MORTGAGE INVESTMENT COMPANIES.

Otago Daily Times, Issue 20689, 11 April 1929, Page 16

MORTGAGE INVESTMENT COMPANIES.

A special committee, which was appointed by the Canterbury branch of the Economics Society ,of Australasia to consider a scheme for the New Zealand Mortgage Investment Companies, has submitted its report. A summary is appended : Farming is undoubtedly the most important industry in New Zealand, and the basis of the country’s economic life. Like other industries it requires a constant supply of credit, which may be divided into long, intermediate, and short term credit. The committee’s investigation lias been confined to methods of supplying short term credit. During recent years fanners have experienced many difficulties in arranging for long term credit. Owing largely to the post-war boom, much land changed hands at inffated values and became oyermortgaged and over-capitalised. Since then, both produce prices and land values have fallen, and there has been much uncertainty regarding the real value of laud as security for mortgage loans. The failure to keep adequate accounts on most farms increases this uncertainty and many farmers might greatly strengthen their positions as borrowers, were they able to produce full statements of receipts and expenditure over a number of years. The total amount of mortgages outstanding on farm lands is not exactly known, but may approximate £130,000,000 to £150,000,000. Probably about onefourth of this is provided through State institutions. The remaining and considerably larger part is provided through private agencies, such as solicitors, trust, and insurance companies, private individuals, etc. Recent discussions have centred mainly on State aid as a means for. providing increased State aid in financing fanners, but it appears that State finance must always be limiftd, since it depends on public borrowing, and is subject to retrictions winch farmers find irksome. The’ possibilities of improving the organisation for the supply of credit to farmers from privately institutions has been little explored in New Zealand, but since such institutions already supply the greater part of farm credit the possibilities of improvement here seem to be well worthy of trial. There exists a strong and growing belief that short term mortgages are uneconomic, and that long term amortisable loans for farmers should be more readily available. Certain State agencies provide this type of loan, but there is little private organisation fitted to supply credit repayable over long terms. It is here that the opportunity for improving the organisation for supply of farm credit from private sources appears to be greatest, and the necessary machinery might be supplied by mortgage investment companies. Such companies have become well established and have met with great success in North America and parts of Europe, and they have been adopted, after exhaustive inquiry into methods of farm finance, in Great Britain. Their method of operation is broadly the financing of groups of mortgages by means of a senes of bonds issued to the public. A company is established and out of its capital lends money in a series of first mortgages, up to 60 per cent, of the security ottered, no one of which may be more than, say, onefifth of the value of the series, lu the Dominion these mortgage securities might then be deposited with a chartered, bauk, and bonds issued, in amounts of £SO and multiples of £SO for sale to the public. As these bonds arc being sold, a further series of mortgages might be arranged. These would then be deposited, furffier bonds issued and sold, and the process might go on till the total bouds issued equalled 15 times the company’s capital, where a limit would be set. The rate of interest charged would have to be sufficient to pay interest on the bonds plus costs of administration, and would be, therefore, somewhat above the market rates at which the bonds could be sold. A further $ to 1 per cent, for amortisation would pay off the mortgage and redeem the bonds in about 364 years. As amortisation payments were made, bonds might be purchased at the lowest price tendered by holders, or balloted for, called up, and redeemed at par. The system would have the advantage of providing amortisable loans in any amounts below a high limit for borrow jus and for variable terms. They might be paid off at any time if mortgagors nought bonds in the open market and scut them in for cancellation against mortgages, or be renewed or extended by transfer to new series. Moreover, the rates charged wculd be the market rates for tho bonds sold, phis administration costs and an allowance for amortisation, and, on account of the more convenient and safer security, money might be obtained at net rotes appreciably lower than for ordinary single mortgages. The investor in bouds would have great advantages over the present investor in mortgages. His risk would be spread widely over a number of mortgages, each allowing a wide margin of security, and the value of his security would increase as amortisation payments were made. He would have also the additional support of the mortgage investment company, for bonds would be a first charge in the company’s assets. And the investor would have a security issued in small amounts, and readily negotiable on the stock exchanges, Such securities have become very popular with investors elsewhere, and have attracted to mortgage investment many short term and other funds which would never be lent on the ordinary single mortgage. The difficulties to be overcome in launching such a system are chiefly due to its novelty in New Zealand. Few investors or mortgagors are familiar with the system, and some would like to see it tried out before they-ventured. The costs of administration are not precisely known, hut it is estimated that 4 per cent, would he sufficient margin between bond and mortgage rates in most cases. Special legislation, too, would be needed in order to provide for such supervision and audit as would effectively safeguard the interests of both lenders and borrowers. A further difficulty lies in the current belief that interest rates are falling and the consequent unwillingness of borrowers to bind themselves to fixed rates of interest on long-term loans. This difficulty might be met by providing in the contract documents for variation in the rates of interest paid to bondholders and charged to the .mortgagors, variations to be arranged not more frequently than every five years, and by amounts of not less than 4 per cent., the direction and extent of variation being determined by movements in the market rate of interest. Summed up, there appears to be a real need for such improvements in the organisation for supplying farm finance as will attract funds seeking investment back to the Dominion’s basic industry—farming, and for the encouragement of long-term amortisable loans. Present facilities appear .to be unequal to meet the variety and extent of the demand, and mortgage investment companies, which have succeeded well elsewhere, are recommended as the best form of organisation for the purpose. Such companies are as yet untried in the Dominion, but the committee has found in this organisation and methods no feature which appears unsound, impracticable. or nnsuited to local conditions. We conclude, therefore, after much critical investigation, that the methods of these companies are well worthy of the fullest investigation and trial, and might prove of great service to mortgagors, invostovs, and to the general public interest or the Dominion.