FARMERS’ FINANCE.

Star (Christchurch), Volume LXVI, Issue 20483, 8 December 1934, Page 33 (Supplement)

FARMERS’ FINANCE.

Government’s Plans for Rehabilitation. MORTGAGE CORPORATION. 111. Parliament is meeting in Februarynext 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 that the people of the Dominion may fully understand and appreciate these important proposals of the Government, the following four articles for publication have been prepared by Mr Coates, Minister of Finance. The third of these deals with State lending institutions to be merged in the Mortgage Corporation, and is as follows: Attention has been drawn to the overlapping that exists in the operations of the State Advances Office, Lands Department and Rural Intermediate Credit Board, and it has been pointed out that this involved a costly duplication of administrative machinery, particularly in regard to field stalts. The Government has come to the conclusion that it would make for increased efficiency and better control both in the field and in the o’ffice if all these lending operations were unified under the control of one Board. To do this would overcome the duplication that exists, but to stop there and then establish the Mortgage Corporation independently would only create further duplication, and that would be economic waste. It is advisable to adhere to the principle of one organisation only and merge the State Advances, the Rural Intermediate Credit Board and the lending operations of the Lands Department in the Corporation. This it is proposed to do. Furthermore, to do this will give the obvious advantage of placing the Mortgage Corporation in business on a large scale immediately. The field force necessary to cope with the work of reconstruction generally can then be built up without delay with a minimum of overhead cost per cent of capital invested. It is recognised, however, that many State mortgagors are in difficulties at present, and there is no intention of requiring the Corporation to accept responsibility for other than sound securities. There is at present no reliable basis for valuation, and, in any case, a review 7 of all the individual securities w 7 ould take years to complete. It would be quite impracticable to hold up the transfer for such a long period, and it would appear that the best way of overcoming these difficulties, without prejudicing the security of bondholders, would be for the Corporation to take over all the current mortgages at their nominal amount, give bonds to the State for a safe proportion, to be agreed upon, of the aggregate amount involved, and accept contingent liability for the remainder as a suspense item, pending a systematic review of the individual mortgage securities. The bonds would be part of the current issue and bear interest accordingly.

The suspense item which might be shown in the balance-sheet of the Corporation as “ Contingent liability to the State ” w r ould not bear any fixed rate of interest, but until this liability was disposed of in one way or another it is proposed that the State should receive the net profits of the Corporation after payment of dividends on capital and making such provision for special reserves or other matters as may be approved by the Minister of Finance. In this way the position of the Corporation will be protected, and the State will receive the net earnings from the mortgages. Situation Stabilised. Losses of capital and interest in respect of any mortgage taken over from the State would be written off by the Corporation against this contingent liability. After a few years, during which the position of each mortgage could be systematically reviewed and the general situation stabilised, as much of the contingent liability as then conformed to the standard conditions would be added to the bond issue and a period fixed during w 7 hich the repayment of mortgages would on the average bring the remainder of the mortgages within the prescribed 70 per cent of the value of securities. Any tendency for produce prices, and therefore land values, to rise would, of course, hasten the time when the remaining amount could be liquidated by conversion into bonds. When the contingent liability was finally liquidated in this way or by capital written off, the State would receive the fixed rate of interest on bonds and the Corporation would retain its profits. During the period that the contingent liability was in existence and the State practically carrying all the risks of loss, it might be advisable for the Auditor to be appointed by, and report direct to, the State, as is the case with the Bank of New Zealand. Properties held by the State Advances Office as mortgagee in possession and other assets not suitable for transfer would be taken over by other Government Departments and the entity of the Office would be completely merged in the Corporation. The relevant part of the public debt would remain as a charge on the Consolidated Fund, but the debt charges would be offset as far as possible by the interest received from the Corporation on bonds and while any the “ Contingent liability to the State ” exists by payment of the surplus profits to the State. _ In due course, operating in collaboration with the Corporation over a period of years, it wijl no doubt be possible to sell gradually the bonds held by the State and use the proceeds to pay off an equivalent amount of public debt. State mortgages would in the first instance be taken over at the existing rates of interest and repayment tables, but in order to give mortgagors the benefit of the lower interest rates now ruling, those at present paying interest at rates above the Corporation’s lending rate could be offered new table mortgages for suitable periods at that rate for the amount then due. plus 2 per cent thereof as a contribution to the Reserve Fund. Those able to pav present charges would gain some relief at the expense of- the State, but thev could get that now by exercising their right to pay off in a lump sum fn any ease, it would not be equitable to exclude them from the benefit of the i

j market rate of interest. As part com(pensation for the loss of the State thereby occasioned, the.se mortgagors w-buld contribute to the Reserve Fund, and thereby benefit the State indirectly. Nucleus of Reserve Funds. In the merging of the State Advances Office it is proposed that the investments of the Local Authorities Branch, amounting to £2,570,000 as at March 31 last, be utilised to overcome the initial weakness in the Reserve Fund of the Corporation previously mentioned. These local body securities would form the nucleus of the Reserve Fund, which would be augmented by the 2 per cent contributions in respect of State mortgages reduced on the above-mentioned basis and also in respect of private mortgages taken over or granted. Thus the minimum reserve of 5 per cent for the protection of bondholders will be provided from the commencement. At the outset the portion of the reserve represented by the 2 per cent contribution will be wholly invested in mortgages, but as soon as sufficient repayments of principal are received an amount equal to such portion of the reserve should be invested in Government or local body securities. In this way the whole reserve could be invested in liquid securities within a year or so.

In general, interest on Reserve Fund investments will go to augment the fund, but out of such interest received there should be paid annually to the State an amount equal to the interest received on the local body investments handed over from the State Advances Office. When the Reserve Fund reaches 10 per cent of the mortgages outstanding, any further amount that would otherwise accrue to the fund should, apart from maintaining the reserve at 10 per cent, be paid to the State until the initial amount of £2,570,000 provided has been wholly repaid, leaving the Corporation with an adequate reserve wholly provided by borrowers as a mutual guarantee fund, but without any real cost to them, for they will have saved considerably more than the amount in lower interest rates.

In transferring the assets of the Rural Intermediate Credit Board to the Corporation somewhat similar arrangements could be made to provide the nucleus of a special reserve to protect bondholders against the greater risks involved in lending on the security of stock and chattels. When this Board was established £400,000 was lent, free of interest, from the Consolidated Fund. Accretions since have increased the surplus of assets over debentures outstanding to approximately £465,000. This amount, it is proposed, should be credited in the books of the Corporation to a reserve against chattel securities. Liability for the amount of the Rural Intermediate Credit Board’s debentures will be assumed by the Consolidated Fund, but will be offset by the bonds received from the Corporation. Special Reserve.

The reserve against chattel securities, which it is considered should be maintained at not less than 20 per cent of the chattel advances outstanding, could be augmented by allocations from profits, the necessary surplus of income being built up from the 2 per cent margin between the bond rates and lending rates of interest. In due course, when the special reserve has xeached an adequate level—say, 30 per cent of advances—provision will be made for further accretions to be applied in repayment to the State of the nucleus of £465,000 originally provided by the State.

To sum up this part of the Mort gage Corporation proposal, the transfer of assets from the State in the manner outlined will be advantageous from every angle. All duplication and overlapping will be avoided, and the separate institutions hitherto operating will be included in one efficient organisation able to obtain all the economy in administration costs that results from large-scale operations. The Corporation will commence business with assets valued at over £50,000,000. Adequate reserves will be provided from the outset, so the position of both bond holders and shareholders will be safeguarded Furthermore, the efficient field force required by the Corporation can be built up to full strength immediately, as there will be ample work for it in reviewing the position of exState mortgagors in difficulty. This expert field force can also play a useful part in the rehabilitation of farmers’ finances generally under the proposal outlined in the next article. (To be concluded.)