CHAPTER III

FARM MORTGAGE CREDIT AND BANKING

Among the early races of men, loans secured by property must have been by way of pledge rather than by means of a mortgage, for having no knowledge of letters or stability of abode, there could of course be no security without actual possession. The first record of a mortgage is to be found in the sacred writings. Mortgages of a peculiar nature are said to have been used by the Jews, from whom according to some writers the notion of mortgaging land originated. From the Jews the idea of a mortgage is supposed to have passed to the Greeks and Romans, and from them was engrafted upon the common law of England.

In the Roman law there were two sorts of transfers of property as security for debts, namely, the Pignus and the Hypotheca. The Pignus, or pledge, was that agreement by which something was pledged as security for money lent, and the possession thereof was passed to the creditor, upon the condition of returning it to the owner when the debt was paid. The Hypotheca was the form of agreement by which the thing pledged was not delivered to the creditor, but remained in possession of the debtor. It corresponds closely with our idea of a mortgage.

The civil law made little distinction between the mortgages of real and mortgages of personal property, whether pledged or hypothecated. The debt was in all cases regarded as the principal, the mortgage as an incident; and until sentence of foreclosure the ownership

of the debtor was not displaced. It is contended by some common law writers that the present notion of a mortgage and its redemption was strictly founded on the common law doctrine of conditions. The general features of the present civil law of mortgages are so similar to the ancient, that the conclusion that one was borrowed from the other cannot be resisted however logical the arguments put forth by National egotism or professional prejudice.

The introduction of the feudal system into England, by William of Normandy, was a memorable epoch in the history of English law. That military institution, the nature of which is such as to exclude any idea of mortgages, soon absorbed all the real property of the kingdom. It was not until the ascension of Henry III that licenses were granted for the free alienation of land. It soon became a maxim of the law, "that the purity of a fee simply imposed a power of disposing of it as the owner pleased." There were two ways of mortgaging lands introduced, which are distinguished by the names of the vadium vivum and vadium mortuum.

The vadium vivum, which is said to have derived its name from the fact that neither debt or estate were lost, consisted of a feoffment to the creditor, until out of the rents and profits he had satisfied his debt. The creditor took actual possession of the estate and received the rents, and applied them from time to time in the liquidation of the debt, the same as a tenant by elegit.

The vadium mortuum is so called, because if not redeemed at the stipulated time, it was dead to the debtor; that is, if the lands were not redeemed upon the day that payment became due, the lands were absolutely forfeited to the creditor.

It is easy to see that these mortgages were not compatable with the interests of a commercial people or the

progressive spirit of freedom. They were a forced advantage to the wealthy barons, who were always striving to extend their landed estates, and a grievous oppression upon the needy and unfortunate.

The English Court of Chancery, by a bold innovation, but acting in personam upon the conscience of the party, declared according to the manifest intent of the parties, that the land was a mere security for the payment of the debt, that the mortgagee held the estate (though forfeited at law) as a trust and that the mortgagor might, within a reasonable time, by the payment of the debt and all equitable charges, recover his legal estate in the land. There was too much of ethics in this new doctrine to meet the ready assent of the severe and unyielding expounders of the common law, and they did not fail upon all occasions to express their disapprobation. But the right of redemption was steadily upheld and at last firmly established.

After the establishment of the mortgage system in the common law of England it seems that the idea spread over all of Europe in a general manner, each country varying the system according to its different needs. From this time on, the development of land credit in general and especially the farm mortgage system cannot be traced in a definite single line, but branches out into almost as many types as there are countries.

Development of the Mortgage Banking in Europe

Mortgage credit, organized into a special system of banking, has existed in Europe since the reign of Frederick the Great. Beginning in Prussia, this system of banking has grown until mortgage institutions have been organized under authority of law in practically every European state. Neither in method or organization, nor in detail of operation does there exist uniformity in

type. The banks of one country, doing precisely the same character of business, may differ widely from those of another country; and it is even possible to find divergent types in successful operation under the laws of the same country.

One general principle which underlies all mortgage banks of Europe is the issue of bonds based on the collective value or security of many individual mortgages on real estate. It is the merging of the credit demands and the property resources of many individuals, somewhat similarly situated, into one financial transaction. States, municipalities, counties, and other organized communities in the United States have adopted this principle. In Europe, all loans exceeding five years are classified as long-term loans, the principal sum being repayable in small annual or semi-annual payments, technically known as "amortization." This is a distinctive feature of their long-term loans. A limitation as to term of the loan as well as to the rate which the bank may charge for administration is usually fixed by law. The usual length of term for loans varies from thirty to sixty years, with the privilege of discharging obligations at any interest period after the tenth year.

In order to obtain for these collective farm loans as low a rate of interest as possible, the securities must be exempt from taxes. This has been generally recognized in all the countries of Europe.

In Europe most states guarantee land titles, and the laws chartering the mortgage banks usually grant a special process of foreclosure which is only effective when the borrower neglects or refuses to keep his contract.

There are certain restrictions which are imposed upon the mortgage bank; resources must always bear a fixed ratio to liabilities-for example, they may be permitted

to issue collateral trust bonds up to fifteen times the amount of their capital and surplus. Their capital and surplus must not be entirely invested in long-term mortgage loans, but should include investments in other securities of shorter maturity. These restrictions are also similar to those of the American Federal Farm Loan System.

Types of Institutions.—The oldest mortgage institution is the Landschaft, which is a local cooperative association of borrowers. Originally a member owning real estate mortgaged his lands and obtained the amount of the mortgage in Landschaft bonds, secured by the collective value of all the lands of the members of the association. He then sold the Landschaft bonds to any one who would buy them. These bonds were perfectly sound, but not liquid. In recent years joint stock banks have been established, with the alertness which private capital always displays. They accepted the bond features of the Landschaft, but organized a selling agency to dispose of the bonds issued by the banks and delivered to the borrowers cash. The banks are supported by ample capital to repurchase their bonds when they are offered on the market below par. These banks supply the borrower with money rather than with their own bonds, and their constant readiness to repurchase their securities in the market renders these bonds liquid. This competition induced the Landschaft to organize a selling agency or banking division, which receives the bonds issued by the Landschaft, sells them in the market, and returns the cash proceeds to the borrowers. It is to be noted that the "New Landschaft" associations limit the liabilities of their members, thus the more closely approaching the joint-stock banks in business methods. The main differences are: the joint-stock banks have subscribed capital and declare dividends,