CRITICAL REVIEW

Dominion, Volume 28, Issue 121, 15 February 1935, Page 12

CRITICAL REVIEW

Mortgage Corporation Legislation SUGGESTED' CHANGES Associated Chambers of Commerce Analysis A critical analysis of tlie Mortgage Corporation of New Zealand Bill is made by the committee of financial-and commercial interests set up under the auspices of the Associated Chambers of Commerce, in a statement made available to “Tlie Dominion” following a meeting of the committee yesterday. The committee remarks on a number of desirable amendments made, but criticises various provisions in the Bill and makes suggestions for numerous alterations to improve the measure. “The committee appreciates that its efforts to secure amendments to the proposals originally outlined by the Minister in his pamphlet have not been altogether futile,” says the statement. “In tlie Bill as presented to Parliament, certain of the committee’s recommendations have been incorporated, but some of the features of the proposals to which the committee took the greatest exception appear in tlie Bill unchanged. “The committee feels that the Bill is capable of very substantial improvement. ■ If the legislation is to be proceeded with, then in the opinion of the committee careful consideration should be given by Parliament to the following matters:— Size of Corporation. “In its original memorandum, the committee expressed the view that the corporation contemplated by the Minister would bo so large that very great difficulties would arise in securing an experienced and efficient executive. The committee sees no reason to depart from this view. It would emphasise the fact tliat the corporation contemplated by tlie Bill will commence business with assets having a face value of approximately £5O, 000,000. There are few institutions in New Zealand having assets of this extent. Those that do exist, without exception, commenced as quite small, institutions. “In its original 'memorandum tlie committee suggested that in lieu of bne huge State institution, several institutions should be formed on a district basis. Tlie committee is still convinced that this would be an improvement on the Minister's proposals. In this connection, it would point out that the magnitude of the task to.be undertaken by the corporation lies not merely in the huge face value of the assets it is to take over, but in the tremendous number of individual mortgages to be taken over by the corporation. “Unless a policy of. decentralisation is decided upon immediately the corporation is set up, grave delays, must be anticipated on account of tlie multiplicity of the transactions of the corporation. On the other hand, to delegate tlie policy of lending to district representatives is fraught with difficulties and dangers. Capital of the Corporation. “Tlie committee regrets to see that tlie Minister’s original proposals have been amended so that the State is to become not merely a bondholder but also a shareholder in tlie corporation. The committee has always understood ' that the Minister was emphatic as to the desirability of divorcing the lending departments from the Government. The original proposals of the Minister contemplated that eventually the Crown might have no monetary interest in the Mortgage Corporation. In tlie Bill as introduced, however, onehalf of 'the original capital of the corporation is to be taken up by the Crown, and there appears to be no provision for these shares eventually to be sold. "The committee regrets to see the Crown taking authority to borrow money for tlie purpose of taking up shares in a corporation tlie primary object of which is the realisation of the Crown’s present mortgage investments. The committee would ask why it is necessary for Hie State to subscribe £500,000. which it may have to raise by loan, when it is already banding over to the corporation £50,000.000 of mortgages. Divider f.s on Shares. “The committee thinks it necessary, in the interests of possible investors, to call attention to tlie provision as to dividends. The Bill does not provide for a fixed dividend on the shares, and it may lie in future years that tlie statutory dividend rate will be so low that the market value of tlie shares wili be less than par. Dividends are expressed as ‘cumulative.’ This expression does not mean that shareholders wiil in any way be guaranteed their dividends oi receive any preference over other classes of tlie corporation’s creditors. All that is conferred on shareholders is a right (should less than tlie statutory dividend lie paid in any year) to expect payment, of tlie shortage out. of tlie surplus earnings it: some future year. Joint Managing Directors.

“Part 2 of tlie Bid contemplates the appointment, as the principal executive officers of tlie corporation, two joint managing directors u ho are to sit as members of the board of management Tlie committee, on two distinct grounds, is very doubtful regarding the wisdom of this proposal. “(a) Past experience lias been tliat. any institution is in an invidious position when it decides to termjnate tlie services of an individual who is both an executive officer and a director. Termination of ills contract as an employee can i>e achieved ou proper firounds and by proper notice, but after tlie individual ceases to be an employee lie may remain a director for a number of years, which cannot be regardeil as satisfactory. . “(b) The position may be aggravat>ed wlien there iaro two individuals sharing equally tin- duties and responsibilities of tlie chief executive office. In the event of a dispute between tlie two chief executives, it Is always easier for tlie board to settle matters it tlie disputants are not entitled to sit at the board table. “Tlie committee would suggest, that the precedent of the Reserve Bank be followed —there being one chief executive officer witli a deputy or assistant chief executive officer. “As stated, the committee is convinced that the wiser course is to have but one chief executive officer witli a deputy or assistant, and that, he should not lie a member of the board. If Hie chief executive officer is not a director, then his salary and duties are properly a matter for tlie board to decide. Should lie be a member of the board, then it would be only proper

that his salary and duties be specifically laid down by tlie statute. Appointments of Directors. “After its interview with the Minister, the committee had hoped that the Minister’s original intentions regarding directors would be modified. It has been the understanding of the committee that eventually a substantial proportion of the corporation’s bonds will be held by the general public. If and when this happens, it would only be reasonable that Hie bond-holders should have some representation on the board. As it is. the directors—other than the three shareholders’ directors—will always be appointed by the Crown, and there'will be no necessity for any one of the five Crown appointees to be bondholders.

“The question of the rights of bondholders in various classes of companies is at.present before Parliament with a view to securing their proper representation. In view of this legislation it is difficult to see why adequate provision has not been made for representation upon the board of management of individual bondholders (if and when they come into existence). “It was tlie understanding of the committee (and probably, of tlie investing public) that the corporation’s business would be the making of loans on first mortgage of freehold lands, with a qualified power to lend (on salvage basis only) against stock and chattels. Clause 24 of the Bill, however, states that moneys may be lent against the security of ‘first mortgage of land or of any interest in such land.’ This would authorise advances against leaseholds, or reversionary interests in land, or against sub-mortgages. “If it be intended to "allow the corporation to make advances otherwise than against first mortgages of freeholds, the Bill should state so specifically, and name the permissible proportion of such advances, so that intending investors in the corporation can know where they stand. Bonds as Trustee Securities. “The committee has already voiced emphatic objection to the corporation's bonds being given statutory recognition as trustee securities. While the Bill contains the right to advance on stock and chattel securities, the committee must persist in this objection. “The committee earlier expressed its fear that the executive of the corporation would find itself in a difficulty when it came to fixing the consideration for the mortgages taken over from the Crown and suggested an independent tribunal to fix this amount. The Bill merely >ays that this consideration is to be an amount mutually agreed upon between the corporation and the Minister. Surely this is far from satisfactory, and proper machinery provisions should be embodied in the Bill. Valuation of Land. “In its original report, tlie committee called attention to the Minister's somewhat ambiguous remarks on the question of the productivity of rural land being used as a basis for valuation. This topic has been dealt with in the Bill, but in very general terms. “Many factors must be taken into account when making a valuation of land, cither rural or urban. To say the least, it is dangerous to give statutory recognition to any one factor as being the factor to be ‘primarily’ considered. “The committee will not at present stress the point further than to say that if the Minister’s proposals become law, the Dominion will have in force contemporaneously two entirely distinct- systems of valuing rural land—one under the Rating Act and one authorised by the legislation now under discussion. “The Bill provides for loans being made up to 80 per cent, of the valuation provided the difference between 66 and two-thirds per cent, and SO per cent, is guaranteed by the Minister. “The committee understood that one of the Minister’s objects was the elimination of political patronage in connection with State lending. Has he considered the possijfly far-reaching, results of. his proposals under this head? The Minister of Finance may in future be inundated with requests by prospective borrowers who cannot obtain their full wants from the corporation on a two-thirds basis, to guarantee the difference -between the loans Hie corporation is prepared to make and tlie amounts they wish to borrow. Re-sale of Mortgaged Properties. “In the committee’s opinion every mortgage taken by the corporation .should contain an express provision making the. principal sum repayable in the event cf the mortgagor selling the mortgaged property. Whether, on a review of the position on a sale, the loan is called up or allowed to run on, should be a matter for the corporation to, decide after.investigating the position of the purchaser. "The committee would repeat its original'observations that at the inception of the corporation, the so-called reserve fund is more. apparent than real. In effect, the corporation will, have possession of certain securities, aud per contra, will owe to the Crown the face value of these securities. This qualified reserve should not be taken into account in calculating the maximum bond issue. “The committee takes the greatest exception to the principle embodied in clause 39 of allowing a first mortgagee and his mortgagor to modify a mortgage contract without obtaining the concurrence of subsequent mortgagees. It may be said that the variations contemplated by this clause are not seriously prejudicial to a subsequent mortgagee, anil that therefore no reasonable subsequent mortgagee would refuse to consent. The committee would, however, point out that one type of variation involves an increase in capital. It is quits contrary to our acce)>6»l rules of law that a. mortgagee and his mortgagor should, without reference to subsequent encumbrances, be able to increase tlie amount of the prior charge. Proxy Voting. “The committee notes there is to be a limitation on the number of votes to be exercised by any siiarebolder at a general meeting, either in liis own right or by proxy. Being fully aware of the use which at times may be made of proxies, tlie committee appreciates the draftsman's endeavour to put some restriction upon the use of proxies. At the same time, the committee would point out that the clause, as drafted, may involve the substantial disfranchisement of shareholders resident outside the city in which a general meeting of shareholders-ts being held. "Under the Bill the Grown is a shareholder for half the capital of the corporation. The Crown would also be a creditor for upproximately 50 million pounds or bonds to be banded to it in exchange tor the mortgages taken over by the corporation. It is essential that on any wiudinguii the Crown should not be able to exercise its prerogative rights (too frequentij exercised at present) ot demanding payment first and in priority to all other creditors. The committee is not satisfied that clause 21 (3) negatives the rights of the Crown above referred |o, and investors will require to see for their protection that there slioutd be no doubt about the Crown’s prerogative being waived. BondSj Handed to Crown. "Tlie committee apprehends that on a disposal by tlie Crown of any part of its bond holding, the proceeds will lie applied in reduction of tlie appropriate part of the Dominion's public debt, that is, moneys borrowed for. State Advances purposes' No mention is made of this in tlie Bill, which should, in the opinion of tlie committee, expressly deal witli his point, and hypothecate the bonds for this and Ho other purpose. “Clause 47 provides for the corporation having the same exemptions from rating as the Crown has in respect of mortgages taken over. As the corporation is a separate legal entity, it should not be placed on any better basis than other lending institutions. Local,bodies have for years laboured under grave disadvantages in respect of properties mortgaged to one or other of the Government lending departments. Evidence Required. "The committee understands from newspaper reports that it is unlikely

that the Bill will be referred to a Select Committee. With all respect, the committee would urge that if this is the intention of the Minister he is making a very grave mistake. The committee would respectfully suggest that the Minister arrange for the Bill to be referred to the Statutes Revision Committee so that those 'who are willing to give evidence—not in any spirit ot opposition, but in a bona-fide desire to help the Government —may be heard. “A number of points of criticism made by the committee in its memorandum published before the Bill was available relate to matters of administration, and no good purpose would be served in restating them at this juncture, although that does not mean that the criticisms , do not still hold. Generally, the committee. while making the above suggestions for the improvement of the Bill, reiterates its opinion, already expressed elsewhere, that it is not convinced of the necessity for the establishment of a semi- - State National Mortgage Corporation, and that it is not sanguine of its success if it be established on the lines proposed. “The committee considers that the House should have before it at the same tiffie tiie Bill dealing with the proposals for the rehabilitation of farmers’ finance. The present Bill provides only half the provisions for the Government’s great experiment in State Socialism.” LABOUR ATTITUDE “Involved Proposals” The attitude of the Labour Party to the Mortgage Corporation of New Zealand Bill was defined by the Leader of the Opposition, Mr. M. J. Savage, in an interview yesterday. He said the Opposition would oppose the introduction of private capital into the corporation. The proposals in the Bill were involved and would turn farmer-mort-gagors into serfs. "The fundamental weakness of the Bill,” said Mr. Savage, "is that the corporation will still have to rely on someone else to supply the money. AU the corporation can do is to borrow and relend. It cannot create money and it cannot issue money. The people issuing the money will still be on the box seat. For tlie purposes of organisation the existing .State lending institutions should be amalgamated—we have always advocated that —and no objection can be takeii to that provision in the Bill. “As far back as 1924 Labour urged a revaluation of all securities and that tlie State should face up to the question of readjustment of the then pro- ■ duetive values of those securities. The same objection was made then as is being made to-day—that they should , give some time for developments. The Minister is saying there is no basis of valuation to-day. What guarantee have we that there is going to be any better basis over the next five years? The farmers will still be in chains and swinging between heaven and earth for a period of up to ten years. They won’t know where they are, and there will be no immediate solution. If prices are no better during the next five years than they have been during the last five years, how much further will we be?” , Mr. Savage said that the State lending institutions should be part of the national money system, but unless they bad the authority to issue money they would be helpless to solve the problem. The only thing wrong with the State Advances Office was that it did not have tlie money to advance •or the power to create it. The alteration iu names and the setting up of boards would not make any difference. There were capable officers occupying positions ou the .State Advances Board to-day, but what they did not have they could not advance. Mr. Savage said Labour would oppose tlie introduction of private capital into tlie corporation. “The £500,000 they will bring into it will not buy ink?’ he said. “It will be infinitesimal. The main weakness iu the existing institutions is not being strengthened.' Private subscription will play no parin helping the farmers, but will merely give those interests an opportunity ot interfering in tlie administration of the corporation. For that interference they will receive dividends and keep up tlie rate of interest on mortgages. “For tlie purpose of assisting farmers. the Government should have the sole authority to issue money. If the farmers are still going to be dependent upon private lenders for a supply ot nionev then they arc not going to get. out of the difficulty they are in now. Summed up, the proposals are involved and will turn farmer-mortga-gors into serf's. Reduced interest charges, although desirable, will not bridge tlie gap between tlie purchasing power of tlie people and production, and is therefore not a solution ot the problems due to falling prices. The solution can be solved by a readjustment of mortgages under State control aud guaranteed prices for products ami services.” " AUCKLAND VIEW By Telegraph—l’iws Association. Auckland, February 14. The Auckland Chamber of Commerce decided to-day to ask the Associated Chambers of Commerce to impress on the Government the desirability ot' not passing tlie Mortgage Corporation legislation through all its stages until the farming rehabilitation proposals have been introduced.