee regards the rehabilitation proposals as unsound, unjust and dangerous,” says its statement. "It believes that justice can be done to all parties concerned, including the. farmer mortgagor without wholesale repudiation of contracts, and without the unjust discrimination against one class of the community—the farmers’ dreditors.. Again.the problem resolves itself into two distinct divisions —State mortgages and private mortgages. The committee, makes the following suggestions in lieu of the Minister’s proposals:— “So far as mortgagors to the various State departments are concerned, the committee lias suggested the creation of boards with full power to effect settlement with these mortgagors. ■ Such settlement would be at the expense of the whole community, and would not prejudicially affect any particular section. “It is, in the opinion of the committee, common ground that the present relief legislation is not altogether satisfactory. From the viewpoint of the mortgagor, the relief afforded is merely temporary by way of suspending payments with a power of writing-off, limited to arrears of interest. Mortgagees, on the other hand, complain, and with some reason, that there is no uniformity of practice. Cases apparently similar are dealt with in varying ways in different districts. Necessity for Amendment.

“Much of the committee dislikes any proposal which validates repudiation of

a contract, it recognises that there is some necessity for amendment of the present legislation. It urges that, having instituted u system of dealing with disputes between mortgagors and. mortgagees, the Government should, if that system has proved somewhat unsatisfactory, endeavour to improve upon it rather than to scrap it and substitute an entirely new and untried system. “The committee therefore suggests in respect of private mortgages, as follows: “(a) That orders under the present legislation may be made to be operative until December 31, 1939 (the present Act expires on December 31, 1935, and orders ■may be made under it having a currency of two years. The proposal of the cominitee therefore means an extension of two years). “(b) That the existing Adjustment Commis«ionfc> be reconstituted on the lines of the proposed special Court of Review, that is, an independent chairman ami two associate members—one representing mortgagors’ interests generally, and one representing mortgagees generally—thus increasing public confidence in these tribunals. “(c) That it be laid, down distinctly that the Judge (or Magistrate) is bound to hear and consider evidence offered by either party which was not available at the hearing before the Commission, and if necessary refer the case back to the Commission. “(d) That a full right of appeal to the Court of Appeal be conferred. This is essential if public confidence in mortgage lending js to be restored. “The committee had hoped,” its statement concludes, “that before completing the preparation of this statement, advance copies of the legislation would have been available to it. Unfortunately, such drafts have not been available, and the foregoing comments are therefore necesarily based on the information given in the pamphlet by the Minister of Finance,. togther with such further information as was afforded the Committee in its conferences with the Minister and his staff.”

NO DEFINITE DECISION Statement by Mr. Coates The Minister of Finance, Rt. Hon. J. G. Coates, has forwarded to the secretary of the Associated Chambers of Commerce the following letter: — “I have to acknowledge receipt of your letter of January 31. forwarding copies of the statement on mortgage finance, which your committee proposes to publish. 1 would point out, however, that the discussions with your committee and with other committees and various interests in other centres were all held in camera as it was desired to have frank expressions of opinion and any constructive criticism which could be offered. Many conflicting opinions have been expressed and some helpful suggestions

have been made, aiid until these have been fully considered a decision cannot he arrived at on a number of points in the scheme. “lu these circumstances it should be realised that the discussions with your committee by no means represent the last word on the subject, and nothing should be included in the statement published by you indicating that a decision has been made on any of the controversial points. In fact, a definite decision will not be reached until the draft legislation has been considered by the Government and brought down in the House. “I would also like to point out that as a result of my discussions in the different centres I am satisfied that the views expressed in your draft statement are not generally endorsed by the various interests enumerated in the second paragraph. The chairman of the Associated Banks, for instance, has advised me that your committee does not represent the banks.” POSITION OF BANKS Reply to the Minister In a reply to the Minister’s letter, Mr. A. O. Heany, secretary of the Associated Chambers of Commerce, refers to points raised by Mr. Coates, and makes the following comments: —. My committee is confident that you will not find- in the memorandum to be published any statement which could be regarded as a breacn of confidence. It is possible that there may be individuals associated directly or indirectly with those interests who do not endorse the views of the committee, but the draft statement has been fully and officially endorsed by all the organisations enumerated excepting only the New Zealand Law Society, which has not yet held a meeting for the purpose. This endorsement includes the official endorsement of the Life (Insurance) Offices Association for Australasia, whose decision in the matter was afterward endorsed by the New Zealand Life (Insurance) Offices Association. “As regards the Associated Banks, your letter has been referred by the chairman of my committee to the chairman Of the Associated Banks, and the chairman of my committee is authorised by Mr. Yaldwyn to tell you that Mr. J. Cruickshank Morrison acted on the committee for and on behalf of the Associated Banks, and that the memorandum, as issued for publication, has the full and official endorsement and approval of the Associated Banks. It seems clear, therefore, that you must have been mistaken in regard to the advice received by you from the chairman of the Associated Banks.

“I am instructed by my committee to again thank you for your promise to arrange a further interview as early as possible. My committee hopes that you will be able to arrange this interview early next week, and awaits your further advice on the matter.”