STATE MORTGAGES

Hawera Star, Volume LIV, 23 August 1935, Page 9

STATE MORTGAGES

TRANSFER TO CORPORATION EXPLANATION OF THE TERMS FINANCIAL SAFEG UAIIDS. (By Telegraph—Press Association.) INVERCARGILL, Aug. 22. A statement explaining the terms upon which the State Advances Department mortgages will be transloi-i-fd to the Mortgage Corporation was issued by the acting-Minister of Finance, the Hon. Adam Hamilton, this evening. “1 understand,” said Mr Hamilton, “that within a few days the Mortgage Corporation proposes to release a prospectus for its first issue of stock and bonds. 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. This lending rate will determine the extent of the concession available under the Mortgage Corporation Act to mortgagors whose securities have been transferred from the State Advances Office to the corporation.

“The relevant part of this Act 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 business provided that the mortgagor agrees to the capital amount secured by the mortgage at the date of 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.

STATE’S GUARANTEE. “I would like to emphasise, however, that the additional capital which the corporation 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 State Advances mortgages to the corporation. 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 1 he borne by the State and not by the corporation. That is to say that all mortgages transferred from the State are guaranteed 100 per cent, by the State. “As a 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 the 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 the straight-out sale of mortgages to the corporation was not possible owing to the difficulty of arriving at a fair valuation having regard to the uncertainty as to the prices of primary products and the cost and. time involved in making a, valuation of all individual securities.. Under the provisions adopted the real value of the mortgages will be ascertained by experience over a period of years during which it is hoped the economic conditions will, become more stable and cases of mortgagors unable to meet their commitments at the lower rate anticipated can be systematically overhauled and t.he extent of losses involved definitely fixed.

FULL NET AMOUNT. “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 by the mortgages. “The amount of the State Advances mortgages involved in the transfer to the'corporation is approximately £30,400,000, in consideration for which it has been agreed that the corporation shall issue to the State stock to the amount of approximately £29,400,000. The remaining £7,000,000 will rank as a contingent liability. “It 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 repect of individual mortgage will be written off by the corporation against the contingent liability and in turn by the State. “In agreeing to the amount being fixed at slightly less than 20 per cent-, of the mortgages the Government is making adequate provision to safeguard the financial 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 the realised losses the Act provides for the cancellation of some of 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. CONTI NG ENT LI ABILITY. “From the point of view of the State if the amount of the 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 tlic loss will not be increased through handing mortgages over to the Mortgage Corporation and in the meantime it should not be, assumed that the figure of £8,000,000 is the measure of fliat loss. To a considerable extent any losses that may accrue will he met out of the existing reserves of the State Advances Office.

“I may mention that the necessary steps have already been taken to hand over to the corporation local body securities to the amount of £2,750,000 to form the nucleus of a. reserve fund in accordance with the provisions of the Act and the undertaking given in the prospectus for the issue of share capital of the Mortgage Corporation.”