MORTGAGE PLAN

Evening Post, Issue 47, 23 August 1935, Page 11

MORTGAGE PLAN

WORK OF CORPORATION

ISSUE OF PROSPECTUS

FIXING INTEREST KATE

(By Telegraph—Press Association.)

INVERCARGILL, August 22.

The-Mortgage Corporation proposes to release within a few days the prospectus for its first issue of stock and bonds, and at the same time the rate of interest at which the Corporation proposes to lend the capital so borrowed on mortgage securities will be •announced. In making this statement tonight the Acting Minister of Finance (the Hon. Adam Hamilton') said this lending rate would determine the extent of the concession available under the Mortgage, Corporation Act to mortgagors whose securities had been transferred from the State Advances Office to theCorporation^ "The relevant part of this Act," said Mr. Hamilton, ■ "provides that at any time within three years from August 1 last-any such mortgagor has'the right to obtain from the Corporation a reduction in the interest rate payable under his mortgage to the rate fixed by the Corporation for its new.lbusiness, provided that such mortgagor agrees to the capital amount secured by the mortgage at the date. of the variation being increased by 2 per cent, thereof as a contribution to the general reserve fund of the Corporation, and that unless the mortgage is already in that form it be converted into a table mortgage. I would like to emphasise, however, that the additional capital which ,the Corporation1 proposes to borrow is for new loans under the provisions of the Act, and it is not involved in any way with the transfer of the' State Advances mortgages to the Corporation.

FTJLI.Y GV ARANTEED. i "As a matter of fact, under the provisions of the Act any ascertained losses arising in respect, of mortgages transferred from the State have to be borne by the State and ,not by the Corporation. This is to say,' all mortgages transferred from the State are guaranteed 100 per cent, by the State.

"As consideration for the State mortgages taken over, the Act requires the Corporation to issue to the State, stock: up to an amount to be .agreed upon, . and. the difference between the aggregate amount of mortgages transferred and the nominal value of the stock is to constitute a contingent liability of the Corporation to the State.

•When these provisions were inserted in the Act it was realised that a straight-out sale of the mortgages to the Corporation was not possible.owing to" the difficulty of arriving at a fair 'valuation'having regard to (a) the uncertainty as to the prices of primary products; arid (b) the cost and time involved in making a valuation of all the individual securities. ASCERTAINING VALUES. "Under the provisions adopted -the real value of the mortgages will be 'as- ' certained by experience over a period of. years during which, it is hoped, economic conditions will become more stable, and cases of mortgagors unable to meet their commitments at the lower rate anticipatedl can be:systematically overhauled and the extent of the losses involved definitely fixed. In the meantime the fact that the State is to receive the net profits of the Corporation after paying working expenses •'and dividends on capital will ensure, that, either in the form of interest on stock or profits, the State will receive -the full net amount earned a by, the 'mortgages. ""•". '-"■' "']' "The amount of State Advances rnorti gages : involved in the transfer Vto the Corporation is approximately £36,400,000, in consideration -for- which it has been agreed that .the Corpora-, tion shall issue to the State^ stock to the amount of approximately. £29,400,000, the remaining £7,000,000. ta. rank as a contingent liability. ' Ifr should be emphasised that this £7,000,000 liability amounts to no more: than a tentative provision for possible losses, and does not involve any immediate writing off at all so far as the State is concerned. Ascertained losses. in respect of individual mortgages "willbe written off by the Corporation against the contingent liabi] ity arid.:' in; turn, by the State. SAFEGUARDS PROVIDED. "In agreeing to the,. amount being fixed at slightly less than 20 per cent, of the mortgages," said Mr. Hamilton, "the Government is making adequate provision to safeguard the Cnancia.l position of the Mortgage Corporation. From this aspect it may be pointed out that if the contingent liability fixed at the outset should by any chance prove ,to be insufficient to cover reaJised losses,, the Act provides for the cancellation of some o£ the stock retrospectively. This provision, coupled with the other one authorising the Corporation to write off realised losses against the State, protects the Corporation absolutely. "From the point of view ot the State, iC the amount of contingent liability fixed is found to be more than necessary, additional stock may be issued. It is almost impossible to say what the ultimate amount of loss to the State will be, -but the amount of that loss will not be increased through handing the mortgages over to the Mortgage Corporation,' and in the meantime it should not be assumed that the figure of £7,000,000 is the measure of that loss. To a considerable extent any losses that may accrue will be met out of the existing reserves of the State Advances Office." • In conclusion, the Minister mentioned that the necessary steps had already been taken to hand over to the Corporation local body securities to the amount of £2,750,000 to form the nuc-' leus of the reserve fund in accordance with the provisions of the Act, and the tmdertaking given in the prospectus - ior the issue of the share capital of the Mortgage Corporation.