THE New Zealand Herald AND DAILY SOUTHERN CROSS FRIDAY, MARCH 1, 1935 THE STATE AND MORTGAGES

New Zealand Herald, Volume LXXII, Issue 22047, 1 March 1935, Page 8

THE New Zealand Herald AND DAILY SOUTHERN CROSS FRIDAY, MARCH 1, 1935 THE STATE AND MORTGAGES

Criticism of the National Mortgage Corporation Bill by members of Parliament has so far, with the exception of Mr. Downie Stewart's contr bution, been mainly directed against the shareholder provisions. The critics want the corporation to be wholly State controlled and State financed. Unfortunately they do not follow out in detail the effect of their general contention, nor has there been any attempt made to appreciate the reasons fortifying Mr. Coates in his insistence on a semiprivate, non-political organisation. His aim is to reorganise and rationalise mortgage finance so that the borrower may obtain cheaper money. To bring this about he proposes to set up the corporation, whose bonds would combine greater security, liquidity and convenience, as compared with the ordinary short-term private mortgage, and would therefore be subscribed at a lower rate of interest. His opponents contend that all these advantages could be secured by a State institution, which could readily raise the necessary funds as cheaply as, or cheaper than, the proposed corporation. That is, they envisage the indefinite extension of the State Advances system until ithe Government has a lending monopoly. What does not seem to be realised is that the State must borrow before it can lend and that, to take up all the mortgages in New Zealand, would involve loans totalling about £250.000,000, less the £60,000,000 already borrowed and lent by the various departments. To take up the privately-financed mortgages, the Government would have to float, say, I!|> successive loans of £10,000,000 each. Before it had proceeded very far with this series, even if mortgagors' demands did not cause the "issues to be rushed, the effect on Government credit would be increasingly prejudicial. The hope of cheap money for mortgagors would vanish at an early stage and, of deeper significance, as Mr. Stewart has pointed out, the value of all Government securities would depreciate, thus iiindennining the foundation on which long-term interest rates are based.

Apsirt from failing of the main objective—cheaper money —a State mortgage corporation would also be left cipen to strong political influences. It has been said jokingly that almost; every New Zealander is a mortgagor, but there is an element of serious truth in the quip. State mortgagors are already a considerable influence in the electorates. Their multiplication under a State mortgage monopoly would make them politically irresistible. No State mortgage corporation would stand much chance of applying sound financial principles in making lending margins, fixing interest rates, or enforcing payments. From the visry outset, moreover, it would have to contend with the unfortunately established idea that the Government is "fair game." Some State mortgagors are quite ready to exploit the reluctance of the Government to take action that has political repercussions. On the other hand the man who i' 3 expected to put u]o the money, whether by subscribing for bonds or to general State loans, will not be encouraged by an; attitude of mind which he is bound to take into account. As a taxpayer he is aware that he is already paying for State-lending indiscretions in the past, indiscretions that cannot be laid at the door of the departments but were due to political pressure from above. The Hailways Department has demonstrably been the stronger in finance and service since it was divorced from .State control, and business principles were applied to it. Similarly the Reserve Bank, by its semi-private ownership, inspires more confidence in the soundness of its direction and the continuity of its policy than if it were purely State-owned and controlled.

In the same way and for the same reasons, the retention of the principle of private ownership and insulation from political interference is vital to the success of the mortgage corporation. It has already been noted that the rate at which the Government can borrow sets the level ifor all long-term loans. That rate i-.-i largely influenced by the extent of previous loans. The corporation would relieve Government finance not only of the weight of heavy borrowing in the past, but of the liability for future borrowing for the same purpose. Government credit would thus be enhanced in two ways and its appreciation would favourably influence the market for other borrowers, including mortgagorii, quite apart from advantages reaped! by the Government and local bodies in effecting conversions and renewals, or raising new loans. So once again it becomes evident that the proposal to separate mortgage finance from State control, and to

organise it under an independent and semi-private corporation, is fundamental to the whole scheme. Parliament has rightly 'seized on that point, but the critics have failed to realise that, if they destroy this feature, they destroy the whole fabric. They have not troubled to count up the obligation they would lay upon the State or its effect on State credit. Neither have they attempted to appreciate the reasons impelling Mr. Coates to stand on the private shareholder provision. Without it he might as well drop his bill. He believes, however, that his proposals should go a long way toward rationalising the mortgage market, conferring the benefits of cheaper money, at longterm with amortisation, on the mortgagor, and of security with liquidity and convenience on the mortgagee. He has recognised, what most politicians overlook, that the borrower is prejudiced by prejudicing the lender, and helped by indemnifying him. His scheme aims to reconcile the two interests to their mutual benefit, a result not to be expected from a purely State-controlled organisation, with its inevitable bias and political influences.