MORTGAGE CORPORATION

Ellesmere Guardian, Volume LVI, Issue 41, 24 May 1935, Page 2

MORTGAGE CORPORATION

ISSUE OF SHARES

STATEMENT BY MINISTER,

As readers will have noticed from the advertisement which appeared in Friday's issue of -the Guardian, the prospectus of the Mortgage Corporation of New Zealand, for which 500,000 £1 shares will be available for subscription by the public, will be issued. A statement has been made by the Hon. Adam Hamilton, acting-Minister of Finance, regarding the corporation, in the course of which he says:— The capital of the Mortgage Corporation is to be £1,000,-000 in shares of £1 each, 500,000 of which are to be allotted to the Minister of Finance and held by him on behalf of the Crown. The remaining 500,000 shares are now offered at par for public subscription, and as the shares will carry a cumulative dividend of 41 per cent, payable out of the profits of the corporation, the Minister confidently expects that the shares will be readily taken up. Not more than 5000 shares will be allotted to any one person, and not less than five. The liability of every shareholder will !be limited to the amount for the | time being unpaid on the shares. Having regard to the national character of the institution, the Mortgage Corporation should give a strong lead in tb:e direction of placing mortgage finance in New Zealand on a sounder basis. The establishment in the Dominion of a system of mortgage finance that has/proved satisfactory in other countries should provide improved finance for farms, business premises, and houses, to the benefit of the community generally. The essence of this system is linking long-term mortgages for borrowers to bonds marketable on the Stock Exchange for lenders. The long-term instalment mortgage is undoubtedly the ideal form of finance for farmers and those buying' a home for themselves. The mortgagor will not only have finality in his financial arrangements, thus obviating the difficulties and recurring expense of refinancing, but will also have that sense of security and independence which must result from the knowledge that his loan liability is being reduced by every instalment paid. On the other hand, holding bonds with a floating charge over a large number of mortgages instead of an individual mortgage will give lenders less difficulty in collecting interest, also much greater security and a liquid investment that can be realised readily on the Stock Exchange, in whole or in part as desired, without any delay.

BUSINESS OF THE MORTGAGE CORPORATION.

will be a charge against the State and not against the corporation.

Some people appear to be a little uneasy at the magnitude of the corporation that is being established, but actually this magnitude will be a source of strength and stability. Experience in other countries with somewhat similar institutions has definitely shown this to be the case. The large organisation permits of a wide diversification of risks and in this regard it may be pointed out that investments throughout -the whole Dominion secured on lands used for a wide range of purposes, both rural and urban, obviously provide a broad basis for stability. Further, the whole volume of mortgage investments will permit of a well organised supervision of the numerous properties at a very low rate per cent, of the capital invested. On the financial side also the large institution has every advantage in that its bond issues when available to the investing public will be large enough to establish and maintain a definite market on the Stock Exchange, while the mortgage capital repayments to the corporation will flow in sufficient volume to facilitate reinvestment or redemption of bonds from time to time.

ADVANTAGES OF A LARGE MORTGAGE INSTITUTION.

The business of the corporation is to borrow and lend at the lowest possible interest rates on long-term mortgage for periods not exceeding 50 years. Provision is, however, made for granting flat mortgages in special cases. In addition, the corporation is empowered to lend on stock and chattels where this action is necessary to safeguard any mortgage of land held by the corporation. The necessity for this power had been amply demonstrated in the experience of the past few years, but is only a safeguarding provision, and the corporation as such will not generally advance against stock and chattels. This class of business is, however, the main purpose of the Rural Intermediate Credit Board, which organisation will continue as a separate financial entity. It may be mentioned, however, that the legislation provides for the personnel on the Mortgage Corporation Board being also appointed to the Rural Intermediate Credit Board. Thus with the same persons on the two boards there will be the closest cooperation and co-ordination in the operations of the two organisations. The corporation will be placed in business on a large scale from the outset as under the provisions of the Mortgage Corporation Act mortgages of the State Advances Office and of the Lands Department are to be transferred to the corporation. The aggregate value of these securities is approximately £50,000,000. With this large volume of business the corporation will be firmly established from the outset in a manner which will ensure that the administrative costs per cent, of capital employed will be maintained at the lowest possible level. The corporation will be adequately safeguarded from loss in respect of mortgages transferred from the State: —Firstly by the fact that such part of the purchase price as is agreed upon between the Minister of Finance and the directors will be represented by a contingent liability to the State bearing no fixed interest; and secondly by virtue of section 38 of the Act under which any capital losses from these ex-State mortgages

FINANCIAL STABILITY OF CORPORATION.

Apart from the share capital, which is to be paid up within 121 months, the corporation will obtain funds for its business from the sale of stock and bonds having a currency not exceeding 50 years corresponding to the maximum period for which loans on mortgage may be granted. In the interests of financial stability, however, the issue of stock and bonds is restricted by the Act to not more than 15 times the capital and the amount then standing to the credit of the General Reserve Fund. As this provision applies to the bonds to be issued to the State in payment for the State mortgages transferred to the corporation, [notwithstanding the fact that the corporation is"- protected from loss in respect to these mortgages, there must always be a very substantial reserve between any loss in respect of new business done by the corporation and the share capital. In effect, this means that whereas the minimum reserve required by the Act must be maintained against the whole of the investments of the corporation, actually only losses in respect of the new business will fall upon that reserve.

Under the legislation, an initial Reserve Fund of not less than £2,750,----000 is to be provided by the State in the form of local body securities to be handed over to the corporation. If, and when, the Reserve Fund amounts to more than 10 per cent, of the bonds or other securities issued by the corporation, the excess accretions to the Reserve Fund above 10 per cent, go to the State until

such time as the £2,750,000 has been repaid, and in the meantime so much of the interest of the Reserve Fund investments as is earned by these securities will also go to the State. The corporation will be an independent statutory organisation entirely non-political in its' management, which is to be vested in a board consisting of eight directors. The corporation is restricted by the Act to lending on first mortgage of land up to the recognised trustee margin of two-thirds of the value of the security only, and in the case of rural lands valuations are to be based primarily on the earning capacity of the lands. Furthermore, it should not be overlooked that by lending on long-term table mortgage the margin of security for such investment will steadily increase as repayments are made. To enable the corporation to assist in the rehabilitation of farmer .mortgagors, provision has been made in the Act allowing the corporation to advance up to four-fifths of the value of the security for the purpose of repaying any existing mortgage, but it should be emphasised that the Minister of Finance is required to guarantee the corporation against any loss that may be incurred by it in respect to any excess of an advance over the trustee mar- | gin of two-thirds. The bonds will be authorised trustee investments, and will fully merit that status.- This being so, it follows that the shares of the corporation must likewise be gilt-edged, for if everything possible is done to make the whole organisation safe and sound, in order to obtain finance at the lowest possible rate, it follows that the possibility of loss falling upon the share capital is very remote indeed.

As it is a national institution, the dividend that may be paid on share capital is properly limited, but the full return of 4| per cent, per annum on the paid-up capital is assured from the commencement. As a matter of fact, the share capital itself will largely earn the dividend payable thereon through direct investment of the amount, but it is otherwise safeguarded by the profits earned on other investments. In this connexion, it may be mentioned that a margin of up to 1 per cent, between the borrowing and the lending rates of the corporation is allowed for administration costs, and these costs do not include the building-up of reserves against possible losses, for which adequate provision is made separately.