REASONS FOR CHANGE

Dominion, Volume 29, Issue 207, 29 May 1936, Page 12

REASONS FOR CHANGE

State and Mortgage Corporation LOANS FOR HOUSES Debate on Government’s Proposals A detailed explanation of the provisions ami objects of the State Advances Corporation Rill was given b.v the Minister of Finance, Hon. W. Nash, in moving the second reading of the Bill in the House of Representatives last night. In changing the name of the Mortgage Corporation <<> that of the State Advances Corporation. said Mr. Nash, the Government was linking with the corporation one of the finest names recorded in the history of New Zealand—a name that would live for many a year.

The cancellation of shares in the corporation would take effect from June 15- The reason that that date had been selected was that shareholders had had their shares allotted to them on June 14, and it was intended to allow exactly one year to elapse before closing the corporation down. The new board would function as from July 1.

The principle adopted by the Government was to give shareholders the equivalent in money or stock they would have received had their shares not been taken over. The cost to the Government would be £281,000; it would be that sum if all had paid up their calls, but something less because there were some of them who had not. The stock would have a currency of ten years and be redeemable any time prior to April, 1946, if the shareholders concerned so desired. Shareholders would receive £ll2/10/- of stock for every £lOO invested to compensate them for a reduction of interests from 4J per cent, to 4 per cent. Whether shareholders took cash or paid up stock they would receive a dividend. Tlie Government would direct the policy of the corporation through the .Minister. Tlie Government would be responsible in its entirety for the acts of the corporation. Tlie hoard would manage. The Minister would control, but only at the point at which the Government felt its policy was not being given effect to would it interfere. Granting of Loans. Mr. Nash said that under tlie existing procedure the corporation was allowed to grant loans up to a margin of 66 2-3 per cent., but tor rural mortgages the corporation was empowered with the authority of the Minister of Finance to advance beyond that margin. That procedure had to a certain extent been changed. Tlie 66 2-3 margin, which was exclusively a commercial basis of lending, still remained, but if tlie Government desired, as it would desire, to make a greater advance, it would guarantee to stand any loss that might be incurred. That guarantee would be given mainly iu the rehabilitation of farmers and the building of houses. Loans to farmers for tlie development of production would be based on the earning capacity of the land, Mr. Nash continued. However, there would be a much sounder basis than formerly as the guaranteed price would determine the earning capacity of the land. The Hon. A. Hamilton (Opposition, Wallace) : That only applies to dairying land. Mr. Nash: That is so at present, but the procedure will be extended later. Other branches of the farming industry will want to come under the procedure which will come into operation on August. 1 for the benefit of dairyfarmers. In cases where farmers could show that an advance of over 66 2-3 per cent, was justified, they would get the larger advance, Mr. Nash said. In addition the table mortgage procedure was being altered so that it could apply to half the loan instead of to the whole loan. Mortgagors could follow the old procedure it they wished or they could get half the loan on table and half on a Hat basis. In a loan of £100(1. it might be that £5OO would be advanced on tabl e mortgage, but interest would be paid on the £lOOO. At tlie end of the table period there would remain a loan of £5OO on much improved security, and there would be n o difficulty for the ordinary mortgagor to refinance. Life Insurance Policies, "There is provision in the Bill for the taking out of life insurance policies.” Mr. Nash continued. "This is associated with houses, but also with rural mortgages. A mortgagor might desire to safeguard the interests of bis wife. In the event of his passing awny during tlie period of the mortgage, repayment would be made out of the insurance and tlie security would remain for his wife and children.” Sir Alfred Ransom (Opposition. I'ahialua I : How . about the man who could not pass a doctor for life insura nee'.' Mr. Nash. He would still get his mortgage in exactly the same way. but his wife would not have the same seen rity. Mr. K. .1. Holyoake (Opposition. Motuekn > : It is really optional, then? Dilliciilty had been caused in the past. Mr. Nash said, through mortgagors being unable to meet their rates. Thousands of mortgagors who managed to. meet their interest could not dream of £6 or £lO a year for rates, although the latter were just as legitimate a -charge as interest. Provision was made for them to make small payments to the corporation, weekly or fortnightly, to enable them to meet maintenance, rates ami insurance charges. There was also the question of rates on properties which reverted to the corporation, in regard to which local authorities had often been unjustly penalised iu the past. There was no specific provision iu tlie Bill, but the matter had been taken up with the Crown Law Office and tlie Audit Department with the result that rates would he paid when a house was let. Mr. 11. S. S. Kyle (Opposition. Riecarton) : That has been done in the past. Mr. Nash: It has not been don?, otherwise we would not find that

grants of £BOOO had been made to reimburse local authorities. The objective of the corporation. Mr. Nash continued, would lie to provide money at low rates of interest. Interest rates in the past had been controlled bv both the Slate Advances Department and the corporation, which had advanced money at lower rates than were customarily charged. It was a question of how far tlie Government could succeed in controlling interest rates through the corporation, but the British Government had' largely succeeded in a similar scheme, and he thought that even belter results could be achieved in New Zealand. The object of the Bill was to provide one centralised lending department with n competent field staff to value securities. Tlie corporation could play an important part in the development of housing, although subsequently either a Bill or an appropriation would come before the House under which the Government itself would build houses to relieve tlie shortage which existed at present. The corporation could make loans to local authorities for housing purposes. In Britain during tlie last few years from £159,000,000 to £200,000,000 had been spent on housing schemes, aud it was obvious that New Zealand was being left far behind. In reply to an interjection, Mr. Nash said it was not yet definite what, rate of interest would be fixed for rural mortgages, but it would be no higher than that ruling at present. Aid for Industry, There was also provision for the corporation to assist in the development of industry, the Minister said. The Bureau of Industries in the first place would investigate proposals and report On them to the Cabinet which would make recommendations about any loaus found to be justified. The loan would then be administered by the corporation. A similar procedure had operated to a certain extent in Great Britain and the Chancellor of the Exchequer, Mr. Neville Chamberlain, had recently referred to its beneficial results in re-establishing industry iu tlie depressed areas. With regard to the issue of bonds. Mr. Nash said the proposal was that they should be issued at a low rate of interest for long terms aud on absolutely gilt-edged (security. The purpose of the Government was to make them guaranteed bonds. Value of State Service. 'The reasons for the Government’s decision to make the corporation a purely State institution were outlined by tlie Minister. “'Ye are taking this step,” said Mr. Nash, “because we believe that the Government can do tlie work better than any private or semiprivate or semi-State institution. The spirit that animates a board of directors faced with the necessity of making a dividend is very much different from which animates a body whose sole object is to render service. “I believe that the State Advances Act introduced by Sir Joseph Ward in 1894 was I he greatest single event from a monetary point of view that lias taken place in politics iu this country. Nothing that has occurred in tlie Dominion lias given greater advantages, provided more homes, or led to a greater development of the land. Since the passing of that Act there has been something like £70,000,000 recorded as advances by the department, and £34,000,</M) has been repaid. The sum of £41,000,000 is still owing, and while the evidence of the past few years is such that the corporation must make provision for a contingent liability of £8,900,000, I am saying that tlie corporation will lose less than any private organisation would in similar circumstances. While it has been operating, the State Advances Department reduced interest rates to 44 per cent. In addition, it lias saved 14 per cent, to 2 per cent, right through the years, not only ou the money advanced b.v the department, but on all the moneys advanced in this country. The saving of the State Advances Department to New Zealand over the years exceeds £20,000.000, as tlie department, has to a certain extent controlled interest Kites for mortgages provided by other interests.” In 1909. tlie Minister continued, the department started to make loans to local bodies. In 1919 the Housing Act was passed and was administered by tlie Superintendent of the State Advances Department. That had not ocn successful in certain directions, hut under the present Bill the State Advances Corporation was empowered to take over housing. Credit for Success. The credit for the success of rhe State Advances system was due in the first, place to Sir Joseph Ward, and next to Mr. W. F. Massey, who had done the thing most criticised of all by deciding to advance up to 95 per cent, of the value of the security. He had certainly created difficulties which had become apparent during the recent depression period, but he had built homes. His system had been abused in many cases, but in the Minister’s electorate alone there were thousands of homes providing the occupants with an environment which would have been impossible had the people been faced with the necessity of saving the money necessary to build those homes. Mr. Massey’s 95 per cent, advances had occasioned much of the losses of the department, but it would be worth while following the same system again if it would build homes. The houses were now there and they would not have been there but for those liberal advances. “State Can Do tlie Job.” The Minister said that the cost of administration would perhaps be higher than 3/2 per cent, but he was hoping that in the ultimate tlie people would be rehabilitated to such an extent that, the loss that was apparent on paper would not be incurred. The Government would be told, no doubt, that the State could not d<> the job. The people who believed that would say that public ownership might be good, but public control "no." They would say that public ownership must be linked up with business management, and that business management was not to be found in government. "I don’t think they are right,” said Mr. Nash. "I think that the real interpretation of what is best is the personnel that is behind it. and there is just as much competency for doing tlie right thing in Government circles as there is in commercial or business circles. I suppose our Opposition friends will say, ‘You will have Io pay for the alteration you nre making in Hie Mortgage Corporation.’ If the price wo have to pay is (he price we paid in the past for private control, then we are not. going to pay (hat price any longer. 1 helieye we have a Public Service that can run a Mortgage Corporation, that can run a State Advances Corporation, that can run a Reserve Bank, if you like, that can run marketing, as well as any private enterprise and in the ultimate with infinitely better returns for the community as a whole.” Tlie claim that the Bill did not by a long way effect a complete reversion to the old State Advances De-

partment was marie by the Hon. A. Hamilton (Opposition, Wallace). He said that, tlie Government would have been wise to have allowed the Mortgage Corporation a longer term to prove its usefulness, although he asserted lhat it bad showed already that it. could play an important and useful part, in the lending system of the country.

”'.rhe Bill, although making very far-reaching and drastic alterations to the constitution and management of tlie corporation, does not revert, by a long way to the previous position,” Mr. Hamilton said. "I should say that it goes about half-way. It is, in a sense, it coalition of the Mortgage Corporation anti tlie State Advances Department. The now institution is still managed by a board of directors, although the board will be very much under the influence of the Minister of Finance.” Mr. Hamilton contended that the Bill, although changing the institution so radically, was still orthodox in its conception. It did not give expression to any Douglas Credit ideas, but followed the line of accustomed finance. In some instances the Bill lifted tlie financial safety-valve a little higher and perltaps in some cases it blew it right off altogether, but generally tlie usual lines of- finance were followed. “But it cannot be gainsaid that the present corporation has done very well indeed,” continued Mr. Hamilton. “It had loaned out a million pounds and was considering lending more. Its lending rate has been a very favourable one for any mortgagor to receive. When a borrower gets a table mortgage and terms over a period of anything up to 45 or 50 years at a low rate of interest he is very fortunate indeed, and if the Minister can get t lose conditions he will be achieving something.” Mr. Hamilton expressed his pleasure at the announcement by the Minister that it was expected to be aide to reduce tlie anticipated loss on the operations of the institution. More than £36.000.000 had been transferred to tlie corporation and it was then anticipated that 20 per cent, of that total would have to be put into a “doubtful” account, and might be lost. He agreed that through careful handling and administration such a proportion of loss might not be experienced. Corporation’s Careful Policy. Tlie corporation had adopted a careful policy. It had become some sort of a father financially to its mortgagors. The business of borrowing and lending always called for the most careful handling. In an institution of the typo to be set up it was always necessary to keep a fair balance between the lender and the borrower. Mr. Hamilton said he was inclined to think that in a democratic country the borrower was more inclined to get consideration than the lender. In New Zealand there had been considerable freedom from the two extremes —tlie extortionate lender and the careless borrower. "Tlie Minister has said that the present guaranteed price which is proposed. might induce other farmers to seek a similar guarantee,” Mr. Hamilton said. “But as used in the- Marketing Bill, the word guarantee is not given its true meaning, or at least the effect of the Bill will not. give it its true meaning that is found iu this Bill. Here guarantee is against a loss if such a loss is not met by the security of the loan.” Mr. Hamilton claimed that the proposal to refuse a second mortgage on corporation mortgages would have too much of a restrictive influence. There was a lot of good in such a proposal, but there might be some evil. Tlie Minister had claimed that the Government could do the work set out for tlie new institution better than private enterprise, but that could be debated. There were some functions which belonged purely to the State. Others belonged to outside interests and should be divorced from the Government. It was open to question whether the country would not be going too far in bringin«?'lending operations under the charge of the State, when strictly it was not- a function of the' State. Money for Rural Development. Advantages of a combination of State and private enterprise were also stressed by Mr. Hamilton, who said there was no doubt that the State Advances Department had been very successful, but more so as an institution for the lending of money for rural development. However, that stage had passed, and there was now very little of that class of lending. Th.- State Advances Department had not been so successful when it had large sums of money for lending at a high rate of interest. It. also became very competitive with other lending institutions. That was not intended. The development idea of the State Advances Office had passed. and it had become a huge lending institution. Large loans to borrowers was not the function of the State. The Mortgage Corporation was a national institution. and although it was separate from the State it was not a private institution. Tlie idea behind the corporation was to give service to the mortgagors and not make it a profitmaking institution. "There are dangers iu a State department having big lending powers,” added Mr. Hamilton. "Although much criticism has been levelled at’ the system of boards, 1 believe it is a good one. The separation of some of our institutions from politics is advisable. In a sense tlie State had fairly good control of -the Mortgage Corporation. Tlie principle behind the corporation was to give the cheapest money and have the soundest management, and I believe that can be obtained through a combination of State and private enterprise.” Mr. Hamilton said 'e believed that with good control the present, system would compare favourably with the system the Minister was reverting to. At the same time he would not say the Opposition was opposed to the Bill. It was not, advisable for the Stat to become too large a mortgagee, because once that happened complications were likely to set in. Mortgagors could become n force in a democratic country. Compliment to Minister. Mr. Hamilton complimented the Minister on the change of name in the corporation, which he thought perhaps a better one than Mortgage Corporation. Tlie State Advances Department had pleasant associations witli New Zealand. The cancellation of the private capital was an important change, but it was not vital. Nevertheless the presence of private capital inspired confidence. The Minister had treated shareholders quite liberally. The opinion lhat it was prudent to set a limit on borrowing powers was expressed by Mr. Hamilton. "There was a limit to the borrowing powers of the Mortgage Corporation, but that is- now taken off ami the sky is the limit. To have no fixed relationship between borrowing powers and loscixos and capital is dangerous.” Mr Hamilton also stressed the advisability of a limit on lending powers, although loans up to 100 per cent, might be justified for housing. It was better that a man’s life insurance policy should be permanently secured for bis wife and family than using it as a collateral security. "The Opposition is not criticising the Bill very seriously," concluded Mr. Hamilton. “I believe

some parts of the Bill are a retrograde step, and that it would be better to try out the Mortgage Corporation for a further term rather than upset it so early in its career. Tlie Slate Advances Department has served its day and generation, lint because it was good 43 tears ago is not to say it is good now.” Cheap Money for Fanners. Admiration of the part: played during its existence by tlie State Advances Department was expressed by Mr. H. Atmore (Independent, Nelson). "I for one did not like to see the disappearance of the State Advances sign when the Mortgage Corporation was established,” he said, "and 1 am glad to see this return to a recognition of the State’s right and duty to work for tin 1 people. I think that right through New Zealand the change will be welcomed.”

Mr. Hamilton had criticised the control of big loan institutions by the State, said Mr. Atmore, but the Minister of Finance, Hon. W. Nash, hud auswered him in advance by pointing to the cheap way in which tlie State Advances Department had been conducted. Before the introduction of the department interest rates to farmers had been as high as .12 per cent., yet Sir Joseph Ward, through the department, had got money for them at 44 per cent. The farmer had been liberated from the shackles of exorbitant interest. Commending the provision in the Bill for the development of housing. Mr. Atmore referred to the exploitation at the present time as a result of the shortage of houses. He instanced the case of a widow and her daughter, living in Wellington, whose small estate was being administered by the Public Trustee. They had a four-roomed house for which they paid 27/6 a week rent. Although the rent had been paid regularly, it. was suddenly increased practically without notice to £3 per week. After seeking advice the widow was told to tender the usual amount of 27/6 each week as formerly, but the agent for the owner had refused to accept the money other than as on account. The latest development was that the woman had been sued for arrears. That was only one instance, although it was an extreme one, of what was taking place at the present time. “The Minister lias stated that although advances for commercial purposes are to be restricted to 66 2-3 per cent., it may in some cases be necessary for housing purposes to advance up to 100 per cent, of the value of the security,” said Mr. Atmore. “I believe that, is a very wise provision. We want homes for the people, and if they cannot pay for them they must have them anyway. If people are not properly housed they lose their selfrespect and that is the biggest loss any country can suffer.” Mr. Atmore expressed disagreement with the method by which the Government proposed to raise the money which would be paid out for housing. He said he hoped it would yet consider that borrowing was not necessary, for the object of the Bill was to build homes for the people and it was their credit that would be used to construct the houses. It was ridiculous that the people should owe money to themselves.

A GREAT CHANGE

Property Speculators To Be Curbed - “This is the beginning of a great change,” said the Prime Minister, the Rt. Hon. M. J. Savage. “We are putting tlie State in charge of another publie service which will be administered for the benefit of the people.” Mr. Savage said that there would probably still be those who would declare that it could not be done. He was prepared to argue with a man about methods of reaching an objective, but the individual who had nothing to say other than “It can’t be done” made him a little tired.

In spite of remarks made by the member for Wallace, the Prime Minister said he thought that the corporation under the Bill would go a little bit farther than the old State Advances Department. There was a clause in the Bill which stated that the board of the corporation must have regard to representations made to it by the Minister of Finance. That meant that the Government policy would be reflected in every act of the board. It would lie managing for the people of New Zealand, whom the Government represent-

ed. . “The principle underlying Hie Bill is to take the Mortgage Corporation back and place it on the foundations from which it should never have been removed.” Mr. Savage said. lhat is the foundation of the State Advances Department. The department failed because the Government of the day reduced the power of the people to pay rents and interest.” The Leader of the Opposition (Rt. Hon. G. W. Forbes) : It reduced rents and interest, too. If the Government had contracted anv evils during the last week or two. said Mr. Savage, it could fairly claim to have inherited them from its predecessors. There was no intention of stealing a march on the people. The Government was merely giving effect to definite undertakings which bad been fully explained months ago. Mr. Savage said that the personnel of the new board would be made known in due course; they would lie gentlemen who would know the job they were appointed to do. and no one else would find a place. He agreed with the member for Wallace that the present management was good. The tact of the matter was that Mr. Hamilton thought the Bill was so good that it seemed the Government would lie justified in taking the committee stages right away. (Laughter.) Meaning of a Guarantee.

“Tin. member for Wallace is still ar-uing about the meaning of a guaiantee," said Mr. Savage. ”My interpretation of a guarantee is simply this: A person gets what he expects. That is all. K he has the word of a Government institution that he is ."Oh'S to a certain amount, he gets it. In referring to interest rates, Mr. Savage said that the Government controlled public credit by Act of Parliament. It remained to be seen whether it had the courage.and wisdom to give effect to its election promises that it would use that credit with care and advantage to the people. The question of preventing' speculation had been raised, ami. he thought, rightly so. It was not a little bit of use the Government. closing all the doors and leaving a window open. “If by mistake we Imppen to leave one window open, and a speculator comes in. lie will soon find himself outside and that window closed. We will make mistakes, but we will not have discovered anything new wlimi we make them.” Mr. Savage predicted that the time was coming when both the mortgagor and the mortgagee would bless tlie day when the Labour Party was returned to power because they would find that their equity had been restored to where it should always h:i\e been. The Government was not legislating for scientists, but for ordinary people such as farmers and home-builders. It wa,s Labour’s intention to roestabiish equi-

ties, not to destroy them. Would anyone ever forget the Rural Mortgagors’ Final Adjustment Act? The farmers would never forget: they were put into chains for five years.

"We have people of various kinds of businesses perambulating through the country telling the people we are going to disappoint them,” continued tlie Prime Minister. "We don’t mind that. We will go before the i>eople as a jury and let them try us. We will see who wins. My word lias been given to the people: I may not teach tlie heights I hope to reach, and if I don’t it will not be through dishonesty or not endeavouring to keep my promises. ’ An Opposition voice: What about the exchange?

The Primo Minister: The less said about exchange the better for the reputation of the Opposition. (Laughter.) Continuing, Mr. Savage said ho would ask the people of New Zealand not to worry about speculators; they might win in the first round but the Government would win all tlie rest because it had the power to legislate. The people had nothing to lose by the pacing of the Bill. The adjournment of the debate was moved by the Leader of the Opposition. Rt. Hon. G. W. Forbes, and the House pose at 10.30 p.m.