B. Long-Time Investment Credit

185. FARM MORTGAGE CREDIT IN THE UNITED STATES'

By C. W. THOMPSON

During the past two years the Department of Agriculture has been making a special study of rural credits in the United States. Information has been obtained bearing on both the conditions and the facilities for supplying farm loans in the different states. I shall endeavor to indicate briefly some of the results of this study with special reference to farm mortgage credit.

The average cost of farm mortgage loans, for interest and commission together, as indicated by a recent inquiry made by the Office of Market and Rural Organization, ranges from about 5 per cent in New York, where commissions are seldom charged, to 10 per cent in Montana, where the commission amounts to about 1 per cent, with 8 per cent interest. In Iowa, where the farm mortgage loan business is pretty well standardized, the average cost for interest and commission together is 5.9 per cent, comprising 5.6 per cent for interest and a commission paid once for all in advance. In Missouri the average cost for these two items is 6.8, comprising 6. 2 per cent for interest and 0.6 per cent for commission. In Texas the average cost for interest plus commission is 9 per cent, with a little more than per cent going for commission; and in Alabama interest and commission together average nearly 9 per cent, of which per cent is for commission.

In the State of Iowa there is relatively little variation from the average rate, 6 per cent, the lowest figure reported from any locality being 5 per cent interest with no commission charged, and the highest figure, for interest plus commission, about 8 per cent. From Texas, on the other hand, with an average of 9 per cent, we have reports from different localities giving the prevailing cost for interest plus commission as low as 7 per cent and as high as 13 per cent; and from Alabama, with an average of 93 per cent, reports ranging from 7 to 15 per cent. In general, the lowest charges both for interest and commission are found in the more developed agricultural sections of the East and Middle West. The extreme figures apply in the South and the Rocky Mountain states.

'Adapted from an address before Farm Mortgage Bankers' Association, Louis, 1915, published in United States Investor, XXVI (1915), 1994–95.

The most common term for farm mortgages throughout the corn belt is five years, with a good many loans made for three years and some for as long a time as ten years. In the South the greater part of the farm mortgage loans made by banks from their own funds are made for one year or less; loans made by insurance companies and mortgage companies in the South, however, usually run for a longer period-from three to ten years. In the Rocky Mountain and Pacific states farm mortgage loans appear to be made rather more often for a term of three years or over than for a shorter period, but the banks at least make a considerable portion of their loans of farm mortgage security for a period of one year or less.

The great majority of the banks making farm mortgage loans for a term of three years or over give the borrower the privilege of paying any part of the principal (in even hundreds) at any time or on any interest date. Some banks, however, lend at a lower rate of interest where the contract does not carry the prepayment privilege. Most of the banks, both in the South and in the West, which make farm mortgage loans for one year or less report that they usually renew satisfactory loans when desired; some of them require the payment of a part of the principal, but the majority seem to be willing to renew the whole amount so long as the security is good.

A general survey of conditions in the country as a whole would seem to indicate that charges for interest and commissions are needlessly and unreasonably high in many localities. Farmers in these localities are clearly in need of better access to the open investment market. Such access would not only afford more reasonable rates but would also enable the farmer to obtain mortgage loans for longer periods than is ordinarily possible at the present time.

Farm mortgage loans are obtained, in general, from four important sources, namely, banks, life insurance companies, mortgage or loan companies, and private individuals. A word may be said with regard to the relative importance of these agencies.

From reports furnished by the twenty-seven life insurance companies in the United States having assets above $20,000,000 and twothirds of the smaller companies we have computed the amount of farm mortgages held by these companies in each state, the total for all states being $660,000,000. We have also estimated the amount of farm mortgages held by banks (including trust companies), and, on the basis of the thirteenth census figures, the total amount of farm mortgage loans outstanding in each state.

For the United States as a whole the life insurance company mortgages reported up to the present time (October 5, 1915) represent about one-fifth of the estimated total for all farm mortgages and the mortgages held by banks a little more than one-fifth. The reports yet to be received from some of the smaller companies, however, promise to bring the insurance company total up pretty close to the estimated bank total.

For the State of Georgia the figures show that the insurance companies hold farm mortgages amounting to nearly one-half the estimated state total and the banks a little more than one-fourth, leaving only a quarter of the total for mortgage companies and private individuals. In a majority of the other southern states the insurance companies are relatively unimportant as sources of farm mortgage loans, though they have made considerable gains in this section of the country even within the last two years.

For the State of Iowa the insurance company mortgages represent 32 per cent of the estimated total and the bank mortgages 22 per cent; for Missouri the insurance company mortgages represent 26 per cent and the bank mortgages 16 per cent. In Nebraska and Kansas, however, the insurance companies are more important as compared with the banks, reporting in each case more than one-third of the estimated total, while the banks report only a little more than one-twentieth. In Oklahoma, likewise, the insurance companies report nearly 40 per cent of the total and the banks only about 3 per cent, and in Texas the banks have only 6 per cent of the total, as compared with 18 per cent for the insurance companies. In Louisiana and in California, on the other hand, the banks take care of more than 40 per cent of the estimated total farm mortgages, while the insurance companies report less than 7 per cent.

Life insurance companies hold very few mortgages on farms in the New England or the Middle Atlantic states; and a considerable portion of the farm mortgages held by the banks in some of the New England states, at least, are mortgages on western lands.

No definite information is at hand relative to the amount of farm mortgages permanently or temporarily held by mortgage and loan companies, but the aggregate is without doubt very large. A number of foreign companies are engaged in this business on a large scale. Many mortgage companies are primarily mortgage brokers or commission merchants, but many also have large funds permanently invested in farm mortgages.

The activities of the mortgage and loan companies as middlemen. purchasing or negotiating mortgages for sale to other investors, have already been mentioned. The banks, likewise, in many localities negotiate large amounts of farm mortgages for insurance companies and other outside investors, in addition to making loans from their own funds.

The banks in North Dakota, for example, which hold farm mortgages to the amount of $5,000,000 (estimated), negotiate for other investors about $40,000,000 in a year, or eight times their own permanent holdings. The banks in Nebraska, likewise, are estimated to handle $33,000,000 in farm mortgage business for other investors, or three times the amount of their permanent holdings ($11,000,000). In general, the banks in most of the states west of the Mississippi River engage rather extensively in the business of handling farm mortgages for other investors. New England banks, on the other hand, do practically no business of this kind, and the other states in the northeastern section of the country do relatively little. In the South, likewise, outside of the states of Georgia, Oklahoma, and Texas, the volume of such business handled by the banks is relatively small.

186. RATES ON FARM LOANS1

Substantially no statistics of rates of interest paid by farmers have been collected in this country since the census of 1890; and consequently it was especially desirable that in the questionnaire sent out by the Department of Agriculture the correspondents be requested to contribute information on this investigation and report with regard to the subject. Six questions were framed, and these were answered with undoubted understanding as to the meaning of the questions. The results are of much interest.

The questions were expressed in dual form in such a way as to call for an answer for agricultural loans and also for loans on town and city real estate, the circumstances of the loans being otherwise substantially the same.

The interest rates on the bulk of the purchase money throughout the United States range from 6 to 8 per cent in the case of farms, and also 6 to 8 per cent in the case of town and city real estate. Upon taking account of the differences in rates of interest as between farm

I

From Report of United States Department of Agriculture, 1912, p. 30.

and town property, it is discovered that in the case of purchase-money loans 10 per cent of the responses state that the rates are higher for farms than for town and city real estate; 33 per cent report that the rates are lower for farms than for town and city real estate, and 57 per cent report that there is no difference in rates of interest on purchase-money loans between the two classes.

Rates of interest do not determine the total cost of borrowing. There are commisions, bonuses, and various costs and expenses that are borne by the borrower, and these, if added to the rate of interest, often considerably increase it. It was reported by 22 per cent of the answering correspondents that no commissions were paid in their communities; those who stated that commissions were paid disagreed very considerably. The country banker stated that the rate of commission, when paid, was 2 per cent. The country merchant and persons of other occupations constituting another class of correspondents reported 4 per cent, and the farmers reported 5 per cent. These differences seem hardly capable of reconciliation. The terms for which mortgages are made usually range from 3 to 5 years, and consequently a commission of from 2 to 5 per cent adds appreciably to the annual rate of interest. If paid by the borrower, the average cost of abstracts was $11.40; where borrowers paid conveyancer for drawing papers the cost was $4.70. In 94 per cent of cases the borrower does pay cost of abstract. Sometimes the borrower was required to pay the registration fee, and, when he did so, the average cost was $1.50.

187. EXPLANATION OF HIGH RATES TO FARMERS1

BY H. S. VAN ALSTINE.

A year or two ago the Kansas Legislature appointed a commission to investigate farm values and rural interest rates, and their report is very enlightening. It shows that the average rate in the eastern counties is from 5 to 6 per cent, while the average rate in the extreme western counties is about 10 per cent.

Now this difference in rate is not because the money lender is taking advantage of the necessities of the western Kansas farmer, but is based wholly upon the value of the land as measured by the yardstick of experience.

'Adapted from an address before Farm Mortgage Bankers' Association, St. Louis, 1915, published in United States Investor, XXVI (1915), 1968-69.