MORTGAGE CORPORATION.

Evening Star, Issue 22031, 17 May 1935, Page 11

MORTGAGE CORPORATION.

TO THE EDITOR. Sir, —Your correspondent "Sceptic" appears to be apprehensive regarding the possibilities of the profits to be made by this company and the payment or the 4J per cent, dividend to shareholders. Ho need have no fear regarding this, as the terms on which the corporation will take over the existing mortgages, amounting to some £50,000,000, will leave an ample margin to cover the cost of administration, payment of the dividend of 4,}- per cent, to shareholders, and the building up nf reserves.

Your correspondent states: “If the corporation borrows at 3J- per cent, on bonds, it will have to lend at percent., even in regard to existing State mortgages, as the .statute does not allow it to charge more than 1 per cent, more than it pays, consequently Mr Reeves’s large margin of profits must bo heavily reduced on this account.” I would point out that the largo margin of profits will bo made out of the 1 per cent, difference between what the money is borrowed at ami what it is lent at. The corporation cannot by law make more than 1 per cent, profit, so that if tbe monev to be paid the Government or bondholders is fixed at 3J per cent, the borrower cannot be charged more than 4J per cent. To make a profit of 1 per cent, per annum on, say, £40,000,000 of advances to start with will leave a very handsome profit to tho Mortgage Corporation. It is possible, when the corporation has been well established, that the margin of ] per cent, between tho cost of borrowing and lending mav be reduced—to the advantage of the borrower The operations of tbe corporation will be just as much outside Govot-n----ment control and political interference as the operations of the Bank of New Zealand, in which the Government has a large financial interest, and on which there are six directors, of which four aro Government nominees and two represent the shareholders. For tho benefit of “ Sceptic ” 1 attach hereto a copy of a statement issued by the Acting Minister of Finance, which I think fully sets out tho position.—l am. etc.. Rahman Reeves. May 17, fExci-osußE.l “ It must be realised that Hie Mortgage Corporation, to achieve its purpose of borrowing money on the best possible terms for lending on mortgage securities, must be a financial success ami pay a full dividend of 41 per cent.

on shares from the outset. <»The transfer of mortgages from the State will place the corporation in business on a large scale 'as soon as it commences operations. It must be emphasised, however, that the terms upon which the £50,000,000 of mortgages are to be transferred from the State are Such as to impose no risk of loss oh the corporation. First of all. it is to give bonds for a safe portion of the amount only, leaving the balance to rank as a contingent liability on which the only return that will be paid to the State is the net profit after paying a full dividend on the share capital. Furthermore, any capital losses in respect ol any of the State mortgages will he borne by the State, and not by the corporation. “ To show how safe is the dividend on shares from the outset, it is mentioned that the interest received by the State Advances Office and the Lands Department during the financial; year 1933-34 on the mortgages that will be transferred to the* corporation amounted to £2.148.000, equal to over 80 per cent, of the amount due for that year. The figures for 1934-35 are not available at present, but it is known that they are as good if not better than the ones quoted. The financial arrangements for handing over the mortgages arc matters: to be discussed with the hoard after it is appointed, but if the bonds issued to the State in exchange for mortgages were equal to 80 per cent, of the latter, and amounted to say, £40.000.000, and bore interest as high as 3J per cent. per. annum, the bond interest would amount to £1,400,000 per annum. Deducting this from the mortgage interest receipts mentioned above leaves £748.000 to cover administration cost, dividend on shares, and return to the State on the contingent portion of tho State mortgages. Administration costs of the State Advances Office and of tho Discharged Soldiers Settlement Account amount to £157,000 per annum, and the _f till dividend on capital will be £45,000 pei annum. It will thus be seen how wide a margin there is to safeguard the dividend on shares, quite apart from new business and tho revenue earned by the direct investment of the capital.”