FARM FINANCE

Southland Times, Issue 22497, 6 December 1934, Page 6

FARM FINANCE

MORTGAGE CORPORATION MINISTER EXPLAINS PROPOSALS EXISTING SITUATION NOT SATISFACTORY (By the Rt. Hon. J. G. Coates.) Parliament is meeting in February next primarily to consider legislation for the establishment of a National Mortgage Corporation and for setting up suitable machinery for the rehabilitation of farmers’ finances. In order tjiat the people of the Dominion may fully understand and appreciate these important proposals of the Government, four articles have been prepared for publication. I.—MORTGAGE POSITION. The existing mortgage situation is not a satisfactory one. There‘is general agreement on that point. The problem bristles with difficulties; but, as it is a major obstacle to economic recovery, it must be tackled in a . comprehensive manner. In considering the matter, two separate though related aspects should be recognized. Firstly, as a result of the heavy fall in the prices of primary, products, the earning-capacity of farms has been so reduced, notwithstanding increased output, that a great many farmers have not sufficient income, after providing for maintenance and living expenses, to meet their present mortgage charges. This, in turn, has meant loss and even hardship to mortgagees. In a productive unit capital values depend on earning-capacity, and the result of the contraction in farm income is that deserving and efficient farmers, through no fault of their own, have lost in the vanished equities in their farms the savings of a lifetime. Unless steps are taken to meet the situation, thousands of them will inevitably be dispossessed of the land into which they have put many years of hard work. Others have been affected indirectly, but the impact of the decline in prices fell first and most heavily upon the farmers. The mortgagors relief legislation has provided a useful measure of temporary relief, and was all that was necessary while there was any expectation or hope that prices would recover with - in a reasonable period. There has been some recovery in the case of wool and meat, but not in the case of dairy produce. In fact, it is now becoming more and more evident that it is idle to look for a return to the level of prices ruling prior to 1930. Some further rise there may be, but we certainly cannot count on it being sufficient within any reasonable period to overcome our difficulties. Accordingly, the time has now arrived to evolve some general scheme of reconstruction that will be as equitable as possible to all parties concerned. Furthermore, any scheme that will again place the farming industries on a sound basis financially will restore the confidence of investors in farm securities and generally react to the benefit of the whole community. Weaknesses in Present Methods.

The second, aspect of the problem is a more permanent one —viz., the necessity for organizing mortgage finance on a more comprehensive basis, and thereby strengthening this part of the financial structure of the Dominion. The strain of the depression has disclosed various weaknesses in our present methods of dealing with this important class of business.

Apart from the State and a few large institutions, the lending has been mostly on the security of what are commonly known as “flat mortgages” for short periods, usually five or seven years. As a revile, the private lender does not want to tie his capital up for a longer period, and on flat mortgage his risks would be increased if he did so. Furthermore, it is normally not convenient to him to receive repayment in small instalments, as that may lead to his capital being frittered away. In any case, reinvestment of small sums cannot be easily arranged apart from making deposits in a savings bank.

On the other hand, the borrower on flat mortgage, be he farmer or city wojker buying a home, normally has no expectation of clearing the property of the mortgage debt within five or seven years, as the case may be. ■ In fact, with no facilities for repayment other than in a lump sum at the end of the period, it usually happens that the mortgagor relies upon being able to renew the mortgage indefinitely, with the same or another holder. While values remain stable, or continue to rise steadily, as was the case in New Zealand for a long period prior to the war, no great difficulty is exnerienced in carrying on in this way. But apart from any unearned increment that may accrue or improvements that he may make the mortgagor makes no headway in acquiring an increasing equity in the property. He remains a nominal owner virtually paying rent, but carrying much greater risks than a lessee. When prices and values decline, the mortgagee naturally becomes concerned about the safety of his investment and the mortgagor is beset with trouble and anxiety in arranging renewal. In recent years, with the violent fall in values that has occurred, many have found it impossible to effect renewal, witl the result that the mortgagee is left with a frozen asset on which he is not receiving full interest, while the mortgagor, with debts piling up around him and seeing no way out / of his difficulties, is alarmed and disheartened at the prospect of being dispossessed of his property. The gnawing uncertainty suffered by mortgagors and the lack of confidence on the part of investors to make fresh loans on broad acres, formerly considered the best of security, are important factors retarding the economic recovery of the Dominion. Higher Interest Rate. Apart from the general risks of loss arising from a fall in prices and values an investor lending on individual mortgage is putting all his eggs into one basket in accepting security over one property backed up by the personal covenant of one mortgagor. The risk involved, coupled with the difficulty in disposing of a mortgage should the lender desire to realize on it during its currency, is reflected in the higher interest-rate that normally must be paid on such a mortgage. Furthermore, in the case of a flat mortgage the cost to the mortgagor is increased by the expense of arranging a renewal every five or seven years. Men who acquire property merely for the purpose of turning it over at a profit as soon as possible want to invest as little as possible of their own money in the property. If the man from whom a speculator buys has little equity in the property, it is easier to arrange the purchase, as there is not so much immediate finance requirecL

On the other hand, it is the longterm table mortgage under which the interest and principal is paid Joy regular instalments that best meets the requirements of both the farmer producer and the city man who desires to buy a home for himself. Under such a mortgage tile financial arrangements are final and complete, and th® owner’s equity increases stead-

ily as repayments of capital are made. In addition to benefiting the individual this method of liquidating debt : s much sounder from the general financial standpoint, as it minimizes the chances of capital becoming frozen. Many farmers- in good times paid their interest charges on flat mortgages regularly, but never dreamt of reducing the principal. Repayments of principal under a table mortgage could have been made quite easily, but the money went in other directions. Some such farmers formerly considered well off are in serious trouble to-day. The obvious remedy for these weaknesses in our financial structure is to extend the facilities for granting longterm mortgages and to encourage people to make use of them. Finally, it is pointed out that our primary industries are export industries confronted with the necessity of selling the greater part of their produce abroad in the face of fierce competition. If our producers are to meet this competition successfully in a world market, production costs must be reduced, and one of the heaviest items of such costs is interest on capital. It is thus essential that the necessary mortgage finance be made available as cheaply as possible. , Mortgage Bonds.

Practically all other industries obtain capital at cheapest rates by selling shares, bonds, and debentures on the Stock Exchange, but, apart from the operations of the State Advances Office and other State institutions lending capital derived from the sale of Government stock and debentures, the farming industry has not obtained this advantage. In Europe the need is met by linking mortgages with bonds on the principles originating in Germany 150 years ago.

More recently this principle has been applied with marked success in America, following the visit of two Commissions to Europe in 1913. It is on record that, as a result of these investigations, the American mind was profoundly impressed with the advantages to be obtained from the mortgage bond coupled with the long-term table mortgage. A member of one of these commissions stated this conviction as follows:— One of the most important discoveries in the world was the invention of the farm mortgage bond or debenture as an instrument to promote land credit. There never has been a successful system of land credit established in any country that does not use the mortgage bond or debenture as an instrument of credit to mobilize and liquefy land-values. Through the mortgage bond the farm mortgage has been made easily negotiable and put in such a form

that the holder may realize thereon immediately. In New Zealand methods will doubtless have to be varied to suit local conditions, but there can be no doubt that substantial and lasting benefits would accrue from a soundly organized uniform system of long-term mortgage credit that would create a standard agricultural investment through which capital could confidently flow into the farming industry. By borrowing on the security of the public revenues and lending on longterm mortgage the State Advances Office has met the need in the past to some extent, but it is evident that this institution alone can never be an adequate or entirely satisfactory solution. The record of the State Advances Office is good, and there is no doubt that the office has aided materially in the development of the Dominion, but substantial objections can be raised to the State taking over an ever-increas-ing amount of mortgages, while the reactions from an increasing publip debt must always hamper and limit the operations of the office. Heavy continuous borrowing by the State would depreciate the value of Government securities and undermine the foundation upon which all long-term rates of interest are based. The result internally would be to harden borrowing rates for the Government, local authorities, and private companies. Externally the effect would be to lower the Dominion’s credit in London and thereby make it.more costly to effect conversions and renewals of that portion of the public debt which is held there. Real Value of Mortgages. In any case, no system of mortgage finance can be fundamentally sound unless the Stock Exchange securities concerned represent the real value of the mortgages in which the capital is invested. Under the mortgage-bond system this is the case. Something in the nature of general reorganization of mortgage finance is clearly necessary, and consideration of the various weaknesses in the existing arrangements has led the Government to the conclusion that the best remedy for them lies in establishing a national institution to handle this class of business in a comprehensive manner. I may add that so far as service to the community is concerned there is no intention of abolishing the State Advances; rather the idea is to extend and amplify the useful facilities offered by that office.

The purpose could be achieved by either one or the other of two methods: firstly, by reconstituting and extending existing State organizations, leaving them under direct Government control; or, secondly, by setting up a new independent statutory authority under proper safeguards, this authority being adequately removed in its administration from direct Government control. That somethink is to be said in favour of each method I am the first to concede. It is a case of weighing pros and cons of the one against the other. In my opinion the independent statutory organization is the better way. Its independence can be effectively secured by having a widelydistributed group of shareholders, the permitted dividends being limited by statute and shareholders having the right to elect a certain proportion of the directorate. The proposals outlined in the following articles have been prepared on this basis. (To be continued.)