TO CORRECT MORTGAGE FAULTS
It is,claimed by the Government thatjts Mortgage Corporation proposals will not only remove the present causes of difficulties but will also prevent similar difficulties arising in the future. If that were so the country might agree to go far in assenting to departure from established principles. But the skilful analysis made by the financial and commercial committee reveals that this claim is more an optimistic hope than a reasonable expectation. Mr. Coates hopes that the operations of the Corporation will result in stabilising mortgage rates of interest at lower levels. The committee, after reckoning the probable interest on bonds and the cost of administration, does not see how lending rates can 'be much lower. Of course if mortgages", are , refinanced now for long terms the mortgagor is likely to be the.gainer; but a general movement for refinancing would of itself harden lending rates. A mortgage corporation which'accepted responsibilities involving heavy issues of bonds for new money would probably find itself before long "compelled to pay a higher price. Stabilisation of mortgage rates is not possible unless all interest rates can be kept at a fixed level. No means of accomplishing this have yet been discovered.- We know that even the State Advances Office found itself compelled to raise its lending rates because it had to pay more, for new capital. It could have continued lending out what came in (except when it had to redeem its own loans), but the fact that it thus kept its lending rates below current market quotations led to heavy demands for loans—and sooner or later a political party was bound to rise with a promise to lend all that was wanted.
Even if lending rates can be stabilised at a low point, however, this will not prevent borrowers from plunging into debt. The, committee makes this point when'it states:
The more successful the Corporation is in raising cheap money from the public and lending it to farmers, the greater will bo the very grave risk of an inflationary increase in land values, and an unjustified speculative boom in land.
Certainly the Corporation will have power to keep its own valuations and loans on a conservative basis (if mobilised mortgagors do not successfully" exert political pressure on a board comprising a majority of State-nominated members); but can it prevent borrowers from giving second and third mortgages? Will it not be criticised as hindering progress and accepting the domination of financial interest, if it attempts lo check a speculative rise in land values and a boom in land sales? We know that even now there are many farmers (as one of their leaders said recently) who argue that there is nothing wrong. with high land values; but high interest rates are at fault.
If this should prove to be the course of events the country will have paid a high price (at the expense of investors) to extricate farmers from their difficulties, and will have done nothing to prevent them landing themselves in similar trouble.- Indeed, it will have made
trouble more 'probable by sanctioning the easy scrapping of contracts. Old-fashioned as it may seem to the modernists in economic statecraft, it is nevertheless true that when contracts are lightly put aside there is decided encouragement given lo the careless acceptance of obligations. If we wish to discourage speculation we must be careful not to create the impression that the Stale stands ready cither to pay the speculator's losses or to cancel his engagements.
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Bibliographic details
Evening Post, Volume CXIX, Issue 30, 5 February 1935, Page 8
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582TO CORRECT MORTGAGE FAULTS Evening Post, Volume CXIX, Issue 30, 5 February 1935, Page 8
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