MORTGAGE BANKING

Taranaki Daily News, 4 September 1935, Page 14

MORTGAGE BANKING

DEVELOPED ON CONTINENT MAKING SECURITIES LIQUID. STEPS TO ENSURE STABILITY.

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“Table Mortgage.”)

A practical part of the system of amortisation of mortgages is the subject of mortgage debentures. The object is to make a mortgage more liquid—that is more readily turned into a cash asset in cases of emergency. The experience of Europe and other countries shows that by means of debentures which are issued in relation to the value of the mortgages held as security, a mortgage has been made one of the most liquid securities offered to the investing public. The first issue of debentures and stock of the Mortgage Corporation of New Zealand, now open for public subscription, inaugurates for New Zealand a system of mortgage banking which has been in operation in many European countries—in most cases with conspicuous success—for a great many years. In agriculture, it is now a recognised world fact that long term collective credit is needed to complete a credit structure begun by short term credit. It' is interesting to study the development of these mortgage banking institutions,. as they have come to be called. The first of the mortgage banking . houses on the Continent was an institution of the co-operative type, founded in Germany as early as 1769, in the reign of Frederick the Great and known as the “Landschaft.” 'TWO DIFFERENT TYPES. There are two distinct types of mortgage banking institutions; the first being co-operative and the second corporative. The co-operative type is virtually an association of land owners for the purpose of issuing bonds based originally on mortgages on property of individual members with some sort of guarantee of the association. The first type of institution originated in Germany and the second in France and they have between them become the chief institutions for mortgage bond issues, being regulated bylegislation and operated upon strictly defined lines. The underlying principle is the mobilisation of real estate credit through the issue of marketable securities and the disassociation of' lenders from real estate debtors. s Of special public interest as affecting the Mortgage Corporation of New Zealand is the fact that over 150 years ago difficulties in connection with mortgage finance on the -Continent of Europe led to the establishment of what have become known as mortgage banking institutions. In New Zealand the difficulties in connection with mortgage finance have, become more pronounced during each period of depression and finally New Zealand has also turned to the mortgage banking system of the Continent. The difficult years through which the Dominion has been passing have illustrated the need for new principles and indeed even in conservative England tile Continental system of mortgage finance has its counterpart (more or less recently established) in a mortgage corporation. Scotland, the home of sound finance, has followed suit. The United' States of America has also met the position resulting from the years of depression in a somewhat similar way. So that it can be said that the mortgage banking system is now of general application and has world-wide acceptance as the medium through which mortgage finance is concentrated. It has the advantage from the point of view of the lender t of giving to him a marketable security; it mobilises real estate credit and appeals to major groups of the conservative investor class. The issue of bonds against the security- of underlying mortgages is the basic principle of these institutions and thus they are entirely divorced from deposit banking. That is to say the institutions do not take deposits in the ordinary sense of the word and use the funds for long term finance. Instead,'they attract the real savings of the public rather than compete for the normal resources of deposit banks. TERM OF DEBENTURES. In all countries where the mortgage banking system has been developed the institutions through their charters must conform to certain specified standards, all of which tend to ensure their stability. In New Zealand, the mortgage Corporation starts off with a substantial reserve contributed by the Government and it is not required to go through a lean period in the building up of a mortgage business, because of the fact that it becomes the clearing’house for mortgages hitherto held by certain State departments. It starts off in a big way of business and becomes at once a specialised institution i ith the knowledge and traditions gained over a period of years when this class of business was handled by Government departments. One of the fundamental principles will be that the lifetime of bonds, or debentures as they are called, will approximate that of the underlying mortgages and thus the volume and duration of the assets will approximately equal the volume and duration of the liabilities. Continental legislation in fact forbids the granting of short term credits as the basis of bond issue. Pre-war Russian legislation, for example, prescribed 18 years as the minimum and 61 years as a maximum for mortgage credit and similarly in other Continental countries where the lifetime of the bonds issued in each country has to be identical or nearly so with that of the underlying mortgage. It is interesting to find also that in European countries safeguards are established to control the volume of borowing by the issue of mortgage bonds. In Germany for instance the volume of mortgage bonds cannot exceed 20 times the amount of capital, including reserves, of each private mortgage bank. In Denmark mortgage bond issues arr restricted to six times the capital and in Norway the Royal Mortgage Bar’; of Norway may not borrow to an extent greater than eight times the foundation capital of tl-e institution. In the New Zealand legislation the borrowing of the Mortgage Corporation is restricted to 15 times the paid-up capital and the reserves, although in quite a number of the European countries the mortgage banking institutions have higher limits than that imposed by the New Zealand legislation. These restrictions ensure the financial stability of the concern and the importance of this is reflected in the lower interest rates on which stable concerns may borrow and conversely make possible low interest rates for lending purposes, a feature which is of major importance in any primary producing country. In New Zealand the Mortgage Corporation has commenced business with a public issue of £500,000, having a currency of 25 years and bearing interest at £3 7s 6d per cent. It has trustee status as do the bonds issued by the mortgage banks of France, -Scandinavia, Belgium and other countries on the Continent. The corporation has announced a lending rate on new business of £4 2s 6d per cent.

From the point of view of the lender, the corporation offers securities which will always command a ready market, can be sold at will on the stock exchanges throughout the country and provide to the holder facilities for the collection of interest not hitherto associated with the investment of monies in mortgage secur-

ities. The future of the Mortgage Corporation of New Zealand judged by the standards of other countries is a promising one. In the European countries the mortgage banks, which have been working for decenniums are still successful in terms of dividends for shareholders, as well as in terms of uninterrupted solvency, of comparative stability for bond quotations, and of relatively small losses of ■interest or principal on their mortgage loans, even in times of extreme depression. The diversification of the mortgage risk and the advantage of the operation of a large unit compared with the small one, particularly in a field unfitted for small scale operation, no doubt have played a prominent part in making mortgage banks the success they have been. From the point of view of stability of mortgage bond issues, it is also the large scale unit which is able, thanks to its reserves, to regulate for any length of time the quotations of its outstanding issues and to enlist the co-operation of other financial institutions for the same purposes, if necessary. It is certain that the advantages of mortgage bonds or debentures will be realised in New Zealand and thus the Mortgage Corporation should be able to borrow at interest rates comparable with the best known gilt-edged securities which are dealt with on the stock exchanges. The field of purchases for corporation securities is an assured one by reason of the fact that with certain limitations a mortgagor of the corporation may tender to the corporation securities in payment of mortgage charges or in full repayment of the mortgage debt.