A MORTGAGE PLAN

Waipa Post, Volume 49, Issue 3554, 6 December 1934, Page 5

A MORTGAGE PLAN

A NATIONAL CORPORATION. MERGING OF DEPARTMENTS PROPOSED. OUTLINE BY MINISTER. “Parliament will meet in February next primarily to consider legislation for the establishment of a National Mortgage Corporation B,nd for setting up suitable machinery for the rehabilitation of farmers’ fiances,” states the Minister of Finance, Mr Coates, in an official explanation of the Government’s proposals just circulated in a neat booklet of 17 pages. The proposed institution Avill, the Minister claims, undoubtedly. be of great assistance in dealing with the present mortgage difficulties, but it should ibe clearly understood tihat it is not being established for that purpose alone. In fact, it is intended to be a permanent part of the financial fabric of the Dominion, the primary object being to provide, on sound business lines, long-term mortgage finance as cheaply as possible. The guiding principle of this national institution "will be service, and not profit. In this respect the Mortgage Corporation will be analogous to the Reserve Band. The corporation Avill be a body corporate Avith a capital of £1,000,000 to be offered for public subscription. Dividends will be limited, probably to per cent per annum cumulative. As in the case of the Reserve Bank, the directorate normally will be partly elected by the shareholders and partly appointed by the State. In the first instance, the whole board Avill be appointed by the State Avith provision for retirement in rotation to secure continuity of policy. A directorate of seA’en and also a Treasury representative ex officio, is proposed. EXTENT OF LENDING.

The primary object of the corporation is lending on long-term mortgage on land, but it. is intended to empower it to lend on the security of stock and chattels. Loans will be made on first mortgage only for fan amount not exceeding 70 per cent, of the value of the security. The experience of other countries has shoAvn that a minimum reserve of at least 5 per cent, of the mortgage is required and the reserve should be built up to 10 per cent, as soon as is practicable. To provide such, a reserve it is proposed to make it a condition of a loan from the corporation on mortgage of land (but) not stock and chattels) that the bojTOAver shall contribute 2 per cent, of the amount of the mortgage to the reserve fund of the corporation. Such a contribution, Avith interest compounded at 4 h per cent;., will amount to 5 per cent, in about 2:1 years, land to about 1 per cent, in 40 years, the period of a long-term mortgage Avith a 1 per cent, sinking fund. The required 10 per cent, reserve fund can be provided in this way, the only Aveakness being’ t|hat at the outset the reserve fund will be only 2 per cent., gradually increasing as the interest is compounded. This weakness, hoAvever, can be overcome in connection with the mei’ging of the. State Advances Department. EASY PAYMENTS.

The reserve contribution, which practically amounts to la, limited mutual guarantee provision, could be paid in cash at the outset. However, the fact that hi man desires to borrow from the corporation Avill indicate generally that he has not the cash to pay this amount, but it can be obtained by adding it to his mortgage and allowing him to pay it with interest over the period of the loan. The borrower can offer little valid objection to the proposal, for adding 2 per- cent to a mortgage on a fortyyear taole at 4& ner cent, xvill add only Is Id per £IOO to the half-year-ly charge for interest and principal, and he will save more than that through the reduction in interest rates as a result of the greater confidence of investors inspired by the reserve fund.

The Government has come to the conclusion that it would mlake for increased efficiency and better control if all the lending operations of the State Advances Office, Lands Department and Rural Intermediate Credit Board were unified under the control of one board. This it is proposed to do —a course that will have the obvious advantage of placing the Mortgage Corporation in business on a large scale immediately TAKING OVER MORTGAGES. 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. 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, will 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. ASSETS OVER £50,000,000.

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 stocks 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. The corporation will commence business with assets valued at over £50,000,000. Adequate reserves will be provided from the outset, so the posi-

tion of both bondholders 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 Avork for it in revieAving the position of ex-State mortgagors -in difficulty.

The Mortgage Corporation will be t.he e means of pro Adding an. adequate flow of capital into the farming industries at the cheapest possible rates of interest. This will be of material assistance, because at a lower rate of interest a given income can support a greater capital burden. Any scheme of reconstruction must be fair to mortgagees, and the basic difficulty is that at present there is no reliable basis of valuation for farm lands.

While mortgagors must be temporarily relieved ot charges Avhich they cannot possibly meet to-day, any final settlement other than by voluntary arrangement, must be postponed long enough to make reasonably sure that the mortgagee suffers no avoidable loss. It is inevitable that judicial powers Avill be necessary to deal with cases in respect of which no settlement can otherwise be arranged. Accordingly, it is proposed to set up a Special Court of RevieAV, consisting of an independent chairman and ttvo associate members, one representing mortgagors’ interests generally and one mortgagees as a class. The present Adjustment Commissions or others constituted on similar lines Avill function regionally under the supervision of the Court.

VOLUNTARY SETTLEMENTS. The ideal method of settlement of a mortgagor’s! difficulties is a voluntary arrangement. If the parties are unable to reach an agreement, it will be open to a mortgagor or any rtf his creditors to bring the case before the adjustment Commission for the district. In cases where agreement cannot be reached, the Adjustment Commission will be required to investigate the case and submit a report thereon, together with a statement by the objecting party concerned, to, the Court of RevieAV. The Court will be given full powers to refer the matter back to the Adjustment Commission Avith directions for further consideration, hear the whole case itself, or otherwise determine the issue. EFFECT OF “STAY ORDER.” Failing consent ctf the persons concerned, however, the Court will not be authorised to order any immediate Avriting-off of capital, but if it is satisfied that the case is one for administration under the statutory schemeof rehabilitation the Court will be empowered to make a “ stay order, the effect of which will be to prevent action being taken against the mortgagor, provided he carries out the terms of settlement. In cases where a “ stay order ” is granted, the property will coime under the supervision of an administrative office of the Court, who will probably 'be designated the Rehabilitation Commissioner.

The basis of control will be farming under supervision on a budgetary system), the income from the farm being apportioned on a predetermined basis. This control will operate for five years, after Avhich a valuation Arill be made for the purpose of ascertaining the meantime fixation of the capital charge against the security. At the end of the second five-year period a further valuation Avould be made of his property and 50 per cent of any additional equity then existing would be liable to be secured in favour of his creditors unsatisfied at the end of i'he period, of budgetary control. Any liabilities not provided for at the end of the ten-year period will be automatically cancelled. MARGIN OF SECURITY. To extend the scope of the corporation to render assistance, it is proposed to authorise it to take over at its discretion existing mortgages vp to an amount not exceeding 80 per cent of the productve value of the security.

The bondholders of the corporation, hoAvever, will not be prejudiced' by this lowering of the margin of security on the mortgage, for the risk on the additional amount over and above the maximum provision of 70 per cent for corporation mortgages Avill be carried by the State. This will be achieved by utilising the machinery outlined previously for dealing Avith the same problem in connection with mortgages taken over from the State—that is to say, any losses in respect of an 80 per cent mortgage from the corporation up to an amount equal to one-eighth of the original amount of such mortgage, less repayment of capital to date, will be written off against the suspense item referred to as the “ Contingent Liability to the State.” This special rehabilitation concession will disappear in due course, leaving the permanent provisions of the Mortgage Corporation standing clear and undamaged.