CHAPTER VI FARM MORTGAGE BANKS Farm mortgage banks in the United States have an interesting history of pioneer struggles.1 For almost three-quarters of a century, however, these institutions have performed a valuable service for American agriculture through the placing of first mortgages upon farms and selling these securities to investors. Through their service of bringing the funds to the borrower, they have been a great factor in promoting the development of agriculture particularly in the Middle Western and Western states where the farm mortgage bankers and their agents have acted as middle men, serving the eastern investors with first-class securities and supplying the western farmers with funds. Dealers in farm mortgages under the name of farm mortgage banks may include strictly farm mortgage banks organized for the sole purpose of carrying on this work, but farm mortgage companies, agents, dealers, state banks, trust companies, and national banks frequently do a very large business in farm mortgage securities. It is therefore difficult to give a definition for a farm mortgage bank which will include all of those operating in this field. Article II, Section 1, of the Constitution of the Farm Mortgage Bankers' Association of America states eligibility for membership as follows: 1 See Appendix, "The Old Farm Mortgage Craze,” for a brief account. Any National or State Bank, Trust Company, Corporation, partnership, or individual, in good standing, having a paid-in capital stock and surplus of $25,000 or more, and which makes a practice of loaning money on the security of improved farm land, and publicly offers such securities for sale, as a dealer therein, shall be eligible to membership in this Association. It is clear that such members must have a fixed capital stock and surplus paid in. Each has the power to issue bonds or debentures and to make, purchase, deal in, and sell loans on real estate. The administration and organization are similar to that of the ordinary corporation. As a rule such corporations may loan on any kind of real estate, but in this discussion we are limited to those which specialize in loaning on farm lands. Most farm mortgage banks embody the principles of the French Crédit Foncier. One of the principal differences between the practice of loaning on farm mortgages by insurance companies and farm mortgage banking houses is: the insurance companies keep the mortgages as investments, whereas the mortgage bankers sell the mortgages or bonds issued against them and release their funds for further loans. How Loans Are Made to Farmers by Mortgage Banks The course of a loan from its initiation to the end of its term may be traced. The farmer who wants to borrow goes to the nearest local correspondent of the mortgage company, who may be a man engaged in a general insurance, real estate and loaning business, or who may be a lawyer, or even a merchant or a farmer. Or the local correspondent may be a local bank or bank officer. The qualifications of the local correspondent are reliability, knowledge of values and conditions in the adjacent farming community, wide acquaintance, with a favorable reputation among the farmers, and ability to judge the moral hazard, i.e., the personal qualities of the borrower. The local correspondent explains the terms on which a loan will be granted, and if satisfactory, obtains from the farmer a formal application on an application form furnished by the Company. The farmer is called upon to answer numerous questions designed to bring out not only the nature, condition, and value of his land, but his financial condition, his personal characteristics, his family relationships, and the purpose for which the money is required. The local correspondent then makes out his own confidential report on the security, both physical and personal, based often on a special trip of appraisal to the farm, and on his personal knowledge of the circumstances attaching to the business. This report and the application then are sent to the nearest branch office of the company, where they are examined by the manager, the application either being rejected or tentatively accepted. If tentatively accepted the manager of the branch office makes his own appraisal of the security and, if he approves the loan, sends all the papers to the head office for final consideration which is always at the hands of one of the executive officers, or a group of them. At the head office there is brought to bear on the application all the accumulated knowledge and experience of years of farm mortgage negotiation and of personal study on the part of the officers of conditions affecting the district from which the application comes. Usually there are at the head office extensive field reports made by officers of the company on their frequent trips of investigations, and there are available to the officers numerous sources of information regarding general conditions in the various loaning districts, including the company's banking connections, the collection departments of wholesale mercantile houses, and the like. If a loan application passes this gauntlet successfully, the matter is turned over to the company's lawyers or legal department, for the preparation of the papers and the examination of the borrower's title to the land he offers as security. The papers are ordinarily sent to the branch office and thence to the local correspondent to be signed, and then are returned, checked up, and when complete and in proper form, the mortgage, trust deed, or security deed, as the case may be, is recorded as a first lien, all existing encumbrances or liens on the land, if any, having previously been paid out of the proceeds of the loan or otherwise. Then all details of the terms and recording references of the mortgage are recorded in the company's mortgage registers, and the care of the mortgage passes into the hands of the department having charge of collections of interest, and the like. A description of the mortgage goes to the sales department for their use, in offering the security for sale to the company's clients. The mortgage, however, whether sold or not, is treated from now on as though it were the property of the company; at least so far as the care of all details affecting the security is concerned. Not only are interest and principal collected when due from the borrower, but insurance, when assigned as collateral security, is maintained, and the payment of all taxes and assessments is secured, and any changes of the ownership of the land or any other matters affecting the security are recorded. If the mortgagor fails to pay insurance premiums or taxes when due, the company ordinarily advances the amounts due, charges the mortgage account, and endeavors to collect the amount in due course from the mortgagor. The customary mortgage provides that failure to pay taxes or insurance premiums constitutes a default just as fully as failure to pay interest, and such default at the option of the holder of the mortgages matures the entire debt, principal, and interest, enabling recovery by foreclosure. Many of the largest mortgage companies, for the convenience of the holders of their mortgages, advance the interest when due to their customers, as well as take the responsibility of advancing taxes and insurance premiums. These companies then rely on their ability to collect these amounts from the mortgagors in due course, or, at the worst, to recover by foreclosure. Customarily, if foreclosure becomes necessary, the company takes back the defaulted mortgage from its customer, giving him therefor either principal and interest to date or another mortgage in good standing. The mortgage company then relies on finally recovering enough to save it from loss, and if the loan was properly placed in the first instance, there will be no loss. This service as practiced for many years by many companies, without loss either to themselves or their clients, has an important bearing on the investment value of the farm mortgage Most mortgage companies make loans on first mortgages on farm lands at the rate of 6 to 7 per cent. 1 "The Farm Mortgage Handbook," by K. N. Robins, 1916, pp. 67–71. Doubleday, Page & Co., New York, N. Y. The length of term allowed is generally five to twenty years with the privilege of repaying by installments, and many companies require amortization payments on loans for periods of more than five years. The amount loaned on a first mortgage varies from 33% to 75 per cent of the appraised value of the farm. The amount of a loan and the interest rate depend upon the characteristics and nature of the security. As stated, farm mortgage bankers sell their mortgages or bonds issued against them. They employ much the same methods of placing their issues before the public as the bond houses. They advertise in the daily press, circularize lists of investors, employ travelling salesmen, brokers, and the like. Farm Mortgage Banking The business of farm mortgage banking has developed principally within the last half century. Prior to that time, farmers borrowed money on farm security by giving mortgages to local capitalists, neighbors or bankers. Following the Civil War, the marvelous growth of the food producing states of the Middle West required enormous amounts of capital. There were no Western capitalists fifty and sixty years ago with resources adequate to finance the conversion of thousands of square miles of wild prairies into productive farms. The West waited because hardy pioneers could not develop its resources without capital. Men with moderate capital living in the West, familiar with its resources and confident of its future, backed their judgment with their money by loaning their own capital on Western farms. They then disposed of the mortgages to capitalists in Eastern financial centers and again loaned to farmers in the new country, creating the new business of farm mortgage banking and making the farm mortgage |