NEW ZEALAND MORTGAGE CORPORATION

Evening Star, Issue 21945, 4 February 1935, Page 13

NEW ZEALAND MORTGAGE CORPORATION

REHABILITATION OF FARMERS' FINANCE [By H. S. Adams.] No. 111. The final operation in which the Mortgage Corporation is to play a part is the rehabilitation of farmers’ finance. Unlike the consolidation of Government mortgages under one board and the supposed- rectification of our system of mortgage finance, neither of which really forms a national problem at all, it must be admitted that this last question is one of great importance. Whatever the causes may have been the fact remains that many farmers are to-day in serious financial difficulties. The rehabilitation proposals contained in the plan for the New Zealand Mortgage Corporation are in effect a new Mortgagors’ Relief Act. It must be admitted that the previous Mortgagors’ Relief Acts have produced a highly unreal and objectionable position which their continued existence can only perpetuate. Every sympathy must be felt with the desire of the Government to break away from the vicious position which the legislation has brought about. As matters stand to-day a large number of farms are heavily over-mort-gaged. Interest is payable on these mortgages at 5 per cent., notwithstanding that bank overdraft can be got at 4i per cent. The farmer feels that his burden is too heavy to be borne, and, in accordance with the best traditions of democracy, he appeals to the Government for help. The Government, however, has equally a duty to the mortgagee, whose side of the case has up to the present received little consideration. . Mortgagees as a class are not so well to do that they do not suffer when the income on their investments is reduced often by one half, and when their capital is jeopardised and sometimes lost. Mortgage capital is always the result of thrift, and is frequently the only resource of its owner. Many pei sons who can no longer earn a living and many widows and children depend entirely on the income, which such investments produce. Such persons may very well feel aggrieved at the effect of the mortgagors’ relief legislation, and it is remarkable how little complaint has been made. , „ Relief to the farmer is generally based on the view that New Zealand is a primary producing country, and that in. the national interest the farming industry must be saved from rum. Perhaps the industry must _ be so saved, but this is not quite the same thing as saying that the individual farmer must have relief at the sole expense of his individual mortgagee. In the first place it is the land which is the basis of the fanning industry, and any relief which will keep the land in production will save the industry although it may not save every farmer. In the second place, assuming that the individual farmer must be saved as well as the industry, then it seems no more fair and reasonable, as the question is regarded as a national one, that the ..obligations it_ involves should be national too. This is the crux of the mortgagees’ objection to the present system of relief. Not only is the mortgagee deprived of his rights at the present time, but substantially it is only one class of mortgagee who has been so deprived—namely, the mortgagee of the land. The mortgage© of stock and plant has hardly suffered any restriction at all. The first Relief Act (April, 1931), was directed against land mortgagees only, and it was not until the amending Act of December, 1932, that, stock mortgagees were taken into account. Even then the courts were only given power to consider whether such a mortgagee had exemsed an unfair advantage, and no effective order could be made against him. It was not until the Act passed m December, 1933, that any effective restriction of a stock mortgagee’s rights was attempted. In the meantime, of course, the stock mortgagee remained master of the situation —a position which was dearly pointed out by the judges administering the Act. Even the Supreme Court was powerless to control his disposition of the proceeds of the farm, and no interest could be paid without the sanction of this class of. mortgagee. It is not too much to say that at this stage of relief the rights of mortgagor and mortgagee were adjusted, uot so much by the statute and the courts as by the unfettered discretion of the stock mortgagees. Although designed to promote voluntary rearrangements between mortgagor and mortgagee, it is probable, if not certain, that the Mortgagors’ Relief Acts have proved the greatest stumbling block in their way. On his part the mortgagor’s first thought has been to rely upon the statute, finding there a certainty of relief, however bad his position, so long as it could not be definitely proved to be hopeless. He can hardly be blamed for this, as without the statute he was but a naked against an armed man in his relations with the mortgagee. The mortgagee for his part has found himself helplessly carried away by the stream of relief. Without any sure footing from which to’ take stock of his position he has not even been able to make an arrangement which would protect him from the force of the current. A mortgagor cannot contract out of the statute. Consequently no arrangement between mortgagor and mortgagee has any. finality. The mortgagor by the express terms of the Act always retains bis right of relief. Under these circumstances a mortgagee has had no incentive to generosity, and he feels the coercive effect of the Act in every concession he is asked to consider. Moreover, the “ stand still ” position which has resulted from the statutes has mad© it impossible for mortgagees to assess the position of their securities with any accuracy. To quote Mr Coates’s own remark, “ at present there is no reliable basis of valuation for farm lands.” In consequence neither mortgagor nor mortgagee knows what concession should he asked for by the one or made by the other There is a great deal to he said for the view that mortgagees will not make permanent settlements with their mortgagors until relief is taken out of the question and the mortgagee has set himself seriously to consider what he is going to do with the land. Then, and onlv then, when he has to test the market for himself, will the position really be faced. THE NEW PROPOSALS FOR RELIEF. Under the new proposals for relief a farmer desiring protection will in the first instance obtain a “ stay order,” the effect of which will lie to put him under supervision in the interests of himself and his creditors for a period of five years. During this period his in-

come and expenditure will be regulated, and at its close the mortgaged property will be valued. The amount of the value will then be adjusted between the mortgagee and the farmer so that the latter will retain an equity in the property. In Mr Coates’s pamphlet the equity to be allotted to the farmer is stated to be 20 per cent, of the valuation, but it is understood that this will be modified. At the end of the above-mentioned period of five years supervision of the farm will cease, but at the end of another five years a second valuation is to be made, and 50 per cent, of any additional equity then existing will be “ liable to be secured ” in favour oi unsatisfied creditors. At the same time all liabilities not provided for will automatically cease. With regard to the first of the above valuations, Mr Coates states “ this valuation will generally be based on the productive capacity of the farm during the stated period,” and again, “ the average productivity of the security over a period of five years under control would provide a basis of valuation.”

These proposals can be summarised as follow;

(1) Five years under supervision. (2) A valuation at the end of this period based on productivity during the period. . , (3) An adjustment on the basis ot the valuation whereby an equity (which may be 20 per cent.) is to be secured for the fanner. (4) A second valuation at the end of ten years from the beginning of_ supervision upon which at least 50 per cent, of any additional equity goes to the farmer. . ... (5) A general release of all liabilities not provided for under the valuations. With regard to the proposed supervision, it as sufficient here to say that efficient supervision .will be very difficult to achieve, yet nothing less offers a shadow of justice to the mortgagee because the valuations will depend upon it. With regard to the ten-year spread of relief,.it is doubtful if either of the parties will welcome a system which, with its predecessor, will run over fourteen weary years. Apart from these two points there are only two matters to consider; first, the valuations, and second, the proposed equity.

THE VALUATIONS

We take the second valuation first. No doubt the exceedingly generous allocation of at least 5U per cent of the additional value to the fanner is intended as a reward for industry and a protection for improvements which may be made during the period. With regard to the other 50 per cent., the actual expression used by Mr Coates is that this proportion “ would be liable to be secured ” in favour of creditprs. Does this really moan that the farmer can hold the whole of the additional value if he can show, for example, that it is all due to his own industry and expenditure, or has merely an unfortunate expression been chosen t It seems reasonable to assume that the expression means what it says. The fanner then will have a chance of retaining the whole of additional value, found when th© second valuation is made, and it will be a strange and rare farmer who does not try. ' But even apart from the confused question of fact and opinion, which may be thus left between the parties, this second valuation holds no prospect for the mortgagee unless there is a substantial improvement in land values. If the additional value to bo divided amounts only to a few hundreds of pounds on a farm of ordinary value the mortgagee may as well accept the loss of the whole. Valuation, which in this case is not apparently to be determined by productivity, is a question on which opinions always differ, and if it is left to the mortgagee to prove that he should have a share it will go hard in most cases if the mortgagor cannot defeat him.

With regard to the first valuation, it will be seen from what has already been said that this is the most important from the mortgagee’s point of view. This valuation is (at least “ generally,” whatever that may mean) to be based upon the _ productive capacity of the farm during the five-year period of supervision., At first sight this may seem to be a reasonable proposition, but it will not bear examination. In the first place, what basis is to be used to convert the productive capacity of the farm into a valuation? No irifromation is given on this point, and it is useless to speculate. In the second place, is it possible to give a mortgage protection against the idle, inefficient, or even' oj honest farmer in whose hands the pro jf.-flon of the farm will be kept at a mil mini? It is a truism that one man vj 1 live where another would starve. Irj ruth, the capacity of lane Is an abstraction which cannot be acr ratcly determined. You ymst be ; intent with finding out the produetivl capacity in the hands of one ma 1 and, when that is found, you do notj et the value of the land, but only its! reductive value to that man. ” ' THE FARMER’S EQDITj

With regard to the equity which the fanner is to receive, whether on the first or on the second valuation, it is difficult to do justice to this extraordinary proposal. Its advantages to the farmer are very apparent. Its injustice to the mortgagee is no less flagrant. Justification there appears to be none except that a farmer will reap the benefit. Upon what honest principle can this suggestion be defended, or have wo reached the point in national affairs where honesty is only a matter of expediency? The truth of this matter is that a reduction of mortgages merely to the value of the security will fail to secure the primary object of relief. , It will not secure the farmer in the possession of his land. On the contrary, it will leave him at the mercy of the mortgagee. Consequently, not only must mortgages be reduced to an artificial value nicely calculated in terms of a farmer’s individual industry and competency, but, in addition, an equity must be given him to further defend him from his obligations. This criticism may seem to be harsh, but it should be remembered that it is directed only against a proposal for relief under which the individual mortgagee is to suffer loss without compensation for the benefit of the individual farmer. As has already been stated, and is in fact generally admitted, the problem of relief is a national problem. No relief can be just and equitable unless the losses which it imposes are also national. If the national interests require that farmers as a class must be given an interest in their properties, then it cannot justly be done except at the expense of the whole community. The new proposals involve the confiscation of a part of the mortgagee’s property for the benefit of the mortgagor.