FARM FINANCES

New Zealand Herald, Volume LXXII, Issue 22026, 5 February 1935, Page 12

FARM FINANCES

' STATE FAULTY BUSINESS MEN'S VIEWS "UNJUST AND UNSOUND" CONSIDERED CRITICISM MANY DEFECTS IN SCHEME Holding that the proposals for tho rehabilitation of farmers' finance to be incorporated in the legislation for the establishment of a National Mortgage Corporation are "unsound, unjust and dangerous," a national conference of commercial and financial interests which recently assembled in ellington under tlie„ auspices of tho Associated Chambers of Commerce of New Zealand has issued a- lengthy review of the proTxisfils, in which it expresses the belief that "justice can be done to all parties concerned, including the farmer mortgagor, without wholesale repudiation of contracts and without the unjust discrimination against one class of the community—the farmers' creditors."

It is stated that the particular interests represented fit the conference were the Associated Chambers of Commerce, the Associated Banks, the NewZealand Life Insurance Offices' Association, the N<sw Zealand Law Society, ■ the Stock Agents' Association, the New Zealand Fire and Accident Underwriters'' Council, the New Zealand Investors' Protection Association, the Building Societies' Association, and investment companies.. "Corporation Hot Required" It is pointed out that the Government's scheme for the reorganisation of mortgage finance contains two proposals. The first is the establishment of a National Mortgage Corporation, which will alter the present system of rural and urban finance, and the other is. the proposal to rehabilitate farmers' finance by readjusting present mortgages to new and undecided levels of land and produce values. The- committee which has issued the statement urges those' considering the proposals to divorce the Mortgage Corporation from the scheme to rehabilitate farmers' finance. The committee states that it is convinced that it is possible to evolve a scheme foi' the final' adjustment of existing; mortgages without creating the Mortgage Corporation, and believes that there areno producers to-day who are efficient and competent men with a sufficient equity in their properties 'who cannot borrow at very low rates of interest whatever money they can use profitably in their businesses. The committee admits that low price;; for produce are a factor, but Bays that probably the main reason for the difficult position of many people in New Zealand to-day is over-borrowing and over-sj>ending by all classes of the community, including. local bodies and the Government. • Finance and Politics The remedy now would/seem to be to restrict rather than to extend facilities for' borrowing,, "Within limits, the committee favours the proposed amalgamation of the Crown's mortgage lending departments, which have been known to compete against each other in lending. It holds that attempts are> now made to bring political influence to bear on these departments, and says that the aggregation of mortgages into one channel will greatly facilitate and accentuate palitical pressure from mortgagors. The view is expressed that the Mortgage Corporation will not be able permanently to stabilise mortgage interest rates at a low figure. The committee points out that the Minister of Finance, Rt. Hon. J. 6. Coates, has indicated that he anticipates the corporation -null be able to issue bonds at approximately the same rate as betterclass local body securities —say, about 3} j>er cent. Borro-vinT»g at this figure, the corporation would have to charge its farmer mortgagors 4£ per cent interest .or more, allowing 1 per cent to cover administrative costs and contingencies, an amount which largescale lenders had 'found scarcely adequate. , * Sale oi the Bonds In addition, the mortgagors would have to pay the annual reduction, on account of principal and a proportionate amount of the contributions to the reserve fund which it is proposed to build up. Even if the bonds could be sold at 3 per cent it is considered very doubtful if the corporation could relend at substantially less than 4£ per cent, and the committee is satisfied that a large amount of money is available for investment on mortgage at 4J r per cent and lower. The committee is of the opinion that the bonds will not find a ready sale at a low rate of interest. * The fear is expressed by the committee that the corporation will be unwieldly in size and impossible of sound ana. economic management. It believes that approximately £50,000,000 face value of mortgages will be taken over ■ and. says that executive officers capable of handling such a huge business are not easily found. From its inception, the corporation will be one of the largest lending institutions in the Dominion. The committee states that it has been given a definite assurance that neither principal nor interest of the bonds to be issued by the corporation will be guaranteed by the State. It is also pointed out that interest rates will not always remain low and the corporation will have to guard against having to re-financo its bond issues at high interest, rates while it still has a large proportion- of its funds locked up in long-term advancesi at low rates. Corporation Reserve Fund

The provision for the creation of a reserve fund is criticised by tlie committee, which states, that it understands that the Crc-wn proposes to lend the corporation £2,570,000 worth of local body debentures. Not only will the interest payable in respect of these debentures continue to be paid to the Crown,- but, when the contributions from borrowers of the corporation have built up a reserve fund amounting to 10 per cent of advances made by tlie corporat:on, these; debentures must be returned to the Crown. While these debentures would in some measure constitute a reserve fund and give more confidence to the investing public, the committee is of the opinion that to include this amount of £2,570,000 in the computation of the maximum permissible bond issue would be wrong in principle and unsound in practic?.. It also seems clear, in the committee's opinion, that in time of stress this nucleus of the reserve fund would definitely bo not liquid and would therefore fail to meet the very first requirement of an adequate reserve fund. Fault is also found with the proportion of bonds to diare capital plus reserves suggested under the proposals. n 6 F omm 'ttee understands that with the . old-established morlgage-bond k institutions on.-tins- Continent : and "in

America tho maximum bond issue varies in proportions from 13 to 1 to 15 to 1. The Minister proposes that the corporation may issue bonds to tho extent of SO times its capital and reserves. This is a larger proportion than tho committee considers wise and prudent and, is a long way removed from Britisji precedeut. The committee finds itself unable to agree witli the assertion by the Minister that the bonds will be trustee investments and will fully merit that status. It is pointed out that the corporation has authority to lend without limit against security over stock and chattels and such loans; have never been an authorised trustee investment. Tho committee holds tho opinion very strongly that this form of lending should not be within the province of the corporation except that tho corporation should have power to take stock and chattels from its own mortgagors who are in default. jf bonds are to qualify as a trustee investment there should be a fixed period for redemption. The pamphlet issued by the Minister had been silent on this point, but the committee had been informed that the bonds would not be perpetual and that probably they would be issued with varying maturity dates. Valuation Difficulties The committee expresses itself as gravely concerned at the difficulties, which it considers insuperable, of creating a competent staff to deal with valuations and points to the present problem of arriving at a really sound basis of valuation. It doubts whether the corporation will be able to secure early a sufficient and efficient staff of valuers- to deal with the volume of business that will fall on it from the etarfc.

It is proposed that valuations should be based on actual production results, but the committee points out that one farmer, owing to superior ability, can make a comfortable liviug on a farm where many another would starve. It doubts whether any system of valuation can be devised which will adequately discriminate between the competent and the incompetent farmer. It claims that the best judge of a farmer's competence is the existing mortgagee or his representatives, who has an intimate experience of the farmer s working of his property and of his general character and ability. Existing State Loans Dealing with the need for the Government to obtain the best possible men not only as directors of the corporation, but as its chief executive officers, the committee states that, if the general public is to ha\;e any confidence in the proposals, it must be satisfied that the administrators of tho scheme are men of integrity, thoroughly capable by reason of previous training of taking an impartial and enlightened view of the matters coming before them and not having any personal interest. The committee refers to the grave difficulty arising in connection with the taking over of the securities of existing Government lending departments. It states that at the outset the whole board of the corporation will be appointed by the State and that board will have to negotiate the contract to be made with the State in regard to the taking over of these securities. The State would, therefore, be both vendor and purchaser. Whatever the personal qualification of the board members, the conflict of interest would make absolutely independent judgment impossible. The very involved proposal under which the corporation will take over all the current mortgages of these Government departments at their nominal amounts, giving bonds to the State "lor a safe proportion" and "accepting contingent liability" for the remainder, appears to the committee to be merely postponing the issue. <> Troubles Being Settled Will this, "safe proportion" be fixed by the board appointed by tho State? asks the committee. Why bury the losses of existing State lending departments for many years ? The committee is very strongly of opinion that the State's responsibility in regard to existing mortgages 'should not be qualified in any way and that any and all losses arising from these mortgages must be borne by the State. The committee emphasises that it is not convinced of the necessity for tho establishment of a semi-State Mortgage Corporation and that it is not sanguine of its success if it is established on the lines proposed. It expresses the opinion that under existing legislation the difficulties between private mortgagees and their mortgagors are in course of settlement. Although in many cases these settlements are stated to be temporary only, the committee believes that final settlement will in. due course eventuate on the lines of and as an outcome of temporary settlement. It holds that the position between the' State and its mortgagors is entirely different and thinks that private mortgages and State mortgages should be dealt with separately. On the matter of State mortgages, the committee suggests the amalgamation of the mortgage lending activities of the various departments and the control of those activities by an independent board. District Boards Favoured In view of the largo sums involved, however, it is stated that the best results would be obtained if jnore than one board were created. For this purpose tho Dominion might be divided into districts, each with its own board, the districts being so arranged that each board would have approximately the ss,me amount of mortgages under its control. To secure uniformity the chairmen of all the boards should form an advisory committee for the whole scheme. It is further suggested that the boards; should be given full powers, comparable with those possessed by individual mortgagees, of varying mortgage contracts by mutual arrangement with the respective mortgagors. The committee is satisfied that thero Is ample finance available at cheap rates to effect the refinancing of existing mortgages as and when this becomes necessary and advisable. If it should be found that there are insufficient; facilities at present for longterm lending on a table basis, the committee considers the proper course is to encourage the formation of new private institutions of modest size on a district basis and free from Governmental control. Rehabilitation Proposals

The committee devotes considerable attention to tbA Government's proposals for fiie rehabilitation of farmers' finance. It expresses the belief that tho risk of a really competent and efficient producer being put off his property, even, if he actually has little or no present equity in his property, is infinitesimal. The best interests of tho mortgagee demand that such a man should be kept on his property.

It is very doubtful whether it is in tho best interests of the community generally, the farmers themselves or the mortgagees -that incompetent farmers should be allowed to remain on their farms producing uneconomical!}'. The committee believes that if the present Mortgagors' Relief Act were repealed to-day the number of farmers who would find it necessary to file in bankruptcy would be small, and, of those who did file, few would bo dispossessed of their farms. Assuming that there is some real necessity for further legislation, tho committee thinks the proposals should not be limited to one sectioii of tho community, the farmers. It asks why similar concessions should not be made to struggling country storekeepers who have done their share toward keeping the farmer on tho land, and whose difficulties are largely due -to-tho in-

ability of farmer customers to pay for goods bought. The committee is of .the opinion that if the proposals go through in their present form tlTpy will involve the ultimate bankruptcy of a largo number of country storekeepers. An important part of the scheme for assisting farmers is the special Court of Review, which it is proposed to set up to adjudicate where voluntary settlements can not be brought about, this court will be empowered to make a "stay order" to prevent action being taken against the mortgagor. The property will come under the supervision of an officer of the court and the mortgagor will be called on to farm the property for the benefit of his creditors and himself for a period of five years. At the end of that period, a valuation will be made and. unless the court determines otherwise, 80 per cent of the valuation will become a fixed charge in favour of the creditors, the remaining 20 per cent representing the equity to be allotted to the farmer. The proposal that an insolvent person should be allowed to retain 20 per cent of the value of his assets is regarded by the committee as an astounding one. It is contended that if a proposal of this nature is given effect to, tho amount of the equity , should be determined by an impartial tribunal and should be subject to a modest maximum limit, not based on a percentage of a valuation of assets. In the committee's view it would be a farce if a farmer with £IOO,OOO of assets and liabilities exceeding those assets were allotted at tho expense of his creditors an equity of £20,000 —a fortune to most people—while the storekeeper with assets of £SOOO and liabilities exceeding those assets has to seek the protection of the Bankruptcy Court and is allotted a maximum of £SO in personal effects and tools of trade. The committee opposes the proposal that the Mortgage Corporation should be authorised to take over at its discretion existing mortgages, financing these at a low rate of interest up to an amount not exceeding 80 per cent of the security as re-valued. It considers also that there should be the right of appeal from the Court of Review and that the only satisfactory appellate tribunal is the existing Court of Appeal For the Court of Review, a set of rules to guide procedure is considered to he necessary. Five years is considered too short a period to furnish sufficient evidence for\a final settlement of cases, the committee advocating a minimum of eight years, and that any "stay" orders in operation should become ineffective if the property is sold in the meantime.

Regarding private mortgages, the committee suggests that the existing legislation should be amended so that orders made under it would be extended until December 31, 1939. The present adjustment commissions should be reconstituted on the lines of the proposed Court of Review, the judge or magistrate being bound to hear evidence offered by either party which was not available at the hearing before the commission. There should be full rights of appeal to the Court of Appeal.