SOLUTION OF RURAL CREDIT PROBLEMS DEPENDS UPON A WIDER MARKET FOR MORTGAGES A CONSIDERATION OF SOME PRELIMINARY STEPS FRANK J. PARSONS Vice-President United States Mortgage & Trust Company and Member Rural Credit (EDITOR'S NOTE: Considering the deluge of legislative proposals before Congress to improve credit facilities in behalf of the American farmer he may well say "defend me from my friends." Many of the pending bills are impracticable, theoretic and involve principles of paternalism which are foreign to the traditional form of our government. The author of the present article has had exceptional opportunity to study mortgage conditions at first hand throughout the United States and the facts which he presents will affirm the conclusion that greater uniformity and intelligent consideration in State laws relating to legal rates of interest, redemption periods, exemptions from levy or attachment and protection of lenders, would be most effective in facilitating land credits and benefiting agriculture generally.) One of the most important questions now before the country has to do with a system of so-called agricultural credits. This matter has developed partly out of actual necessities, but has also received a considerable impetus from political considerations, and requires most careful consideration and study, if pitfalls are to be avoided. The movement separates itself into two main divisions: (1) The furnishing of money upon long-time loans upon farms, with the principle of amortization included, and (2) the granting of short-time personal credits to local groups or associations of farmers. The former movement may be said to have made considerable progress, but a great deal of doubt and misconception as to the scope and application of the latter seems to exist. The whole question of a more scientific method of mortgaging and a more thorough co-operation in the matter of personal credits, however, has been investigated as never before, and present indications undoubtedly point towards the gradual solution of this important phase of the financial problems of the country. In any discussion of this subject it should be borne in mind that the great life insurance companies of this country in large measure supply the funds required for farm mortgages, which in foreign countries are provided by the mortgage banks. Dr. Cyril G. Hopkins, of the University of Illinois, in a recent address stated the amount of farm loans in the hands of life insurance companies in the United States to be in excess of $660,000,000, this by way of contrast to a total of $290,000,000 held by all of the mortgage banks in Holland, whose investments are world-wide. In the view of many of those who have given thought to the subject, little real progress can be made towards standardizing mortgages and making such investments acceptable to a wide market until some general legislation shall be had looking towards more uniformity in the laws of the various States. Disparity in Interest Rates In the matter of interest rates, for instance, in Connecticut, an old and settled community, where competition makes it extremely difficult to secure better than 5 per cent. upon sound mortgage investments, the State law permits a maximum legal rate of 12 per cent. per annum, which is, of course, never obtained on conservative investments. In Kentucky, North Carolina, and Tennessee, however, which are relatively undeveloped States, and where new capital would give an impetus to farming and manufacturing, it is not possible to obtain legally a higher rate than 6 per cent. per annum. This is unwise and, of course, equally futile, as local lenders frequently secure a higher rate through the use of commissions or attorneys' fees, while outside lenders simply refuse to enter the State. The situation in the various States with respect to this important feature is indicated as follows: Redemption Period After Foreclosure Again, in the majority of the States a period ranging from six months to two years is provided by statute within which borrowers may redeem their property after foreclosure has taken place, thus making it practically impossible for mortagees to dispose of their interest in foreclosed properties prior to the end of the redemption period. In a few of the States, however, notably, New York, New Jersey, Pennsylvania, Ohio, and Virginia, the mortgagee is placed in full control of the property as soon as the necessary legal steps can be completed. This feature has doubtless done much to popularize the States mentioned as loaning fields and has had its influence upon the lowering of interest rates. Conversely, States such as Alabama, Kansas, and Illinois, where long redemption periods exist, are considered unattractive by many lenders. The situation in some of these States, however, is modified by the fact that the lender has possession of the property and the use of the rents during the redemption period. Moreover, it is the practice among careful lenders to confine their loans to a smaller percentage of the security in States where long redemption periods exist. Without going into detailed modifications, the following table will indicate in a general way the situation in the different States with respect to redemption periods after foreclosure: Kentucky. Louisiana. Massachusetts. New Hampshire.. New Jersey.. New Mexico. New York. North Carolina.. North Dakota. Ohio. Oklahoma. Oregon. Pennsylvania. Rhode Island. South Carolina.. South Dakota.. Tennessee. Wyoming.. None. 1 year. 1 year to owner-15 months to creditors. 1 year. 1 year. 18 months. 1 year. None. 1 year. None. None after foreclosure becomes perfect. 1 year. 1 year. None. 1 year if sold to beneficiary in deed of trust-otherwise none. 1 year and 60 days additional for every possible redemption (Creditors). 9 months. 6 months. 1 year. None, unless a separate deficiency judgment is obtained and paid. 1 year. None, but any owner of equity not made defendant to foreclosure proceedings has 20 years thereafter to redeem. None. 1 year and 60 additional days for every possible redemption (Creditors). 30 days, but sale is delayed until property sells for 2-3 of appraisal. None. 1 year. None. In some States where the redemption period is not in itself objectionable, the technical requirements of the law are such as to render it difficult to acquire title and to make innumerable delays possible, all of which deters capital and is reflected adversely in the interest rate. These attempts at protecting the borrower have grown in large measure out of conditions existing after the depressions of twenty and forty years ago, and were, of course, intended to act as a stay, permitting the owner of property to take advantage of improved conditions in order to regain possession of his property. In general, however, redemption rarely occurs, and it is safe to assume that with the exception of special cases, property acquired under foreclosure proves undesirable and if there is an actual enhancement to the mortgagee over his original investment, it is usually fully offset by accumulated advances, together with interest on his funds. The policy of the average lender may, therefore, be stated to be averse to the acquisition of real estate, and these long redemption periods, which rarely serve the borrower, work a very real hardship upon the lender. Lack of Uniformity in Exemption from Levy or Attachment Another important phase of the problem of mortgaging is presented by the State systems, under which property to varying extents is exempt from levy or attachment. These provisions are usually referred to as homestead exemptions and may be briefly summarized as follows: State: Alabama.. Arizona. Arkansas. California. Colorado. Connecticut. Delaware. Dist. of Columbia Florida... Georgia. Idaho Illinois Indiana Iowa... Kansas. Kentucky Louisiana. Maine Maryland. Massachusetts. Michigan... Minnesota Mississippi Missouri Nebraska. Nevada. New Hampshire.. New Jersey North Carolina. Ohio Oklahoma Oregon. South Carolina.. South Dakota. Tennessee.. Texas. Homestead Exemption. $2,000. Real estate to the value of $4,000 in one parcel and family must reside in State. $2,420. Such as is declared by the party by the instrument in writing filed in County Recorder's Office. $2,000. Real estate to the value of $1,000, actually occupied. No homestead exemption. 160 acres of land or half an acre within limits of incorporated city or town, together with $1,000 worth of personal property and improvements On real estate. $1,600. Real estate to the value of $5,000, if selected by head of family-if by any other person, $1.000. Real estate to value of $1,000. $600 One-half acre in cities and towns-40 acres in country. 160 acres farm land-1 acre in city or town. Real estate to value of $1,000, Real estate to value of $2,000, and 160 neres farm property Real estate to value of $500. House owned and occupied by debtor, together with land on which it is situated. In country, XO geres. In towns fewer than 5,000, half an aere, in towns 5,000 or more, 1-3 acre. Real estate to value of $2,000 in furm land, or $300 in city land. House and lot to value of $3,000. Real estate to value of $5,000. Real estate to value of $1,000. Real estate to value of $500. Real estate to value of $1,000. Real estate to value of $1,000. Real estate to value of $5,000 and 160 acres farm land or 2 acres town land. $1,000. Real estate to value of $5,000 and not more than 1 acre or less than 4 acre without regard to value. No homestead exemption. No homestead exemption. No homestead exemption. $1,000 property. Real estate to value of $5,000 and 1 acre in town or 160 acres in farm land. $1,000. No homestead exemption. Real estate to value of $1,000. Real estate to value of $5,000 and acre in town or 40 acres farm land. .Real estate to value of $1,500, any house and plot in town, or 160 acres farm land. Making Farm Loans Safe This showing on its face seems to furnish conditions making it impossible to make loans with safety. Generally speaking, however, under careful legal advice, the situation can be met with entire security. In practically all of these States the homestead exemption can be waived, usually by means of the husband and wife both joining in the mortgage or deed of trust. There are certain variations of this general rule all of which are familiar to careful lenders and which are covered by counsel learned in local law and procedure. In Texas, the most pronounced exception, there are provisions in the law whereby loans may be made on homesteads for the purpose of purchase or improvement, and with careful legal advice this situation is subject to no unduc risks. The foregoing will serve as illustrations of the lack of uniformity in State laws respecting the more important considerations of safe mortgaging and will point the way to some of the preliminary steps which must be taken looking toward a more general recognition of mortgage securities as safe and attractive in vestments. Course of Lectures on Bank Advertising and Business Building No authority on bank or trust company publicity has contributed more to enlightened discussion on that subject than Mr. Fred W. Ellsworth, publicity manager of the Guaranty Trust Company of New York. His views are always to the point, frank and practical. It is therefore natural that the series of six lectures which Mr. Ellsworth is delivering under the auspices of the New York Chapter, American institute of Banking, is attracting unusual attention. The general topic is "How to Build the Business of your Bank" and the treatment relates specifically to fundamentals, methods cmployed, personal work, direct and indirect advertising. The first lecture of the course, delivered on the evening of March 8th, showed a record attendance and the series will be continued during six consecutive Wednesday nights. Needless to say the lectures are of value to all those who are selected by banks and trust companies to shape the advertising policies of their respective institutions. A PROGRAM FOR "FINANCIAL PREPAREDNESS" AND IMPROVEMENT OF THE CURRENCY SYSTEM STATUS OF THE NEW FEDERAL RESERVE NOTES WM. H. BERRY Ex-State Treasurer of Pennsylvania This country escaped a severe financial crisis through the fortuitous circumstances incident to the European war, just as in 1897 and 1898, the financial stress was relieved by the fortuitous discovery of new gold fields in Alaska and dsewhere, and by the cyanide process for treating low grade ores, thus doubling the world's annual supply of gold in the short period of two years. So, in this crisis, the importation of $435,000,000 of gold in 1915 has relieved the financial stress and set our business activities moving at an unprecedented pace. In The basic facts underlying our currency system are these: In 1864 the banks collectively carried 24 per cent. of legal tender money in reserve against their demand obligations. answer to the ambition of our people, the banks expanded credit faster than legal tender money accumulated, and by 1873 had reduced the reserve to II 6-10 per cent. The memorable panic of that year was the necessary consequence. Universal depression prevailed until the coinage of silver under the Bland-Allison Act supplied, in some measure, the deficiency and made possible a moderate degree of activity. The increment of legal tender from the free coinage of gold, and the limited coinage of silver was insufficient to supply an adequate reserve under the credit necessary to meet the growing demands of business in this country, and a further expansion of credit resulted in the reduction of the reserves, to 16 7-10 per cent. in 1893, precipitating the panic of that year. the issue of $350,000,000 of emergency currency by the United States Treasury. By the use of this currency, the banks were able to continue their payments, but since this money was not competent to stand in bank reserve, they were compelled to withdraw credit, which resulted in a larger number of failures among the business men of the nation than was ever recorded in any previous period in our history. Revival of Industry Based on Gold Importation and Trade Balance In December, 1914, the psychology changed, and it became apparent that American securities were about the only things worth holding, and Europeans ceased sending them to this market; at the same time, enormous purchases of war munitions created a balance in our favor unprecedented in our history, and caused the importation of $435,000,000 of gold during the year. This replaced the $160,000,000 we had lost the year previous, and left us with $240,000,000 to the good. To this add $60,000,coo produced from our own mines, and we have an increment of $300,000,000 reserve money in one year. This made possible the expansion of $2,000,000,000 of credit which would have been impossible without it, and made possible the revival of industry all over the country. The issue of emergency bank notes temporarily helped the banks, but did not, and could not, help business. The importation of gold, and this alone, produced the results. Legal Tender Power Should be Given to Federal Reserve Notes If the new Federal Reserve notes were given legal tender powers, and thus made competent to stand in bank reserve, the issue of $350,000,000 of them instead of the non-legal tender emergency notes, it would have helped business, as well as the banks, and we should have been independent of either inward or outward movement of gold. The credit thus far granted is but a drop in the bucket, as compared with the needs of the country. The railroads of the nation alone need seven billions of credit with which to improve their lines and terminal facilities and rolling stock in order to be able to handle the maximum traffic in this country, and while the legal status of the banks has greatly improved by the new Federal Reserve Law, having reduced the required reserve by 25 per cent., their physical status is not improved, and it will be impossible for the banks to modate the legitimate demand for credit in the United States unless legal tender powers are given to the new Federal Reserve notes, or enormous sums of gold are imported in addition to that already received. accom It is doubtful if the exigencies of the war will permit European countries to continue sending gold in any considerable quantity to this country. If they liquidate their purchases by the establishment of credits in this country, much of our banking power will be absorbed in carrying these credits, and no further expansion of domestic credit can be expected. Approaching a New Period of Expansion The attenuation of the reserve from 24 per cent., in 1865, to 8 per cent. in 1914, has been carried to the limit, and since the demands upon the United States for financing its own growth, as well as for developing trade in South America and other parts of the world, will be enormous in the near future, we are approaching a crisis which can only be met by giving to the new Federal Reserve note legal tender powers, and maintaining behind them an adequate gold reserve for their prompt redemption. The present legal tender issues of the Government are practically upon a 100 per cent. gold basis, and in the last thirty-three years prior to 1914. we have required no gold whatever for redemption purposes, and it is piled up in the United States Treasury in unprecedented quantities. The new Federal Reserve law requires 40 per cent. reserve of gold behind these notes. This percentage would allow us to more than double our present legal tender issues, including silver and greenbacks, and make possible the flotation of ten billions in domestic credits. Plan for "Financial Preparedness" In a pamphlet recently published by the Economic Publishing Company of Chester, Pa., entitled "Preparedness for Peace," I have outlined a plan in detail for safely meeting the responsibility now devolving upon this nation of financing the world. The first steps of this program have already been taken in providing the Government notes, backed by 40 per cent. of gold; the next step is to em power that note to stand in bank reserve; the next step is to retire the bank notes, root and branch, and purchase the 2 per cent. bonds upon which they rest, with legal tender notes, thus practically eliminating the bonded debt of the United States without cost or injustice to anybody. The next step, or rather, a coincident step, would be to cease the issue of gold certificates and open a world market for the purchase of gold with Federal Reserve notes, maintaining redemption for the same, thus opening a free world market for gold in the United States in competition with Great Britain. To provide for the enlargement of the navy and every other national activity, bonds should be issued convertible into legal tender notes at the will of the holder. By this process, in the next ten years, a navy can be built, an army equipped, and internal improvements established upon an enormous scale without costing the people of the country a dollar outside of the transient interest on the amount of the bonds that may be floated at any one time. Unique Plan to Promote Life Insurance An entirely novel plan of providing so-called "premium savings account" facilities for prospective purchasers of life insurance has been devised and is being extensively advertised by the St. Louis Union Bank of St. Louis. The plan may be illustrated as follows: The purchaser of a $15,000 life insurance policy opens a premium savings account in the savings department of the St. Louis Union Bank. He has paid the first premium of $995.40 and puts into the account $100 a month and at the end of ten months he is ready to pay his second annual premium on the policy. The purchaser of the insurance thereby accustoms himself to a monthly saving of $100 and instead of accumulating just enough for annual premium he will continue depositing monthly. At the end of the year he has $1,200 to pay his premium of $995.40 plus accumulated interest of $19.50. The idea of conducting a campaign along these original lines was conceived by Mr. B. W. Moser, secretary of the St. Louis Union Trust Company and assistant cashier of the St. Louis Union Bank. The campaign calls for a series of twelve advertisements describing various plans by which those who contemplate taking out life insurance policies may do so in the convenient manner provided by the premium savings account. Readers of TRUST COMPANIES Magazine interested in the plan of operation, are invited to apply to the St. Louis Union Bank for detailed description. |