MORTGAGE COMPANIES 193 the investor to be filed with the other documents relating to the mortgage. "Where conditions have changed and the new valuation of the real estate will not justify extending the mortgage for the full amount, a reduction of the principal is required. In cases where the future of the property is unfavorable or uncertain, or where the mortgage, in the company's opinion, has become otherwise undesirable, the payment of the entire principal is demanded. When such a mortgage is paid the investor may reinvest immediately in another guaranteed mortgage without any break in the investment or loss of interest. "Should the investor desire the payment of his money, the company, in a normally active market, repurchases. the maturing mortgage with its own funds without delay. But if, at the time, there should be a financial stringency or, for any other reason, an inactive mortgage market, the company demands that the owner of the property pay off the loan and makes remittance of principal and accrued interest as soon as this is done. Under such market conditions, however, it will be rare that he can pay at once, and when he cannot the company puts the mortgage on sale with its guarantee while urging the borrower to continue in his efforts to raise the money. When sold to another client the company repurchases the mortgage immediately in order to make delivery. "The charge of the company for guaranteeing the payment of mortgages shall not exceed one half of one per cent per annum of the principal amount guaranteed." 3 The third type of mortgage company is the one which makes loans of large sums on first mortgages, holds the mortgage bond of the borrower as a trustee and issues against it certificates of $100 and upward in amount which 3 Lawyers Mortgage Company, Guaranteed First Mortgages on New York City Real Estate. it sells to investors both large and small. Each of these certificates participates equally in proportion to its denomination in the mortgage so that the $500 certificate is as well secured as the $50,000 certificate. A well-known investment company makes the following statement of what it requires of the borrower: "1. Each issue of these bonds is distinct and separate, and is a direct first mortgage on a specific piece of high grade property, located in one of the largest cities of the United States, such as New York, Chicago, Philadelphia, or St. Louis. These properties include (a) large downtown buildings, such as office, store, or hotel structures, and land, located in cities where there is an assured heavy demand for such space; (b) high grade apartment buildings and land, located in stable, first class residence districts, where transportation is excellent and renting conditions strong; (c) high grade industrial properties, with ample real estate assets, owned by established and going concerns with the highest credit ratings, established records of earnings, dealing in fundamental necessities, and with assured, stable markets for their goods. "Each bond is a direct closed first mortgage on the property securing the issue. "2. Each bond of an issue is signed by the borrower, owning the property mortgaged (whether a corporation or an individual), who is responsible to the bondholder for payment of principal and interest. Each issue is secured by a mortgage deed or trust deed, which is recorded in the office of the county recorder or register, like an ordinary mortgage loan. "3. We accept bond issues only on those properties which earn a good income, sufficient to meet the annual interest charges, pay off a part of the principal (as shown in the following paragraphs) and leave an ample surplus. In other words, the assured net earnings must be at least two or three times the greatest yearly interest charge on the bonds. This is a safeguard of the utmost importance. It assures prompt payment in cash by borrowers to investors when interest or principal is due. We regard income as so vital that we would not accept a loan with security of 10 to 1 without sufficient earning power. "4. We require each borrower to pay off about five per cent of the principal of the bond issue every year without releasing MORTGAGE COMPANIES 195 or impairing the mortgage. This is accomplished through serial maturities or installments, the first group of bonds maturing in two years, the second in three years, and so on to the last maturity, usually ten years. These serial payments are made out of the earnings of the property. They constantly reduce the amount of the loan outstanding, and increase the equity or margin of safety protecting the bonds. "5. In order to compel the borrower to provide systematically for the payment of the bonds each year and to apply the earnings as received each month to the payment of principal and interest before any other obligations are met, monthly deposits of principal and interest in a sinking fund are required. Each monthly deposit is one-twelfth of the amount of principal and interest combined coming due during the year. For example, if $24,000 in interest and $20,000 in principal are due during the year (a total of $44,000) each monthly payment must be one-twelfth of $44,000, or $3,666.66. From these deposits the semi-annual interest coupons and the annual serial principal installments are paid to the bondholders. These deposits assure the prompt application of earnings to the payment of the bonds, prevent the diversion of these funds to other uses and enable us to keep in closest touch with the affairs of the borrowing corporation month by month. It will be seen that payments to investors thus are made through us and not by us. Furthermore it will be evident that each of these loans is self-liquidating. "6. We require that the value of the property mortgaged be about 50 to 100% more than the total amount of the bonds, thus leaving an equity or margin of safety more than ample for the protection of the investors. "7. We have no share or financial interest in any way whatever in the ownership, management, or control of any property on which we underwrite bonds. When a loan is offered to us, we investigate it with the utmost thoroughness in all its details, and if we are satisfied that it is safe and desirable, we make the loan ourselves by purchasing the entire issue outright from the borrower, with our own funds. We then sell the bonds to the investing public with our recommendation. Being thus in an entirely independent and unprejudiced position, we are able to act on behalf of the investor in making our investigation, and to take the attitude of an impartial judge of the loan, accepting it if safe, and rejecting it if unsafe. We accept, offer, and recommend only such bond issues as are investments fit for our own funds, which we invest in the bonds before offering them to the public. The precautions which we take to protect ourselves in our purchase of these securities, are the precautions which protect the investors who buy them of us. We reject fully one hundred loans to every one we accept. "8. We watch everything that concerns the repair, upkeep, and earning power of the properties that secure these bonds. We see that insurance is maintained for the protection of the bondholders. The title to the property is assured by the opinions of the able attorneys of our legal department or by title guarantee policies." 4 "4 Many mortgages which are being sold in the United States by some mortgage companies are second mortgages. Some so-called first mortgages are upon buildings which are built on sites not owned but leased. Therefore the ground rent is equivalent to a mortgage ahead of the mortgage certificates that are being sold. In 1923 the Lawyers' Mortgage Company of New York in a warning to the public concerning the unsafe risks which many investors were being sold said: "These bonds look attractive until the investor pauses to inquire what these properties cost for land and building, what is their present value and what is their probable future value. The prospectus of these bonds is usually discreetly silent on these points, and the average investor is entirely unable to appraise the value of the land and buildings securing these bonds. It is safe to say that if these bond issues were restricted to the usual twothirds of the valuations of the well-known appraisers in New York City, none of them would be made. The plain truth is that these issues are excessive in amount, running up to 80%, 90% or 100% of the cost of the properties, excessive in the rate of interest promised on the bonds, 6%, 6%, or 7%, and excessive in the fees 4 S. W. Straus and Co., Safety and Six Per Cent. CATTLE LOAN COMPANIES 197 paid to the issuing companies, which run from 10% to 15%." 5 136. Cattle loan companies. The demand by stockmen for large loans which the local banks could not conveniently handle led to the organization of cattle loan companies to specialize in this field. Since these loan companies provide for the large borrowers the lending power of the local bank is available to a much greater extent to the small borrower. It not only takes much money to finance the raising, fattening, and marketing of a herd of cattle, but the lender must use expert judgment. The stockman himself is the biggest risk. What is his ability and his integrity? Does he usually succeed? What property does he possess besides the live stock which is to be mortgaged? Since disaster may reach the mortgaged property, there must be other assets as additional security. If the man is all right then the lender must judge the cattle that are to be bought with the borrowed money. Are they worth the purchase price? Are they of the character to withstand the hardships of the locality? Will they grow in value, so that the borrower can sell them and repay the loan at a profit? Another point that is investigated is whether the borrower has proper facilities for taking care of the cattle-abundant pasturage and water if they are ranch cattle; plenty of feed, water, and shelter, if they are to be fattened. The loan companies have an organization the members of which are trained in every feature of making loans upon live stock. The cattle man applies to a company that knows him and submits a complete statement of his affairs. An investigation follows. If the loan is approved, the cattle are bought, the notes in $5000 pieces are signed, the cattle are mortgaged, and the mortgage is filed for record in the proper county, or counties. The loan com 5 A Day of Reckoning in Mortgage Securities (a leaflet). |